An interesting public choice
question facing us (America) at this time, is the apparent inability to reverse
course and undo the establishment of multiple voting and lobbying
constituencies once they have been created - many of whose members do not pay taxes (example many entitlement recipients). This is what Romney was referring to in his 47%
comment. Once these power groups have been created and receive benefits in
excess of the (perceived and actual) payments they make, the likelihood of
their members voting to cut expenditures for these benefits diminishes over
time. Crudely expressed, when a majority receives benefits from a paying minority (in
power terms, if not in numbers), there appears to be no going back if we are to
rely on the normal majoritarian democratic process. The article reproduced below from
today’s WSJ, suggests something may be missed in the above analysis. It prompted me to think things through to the ultimate implications.
In essence,
a welfare-dependent-majority situation is one that is not static; it gets worse over time
and the growing costs, and the hardships imposed on a growing number of taxpayers, must eventually cause some kind of reform – either that or a complete fiscal
collapse. To be sure, a welfare majority does make expenditure reform much more
difficult. At the very least, it suggests that things have to get pretty bad
before any kind of reform initiative is likely to have any traction. Current events
in Europe bear witness to this. It is a consideration of the constitutional status of the debt-servicing, expenditure-appropriation process that clarifies the situation we face.
Contrary to popular conception,
entitlement expenditures are not constitutionally
entrenched. They can be cut anytime Congress decides to pass legislation to
that effect, or anytime Congress fails to appropriate money for them. On the
other hand, as explained by the article below, government debt payments (principle
and interest) are so entrenched by
the 14 Amendment, Section 4 of the Constitution. This means that if Congress fails to raise the
debt ceiling, thus preventing new government borrowing, the existing debt still has
to be paid. In the absence of being able to borrow in order to pay for its
expenditures, the government would then have to prioritize and decide what to
cut in order to pay interest and principle due on the debt or increase revenue by raising taxes. So the question
becomes, will the Congress continue to approve debt-ceiling increases ad infinitum? If not, then the
government will have to face its budget constraint and make cuts or consider
even more tax increases – one can imagine the blood that will flow in that
debate. Of course, using tax increases to solve this problem also has a limited
range of effectiveness. At some point the Laffer curve will kick in – higher tax
rates will bring in less revenue as
tax-constrained incomes put a crimp in income generation through value-creation.
At that point expenditure cuts have
to be relied on.
On the
other hand, if Congress simply continues to raise the debt-ceiling, the
economic consequences will be dire, and bad things will start to happen at an
accelerating rate. The deficit and the debit will become a larger and larger
multiple of the revenue coming in. A
number of things are likely to happen, though the timing and the sequence cannot
be predicted. With a greater portion of the debt being financed by the Federal
Reserve, bank reserves will continue to rise (even though they stand at unimaginably
high levels already). As the economy continues to recover (in spite of the dysfunctional
polices of the last four years), the banks will begin making loans, market interest
rates will rise, and the money-supply will rise. This, in turn, implies an exploding increase
in the interest payment due on newly borrowed debt, and widespread price
inflation. Americans are historically very antagonistic to both interest rate
increases (which will wallop the stock markets) and, even moreso, high levels
of inflation.
At that point, who knows? Will we have a Carter to Reagan type
situation again? Or will it have to get much worse before any pendulum
swing-back can be expected? I guess we will find out.
Updated January 10,
2013, 7:12 p.m. ET
Rivkin and Casey: The Myth of Government Default
The Constitution commands that public debts be repaid. There is
no such obligation to fund entitlement programs.
Three
false arguments, pushed hard by the Obama administration and accepted on faith
by the media and much of the political establishment, must be laid to rest if
the American people are to understand the issues at stake in the federal
"debt ceiling" debate.
The first is that Congress's failure to raise
the debt ceiling—the amount of money the federal government is authorized to
borrow at any given time—will cause a default on the national debt. The second
is that federal entitlement programs are constitutionally protected from
spending cuts. The third is that the president can raise the debt ceiling on
his own authority.
To take up the first canard: Contrary to White
House claims, Congress's refusal to permit new borrowing by raising the debt
ceiling limit will not trigger a default on America's outstanding public debt,
with calamitous consequences for our credit rating and the world's financial
system. Section 4 of the 14th Amendment provides that "the validity of the
public debt of the United States, authorized by law . . . shall not be
questioned"; this prevents Congress from repudiating the federal
government's lawfully incurred debts.
