09 Oct 2013

Two Obvious Facts on the Debt Ceiling Showdown

Austerity, Debt 67 Comments

Big “showdowns” in Washington are always hype, with both sides distorting the facts so that the hapless citizen–whether he watches Fox or CNN–focuses on irrelevant details and misses the big picture. When it comes to the recurring conflict over raising the debt ceiling, here are two obvious facts that explode just about everything that the Republicans and Democrats are saying:

OBVIOUS FACT #1: Refusing to raise the debt ceiling is equivalent to insisting on a balanced budget. Any Republican politician who has (a) championed a balanced budget amendment but lamented the difficult road ahead while (b) voted to raise the debt ceiling, is obviously insincere (or doesn’t understand accounting). Either way, genuine fiscal conservatives cannot take such a person seriously anymore.

OBVIOUS FACT #2: If the debt ceiling is not raised, the government by no means needs to default on its outstanding bonds. There is an enormous amount of revenue flowing in, with which the government could pay existing creditors, as well as people owed money through Social Security, pensions to retired government workers, etc. Thus when President Obama and other Democrats say that if they don’t get their credit limit raised, they will crash the Treasury market, they are (using their rhetoric) holding the global credit markets hostage to their spending goals.

To see just how absurd it is to link the debt ceiling to a Treasury default, consider the following charts which are based on the 2014 Fiscal Year (which runs from October 1, 2013 through September 30, 2014) as estimated by the CBO in May:

As the above charts indicate, back in May the CBO projected a budget deficit of $560 billion for Fiscal Year 2014 (which just started on October 1). So if the debt ceiling isn’t raised, it basically means the government needs to trim $560 billion from its total spending of $3.6 trillion, a reduction of about 15.6% of total spending.

Is such a statement the same thing as saying the Treasury needs to default on its outstanding debt? Of course not. Of the major categories listed above, “Net interest” on existing federal debt is the smallest, representing only $237 billion / $3.6 trillion = 6.6% of total spending. There is no reason the government has to place “Net Interest” on the chopping block first, ahead of Defense and Nondefense Discretionary spending. I separated out all “Mandatory” outlays to show that those don’t need to be touched, either, in order to balance the budget.

It would take about a 48% reduction in Defense and Nondefense discretionary spending, in order to balance the budget and incur no further debt. The government could maintain its payments to Social Security, Medicare, Medicaid, and all other “Mandatory” programs, as well as interest to existing bondholders. The situation would change, moving forward, as Social Security and Medicare requirements grew larger, but the point is that even with no increase in the debt ceiling, there is nothing in the arithmetic forcing the Treasury to default on bondholders anytime soon, unless it chooses to do so.

67 Responses to “Two Obvious Facts on the Debt Ceiling Showdown”

  1. Matt M (Dude Where's My Freedom) says:

    BOTH sides are lying to us?

    Surely that’s impossible or CNN would have told us about this already!

  2. Spooner says:

    It would also interesting to know in what year our defense spending was equal to the 2014 level reduced by 48%. I suspect cutting the 48% on defense would not bring us back to levels of another century, but rather just what we used to spend a few years ago.

  3. Samuel Wonacott says:

    In theory, right? Because, from what I’ve heard, there are legal and logistical difficulties and unknowns in having the Treasury prioritize bond holders. It’s never happened before, and it’s not even clear the Treasury has the legal authority to pick and choose who gets paid and who doesn’t. There’s also the question of how the Treasury’s payment system would handle attempts to prioritize payments, since, right now, it’s done automatically and across a number of departments. Given the technical problems associated with the exchanges, it would hardly be surprising to watch the Treasury’s payment system go into a meltdown.

    Don’t thes unknowns make you somewhat less optimistic that they could avoid default if they only had the willpower to do so?

    • Rick Hull says:

      Fear, Uncertainty, and Doubt.

      Between Executive Orders, emergency legislation, and the surely uncountable number of contingency plans drawn up by departments without a .gov website, you’ve got to be kidding me.

      Any laws that prevent the payment of public debt would certainly seem to be in violation of the 14th amendment.

      You really think the Obama administration doesn’t have its own http://en.wikipedia.org/wiki/John_Yoo

    • AHM says:

      This morning before a Congressional committee Jack Lew did not say he “could not” prioritize. Which means, there is no legal reason he cannot prioritize. But what he did say was “I will NOT prioritize and pay some bills and not others”. In essence, his statement says that the Obama administration is willing to crash the world economy on a whim. Who in hell are these people we sent to Washington who are willing to destroy this country? I regard his statement, if the situation required prioritization to pay bond holders as first claimants on available monthly revenue to be an act of treason as despicable as an insurrection using military force to destroy our Republic.

  4. Michael Tew says:

    In addition to the government being able to cut expenses to avoid default, can’t we say that the government could raise more revenue without raising taxes, namely by selling assets?

    • Bob Murphy says:

      Exactly Michael Tew, I pointed that out as well the last time we had such an impasse. Good point. They wouldn’t even need to sell them, they could “pawn” them (or do a repo ninja move like investment banks do).

  5. Blackadder says:

    Suppose we pass a balanced budget amendment. The following year appropriations time rolls around, and Obama puts out his budget proposal, which includes $3.5 trillion in spending and $2.5 trillion in revenues.

    “Hold on a minute,” say the Republicans. “This isn’t a balanced budget. The Constitution says you have to have a balanced budget.”

    “Boy are you guys dense,” responses Obama. “Don’t you realize that a balanced budget is equivalent to not raising the debt ceiling? That’s obvious. Sure, my budget anticipates spending more than we take it. But nowhere in there is there anything about raising the debt ceiling. If you object to my budget on the grounds that it’s not balanced, well, that just proves you shouldn’t be taken seriously.”

    The Republicans confer and, after much furrowing of brow, conclude that Obama is right. So they agree to pass the budget.

    And they all lived happily ever after. Right?

    • Ken P says:

      So Bob, should have added a qualifier such as: “Refusing to raise the debt ceiling -WHEN WE ARE AT THE DEBT LIMIT – is equivalent to insisting on a balanced budget.”

      It’s still a lot better than the way the press and polis are all saying “not raising the debt ceiling” = “not making our debt payments”.

      • Blackadder says:

        So Bob, should have added a qualifier such as: “Refusing to raise the debt ceiling -WHEN WE ARE AT THE DEBT LIMIT – is equivalent to insisting on a balanced budget.”

        The two aren’t equivalent even if we are already at the debt limit.

        Consider two situations:

        1) I make $3000 a month. My rent is $1000. In order to keep from spending more than I make, I keep my other expenses to $2000.

        2) I make $3000 a month. My rent is $1000. I spend all $3000 on food and entertainment, and then don’t pay my rent.

        Are those two situations equivalent?

        • Jonathan Finegold says:

          In case (2) you get kicked out of your apartment, which is equivalent (for our purposes) to a default. But, Bob is saying that default isn’t the only option, as long as you balance your budget (equivalent to option 1).

          • Blackadder says:

            So not raising the debt ceiling is equivalent to a balanced budget, because if you have a balanced budget you don’t need to raise the debt ceiling?

            • Ken B says:

              No, because if you cannot incur any extra debt you can’t run a deficit which is more or less exactly what balanced budget amendments say. Or would say if you could hear them in space, which you can’t.

              • Blackadder says:

                if you cannot incur any extra debt you can’t run a deficit

                Not true. If the federal government hits the debt ceiling that means it won’t be able to issue any more bonds, but it will continue to incur obligations in excess of revenue.

                For example, suppose the U.S. budget provides for $300 billion in spending a month with $250 billion in revenue.

                During the first month, the government will incur $300 billion in obligations, of which it will leave $50 billion unpaid.

                During month two, it will incur another $300 billion in obligations, of which $100 billion will go unpaid.

                And so on.

                The fact that you can’t borrow does not, by itself, cut a single dollar of spending, even if expenses exceed revenue. It just means you don’t pay people on time.

                Now as I understand it, Bob’s idea is that instead of not paying people on time, Obama should just unilaterally decide to cancel certain spending altogether. That is probably illegal and unconstitutional, and possibly be logistically impossible. But the important thing is that this is at best only one possible way to react to hitting the debt ceiling. There’s no necessity to doing it that way. So saying that hitting the debt ceiling is equivalent to passing a balanced budget is just plain false.

              • Ken B says:

                That’s non-responsive BA since I didn’t talk about borrowing I talked about *incurring debt*. And in your example the govt incurs more debt.

          • John Lent says:

            Raising the debt ceiling is like saying, well we also have this credit card with no pre-set spending limit, so we can actually pay anything we want, so yeah feel free to put the tanks on the credit card, since we already ordered them.