The
original concern of this provision was to guarantee the integrity of federal
debts incurred during and immediately after the Civil War (while the debts of
the Confederacy were nullified permanently), and to ensure that a newly
"reconstructed" Congress—to which the Southern states were
readmitted—would not reverse these decisions. However, the amendment's language
was not limited to the Civil War-related debts. In Perry v. United
States (1935), the Supreme Court made clear that the provision
"indicates a broader connotation" protecting the nation's debts as a
whole.
This
means that a failure to raise the debt ceiling—to prevent new borrowing—does
not and cannot put America's current creditors at risk. So long as this
government exists, and barring a further constitutional amendment, those
creditors must be paid.
Nor are
they at risk in practice, since the federal government's roughly $200 billion
in tax revenue per month is more than sufficient to service existing debts. If
the executive chose to act irresponsibly and unconstitutionally and failed to
make any debt payments when they come due, debt-holders would be able to go to
the Court of Federal Claims and promptly obtain a money judgment.
These
basic facts should inform any credible decisions by credit-rating agencies in
establishing the government's creditworthiness. Significantly, these agencies
have traditionally acted favorably when heavily indebted countries have not
defaulted on their debt but cut deeply their public spending.
Second,
despite White House claims that Congress must raise the debt ceiling to pay the
bills it has incurred, the obligations protected as "debts" by the
14th Amendment do not include entitlement programs such as Medicare and Social
Security. These programs are not part of the "public debt," which
consist of loans that are made to the federal government through bonds and
similar financial instruments. Entitlement programs are instead political
measures that are fully subject to the general rule that one Congress cannot,
by simple legislation, prevent a future Congress from making cuts.
This
fundamental and vital distinction is clear from both the text and the drafting
history of the 14th Amendment's Section 4. The wording of the section was
revised before its enactment and ratification to replace the term federal
"obligations" with that of "debts," a far more narrow (and
manageable) category.
The
distinction was recognized by the Supreme Court in Flemming v. Nestor (1960),
which involved the power of Congress to modify Social Security benefits. The
court noted that entitlements and "contractual arrangements, including
those to which a sovereign itself is a party, remain subject to subsequent
legislation by the sovereign."
Congress can reduce a wide range of payments to
various beneficiaries at any time by amending the statutes that authorize them
or simply by failing to appropriate sufficient funds to pay for them. Nor does
Congress have any legal or constitutional obligation to borrow money to pay for
entitlements.
Third,
assertions, most recently made by Nancy Pelosi, that the president can rely on Section 4 as a
pretext for raising the debt ceiling by himself are manifestly incorrect and
constitutionally dangerous. Section 4 grants no power whatsoever to the
president—instead, the 14th Amendment grants Congress the
"power to enforce, by appropriate legislation, the provisions of this
article."
More
fundamentally, this argument—which has been tentatively advanced and then
tentatively withdrawn by the White House, both during the 2011 debt-ceiling
battle and in the last several weeks—is contrary to the language, structure and
history of the Constitution.
Like the British Parliament before it, Congress
controls the power of the purse—the authority to raise taxes, borrow money and
direct how revenues are spent. In particular, Article I, Section 2, grants to
Congress the power "to borrow money on the credit of the United
States." There is no similar grant to the president. Any effort by the
chief executive to borrow money without congressional action would be every bit
as injurious to our constitutional system as presidentially ordered taxation.
True enough, the "debt ceiling" is not
a constitutional requirement. Congress could choose instead—as used to be the
case during most of our history—to vote separately on the issuance of each
federal debt instrument. However, nowhere in the Constitution is the president
authorized to borrow or spend money without congressional action, except
insofar Congress itself may permit.
Once
these false arguments are cleared away, the real issue in the debt-ceiling
debate becomes clear: the proper level of federal spending. Should Congress
fail to increase the debt ceiling as much as the president wants, the effective
result would be major government spending cuts, with payments on public debt
excluded.
This is
tough medicine and not to be administered lightly. If Republicans are serious
about winning this debate, they must strive to convince the American people
that such spending cuts are necessary, given President Obama's openly
articulated unwillingness to implement any meaningful spending cuts other than
defense and his clear preference for limitless borrowing.
Whether
they can succeed in this task is unclear. But the public must at least be
allowed to ponder these vital issues without being misled by false claims
involving debt default, the nature of federal obligations, and which branch of
government is in charge of the public fisc.
Messrs.
Rivkin and Casey are partners in the Washington, D.C., office of Baker
Hostetler LLP and served in the White House and Justice Department during the
Ronald Reagan and George H.W. Bush administrations.
A
version of this article appeared January 11, 2013, on page A13 in the U.S.
edition of The Wall Street Journal, with the headline: The Myth of Government
Default.
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