        • Tel says:

          Refusing to raise the debt ceiling -WHEN WE ARE AT THE DEBT LIMIT – is equivalent to insisting on a balanced budget.

          It does seem to be a safe assumption that every government always operates at the debt limit (or very close). Even after the Clinton surplus they suddenly needed to raise the debt limit.

  6. Ryan says:

    You have left out principal repayments. The government not only owes bond holders interest on the debt but also principal repayments. Does the Treasury have that data? That would be an important component – how much interest + principal repayments are required for fiscal year 2014. I imagine principal repayments could be quite significant, but I ask because I don’t know the answer.

    • Shailesh says:

      Principal repayments are correctly left out since they can be financed by new debt without raising the debt ceiling.

  7. joe says:

    1) Refusing to raise the debt ceiling does not balance the budget. The budget is not balanced unless spending is cut under a law passed by Congress. Refusing to pay for spending ordered by a law passed by Congress does not balance the budget. The obligations will not go away. Creditors will have a claim on federal assets. A doctor who is owed money by Medicare will have a claim for breach of contract. Military contractors who are not paid will have a breach of contract claim, etc. etc.

    2) Refusing to raise the debt ceiling does mean govt has to default on outstanding bonds. There is no way to prioritize payments efficiently so that every bond payment is made on time.

    • Ken P says:

      “Refusing to pay for spending ordered by a law passed by Congress does not balance the budget.”

      What law was passed that “ordered” this spending? I thought no spending has been authorized by Congress yet.

      Non-defense discretionary is larger than the shortfall.

      • Blackadder says:

        What law was passed that “ordered” this spending?

        The Social Security Amendments of 1965, to give an example.

        • KaraTheAwesome says:

          Yes, yes, that would be part of MANDATORY spending. Now, why would we be forced to keep paying for the discretionary stuff if no budget has been passed?

        • Ken P says:

          Yes, Im aware of that one. Thus my last sentence. Joe is saying there is enough of these to make a balanced budget impossible.

          • KaraTheAwesome says:

            My comment was in response to Blackadder. He seems to be having difficulty understanding the Mandatory versus Discretionary part of Bob’s lovely pie chart.

            • Picachu says:

              My daughters name is Kara; she too is awesome.

            • Ken P says:

              Sorry, Kara, I was attempting to respond to Blackadder. My phone acts up in multilevel posts sometimes.

        • Mike M says:

          There is a difference between authorized and appropriated. A two step process is required by Congress. Just because they authorize something doesn’t mean it is automatically funded.

          There is no ture “mandatory” spending. In this context mandatory is a political word not a legal word. All “mandatory” programs can be changed or defunded.
          For example you have no property right in you Social Security “benefits”

      • Tel says:

        Congress keeps trying to pass exactly the law you describe, it’s known as a “budget” and these laws originate in the House, then go to the Senate, then get trashed.

  8. joe says:

    Also, if the debt ceiling is “no big deal”, then why do Republicans believe refusing to raise the debt ceiling can force Obama to make concessions? If they are trying to “rein in an out of control executive who is trying to destroy the economy”, then why give him the power to default on debt and destroy the economy?

    Bottom line is that the debt ceiling will go up and the GOP will get nothing in return for it. Zilch.

    • Mike T says:

      Because politics is all about instilling fear and casting blame in pursuit of consolidating power. Budgets, debt ceiling, etc are merely props on the stage in the theater of the absurd. With few exceptions, I doubt those in Congress really care about what they publicly claim on these issues.

      • Tel says:

        It is absurd, but in that theatre at some step along the line shit suddenly becomes real. The trick is to step exactly right so as to put the other guy into position so the roof falls on his head.

  9. Bob Murphy says:

    Oh my gosh you guys…

    (1) Blackadder you’re the kind of guy who watches Star Wars for the first time and then says, “But you can’t hear sound in space.”

    (2) Ryan you can roll over the principal without breaching the debt limit. So as long as the government balanced the budget and in its expenses it included net interest on the existing debt, the total outstanding debt would stay fixed.

    (3) Joe, you’re totally against Obamacare right? If you don’t think the government has the ability to efficiently prioritize payments, then surely you wouldn’t want it dabbling in all of our health care, right?

    • Blackadder says:

      Blackadder you’re the kind of guy who watches Star Wars for the first time and then says, “But you can’t hear sound in space.”

      If by that you mean that I’m pointing out something unrealistic about your story, then yes.

  10. Churuya says:

    Both your obvious facts are false. Refusing to raise the debt limit is much stricter than any proposed balanced budget proposal. The idea behind balanced budget amendments is to balance the budget over the course of a year. Nevertheless, the government would still be able to borrow money on a short term to meet shortfalls over the course of a year. Tax money comes in spurts over the course of the year, so even if revenue exactly equaled expenditures over the course of the year, they’d have shortfalls on some days. In principle, if the government was banned from borrowing money it could build up a savings account to prevent from having to borrow on a day-to-day basis, but since the government has not had time to build up such a reserve, it only has until about November-ish until it’ll run out of money. It is not enough to simply cut the $560 billion out of the budget. (Which, as has been pointed out, they might not be able to do anyway.)

    • g-dub says:

      “but since the government has not had time to build up such a reserve, ”

      They have had plenty of time. They simply blew off doing it.

  11. Joe Plummer says:

    Bob, quick question: What if “balancing the budget” means less money creation (through the FED) and less money creation means higher interest rates?

    Is it possible that the monetary scientists are holding that threat over our “representatives’” heads in Washington?

  12. John says:

    Great post Bob. Everyone who has been expressing an opinion on this issue should be required to read this first (not really since I’m against frivolous uses of the societal apparatus of compulsion and coercion).

  13. Daniel Kuehn says:

    I want to echo Samuel Wonacott. I’m not one that goes around casually equating the debt ceiling with default for precisely the reasons Bob (and many others) have raised, but I don’t think it’s quite as easy as it’s made out to be here either. Somehow the government has to violate the laws of arithmetic to uphold both the debt ceiling, spending legislation, and tax legislation – or else not violate the laws of arithmetic (my bets are that they will not) and violate one of those three pieces of legislation.

    So could they pay bondholders? Of course – they have the money to. But to do that they’d have to break faith with the whole process.

    A much more sensible solution is to not have a debt ceiling and recognize that when you pass tax and spending legislation you are legislating for an implicit deficit level.

    • Ken P says:

      “A much more sensible solution is to not have a debt ceiling and recognize that when you pass tax and spending legislation you are legislating for an implicit deficit level.”

      I agree with Tel on this. We seem to always operate very close to the debt limit.

  14. Daniel Kuehn says:

    btw – I like the “both sides” framing… as if the libertarian narrative has been all sunshine and light and above the fray :)

    • Major_Freedom says:

      As if Bob must be “representing” a particular worldview and showing duty to it every time he makes an argument, instead of speaking for himself as an individual.

      Ergo, if you attack a Republican you must be making an implicit argument to become a Democrat. If you attack a Democrat you must be making an implicit argument to become a Republicans. Or both, a libertarian.

      Whatever the case, you MUST come wearing a badge, so that we know how to ignore your argument and attack a group of which you belong instead.

      • Daniel Kuehn says:

        Ummm… of course he speaks for himself as an individual. Don’t we all? But the arguments individuals present can still be open to criticism.

        re: “Ergo, if you attack a Republican you must be making an implicit argument to become a Democrat. If you attack a Democrat you must be making an implicit argument to become a Republicans. Or both, a libertarian.”

        Um, no you miss the point. The point is there is blame on the libertarian side and Bob quite conspicuously wasn’t laying it out. Libertarians, because of the nature of party organization in this country, get away with looking even handed when they’re really being quite partisan (in the general sense, not in the organized party sense). It’s a great strength of the movement – the appearance of being non-partisan and above politics. I’m just poking the bubble a little.

        re: “Whatever the case, you MUST come wearing a badge, so that we know how to ignore your argument and attack a group of which you belong instead.”

        I disagree. I don’t wear a particular political badge for example (I wear other sorts of badges, though). Bob chooses to identify himself politically.

        • Dan says:

          You don’t think you wear a badge, but the rest of us see the big government badge that you always have on.

          • Daniel Kuehn says:

            Dude, EVERYONE is pro big government in an-cap/libertarian eyes. Is that all you’ve got?

            The fact that I actively don’t like to be called anything makes the idea that it’s a badge a little dubious in the first place.

            • Major_Freedom says:

              Mussolini never called himself a fascist.

              Just sayin’….

        • valueprax says:

          Doesn’t DK kind of remind you of Cypher from The Matrix?

          For those who need a refreshing: http://en.wikipedia.org/wiki/Cypher_(The_Matrix)#Cypher

          Daniel “Ignorance is Bliss” Kuehn– Please, put me back in the Matrix!

          • Daniel Kuehn says:

            Unless ya’ll are wrong then you’re the ones wallowing in ignorance and treating it as bliss.

            If your argument by its very construction won’t make sense to anyone that doesn’t already agree with you it’s a pretty crappy argument.

        • Major_Freedom says:

          “The point is there is blame on the libertarian side and Bob quite conspicuously wasn’t laying it out. Libertarians, because of the nature of party organization in this country, get away with looking even handed when they’re really being quite partisan (in the general sense, not in the organized party sense). It’s a great strength of the movement – the appearance of being non-partisan and above politics. I’m just poking the bubble a little.”

          Sorry, but could you explain how libertarians are to blame for the debt ceiling problem of the government?

          “I don’t wear a particular political badge for example (I wear other sorts of badges, though). Bob chooses to identify himself politically.”

          I think the difference is that he has no problem admitting what his badge represents IF and WHEN he wears a badge in a particular argument.

    • Mike T says:

      “Both sides” as in the Republican and Democratic parties which dominate the American political system, esp with respect to the current debate taking place in DC which Bob seemed to be explicitly referring to in his first paragraph. What “libertarian narrative” are you referring to with respect to this political debate?

  15. Teekhe says:

    This assume that no government bonds need to be repaid, which is a far-reaching assumption. We have about $16T in US Govt. debt outstanding. If the average maturity is 10 years, about $1.6T could be due over the next year. Your math just does not add up.

    We are facing default thanks to Tea Party hatred of all things Obama and a lack of intellectual capability on the part of people making silly arguments that “oh..default isn’t going to happen and if it does it’s not that bad.”

    Fight for America, fight against the Tea Party.

    • Bob Murphy says:

      Teekhe no you are just wrong. If you pay down the principal then you have that much more room, relative to the debt ceiling. They can borrow $1.6T from new lenders to pay off the $1.6T (your number) coming due over the next year, and that doesn’t affect the debt limit. But since there is net interest, it’s not a wash. They are running a Ponzi scheme wherein they need to bring in new people or else it comes crashing down, and people objecting to this scheme are labeled as terrorists against the American people or uncivilized.

  16. Yancey Ward says:

    Professor Murphy, without knowing precisely what the danger is, would you say it’s time for your readers to crack each other’s heads open and feast on the goo inside?

    • Bob Murphy says:

      Yancey, only after Healthcare.gov gets fixed and they all have insurance.

  17. Ben Kennedy says:

    Question – is raising the debt ceiling more-or-less equivalent to financing via inflation as opposed to financing via taxation?

    • Picachu says:

      Hi Ben, are you from Houston?
      I know a ben(brother of Donny, Beverly, john, Edward) who was from Houston and I’m just wandering.

      • Ben Kennedy says:

        No, sorry – I’m in PA

  18. Matt M (Dude Where's My Freedom) says:

    Is “mandatory” spending even really all that mandatory?

    Couldn’t Congress repeal the social security act tomorrow if they wanted to? The Supreme Court has already ruled that the revenue the SS tax generates are considered general revenues and paying the tax does not necessarily entitle you to receiving any benefits.

    Couldn’t they defund social security just like they’re trying with Obamacare? Even IF the act specifically says “Congress cannot defund or repeal this,” the constitution says that Congress has power over all spending. Congress cannot pass a law that overrules the constitution.

    I know that for practical reasons, it is essentially impossible to get rid of social security, but surely it’s not *literally* impossible. Like, if a new poll came out tomorrow stating that 100% of Americans wanted to get rid of social security, surely they would do it, wouldn’t they? They wouldn’t just shrug their shoulders and say “Sorry, our hands are tied, it’s mandatory.”

  19. Jared Lynch says:

    Bob,
    This might be a dumb question but how is the net interest only projected at $237 billion when fiscal year 2013 just ended with $415 billion of interest? Here’s a link:
    http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

    I’ve always been curious about the difference in the reports.

    Thanks Bob

    • skylien says:

      I guess interest owed to the Fed is subtracted from the lower figure, I am not sure though…

    • Rick Hull says:

      Entirely too sensible and logical. To paraphrase Stephen Colbert, we need less journalists telling the news to us and instead feeling the news at us.

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