Should There Be a Debt Ceiling?—Posner

The “debt ceiling” is a statutory cap on the amount of money the federal government is permitted to borrow. Introduced during World War I, the debt ceiling has been raised by vote of Congress dozens of times as federal debt has grown. A statute raising the debt ceiling must, like all federal statutes, be passed by both houses of Congress and signed by the President (unless his refusal to sign it—his veto—is overridden by a two-third vote of each house of Congress) before it can become law. The Republican members of the House of Representatives, who have a majority in the House and are preoccupied with federal debt and determined to reduce it solely through reductions in government spending, have lately taken to threatening to vote against raising the debt ceiling, as a lever to induce spending cuts. 

The concern with the size of the federal debt is legitimate but the debt ceiling is an illegitimate device for seeking to limit the debt. The reason is that the ceiling enables the requirement that I just mentioned that legislation to be valid be passed by both houses of Congress and signed by the President to be circumvented. The various programs that require federal spending—programs that range from defense expenditures and civil servants’ salaries and agricultural subsidies to Social Security benefits and Medicare benefits—were all enacted by Congress in the prescribed manner. If the government cannot fund the programs without borrowing, a refusal by Congress to raise the debt ceiling operates in effect as a partial repeal of the statute creating, and prescribing or authorizing funding for, the program. The repeal of a statute is governed by the same requirements as initial promulgation—passage by both houses of Congress and presidential signature. By refusing to vote to raise the debt ceiling, therefore, the House of Representatives would be effecting a partial repeal of many federal programs, all duly authorized, all by itself, without the concurrence of Senate and President. 

This strikes me as improper but also as reckless because of the possible economic consequences. It is true  that defaulting on bonds and other securities issued by the federal government could be averted simply by paying the holders of federal securities ahead of other persons entitled to money from the government, such as social security annuitants, civil servants, military personnel, and contractors who sell goods and services to the government and are owed payment. Debt service—interest on government securities—is actually only a small part of the federal budget. But because the federal deficit (the excess of revenue over expenditures) was $1 trillion this past year—though that was 20 percent below the deficit in 2011, a result of the economy’s improving—a reduction of the 2013 deficit to zero because the debt ceiling wasn’t raised would cause substantial economic dislocation, so substantial that the Republicans are now willing to raise the ceiling to avert a default, though only for three months. 

As I said, I think the use of the debt ceiling as a bargaining lever is improper because the debt ceiling is improper. But I also think that the conservative policy of reducing federal debt by cutting non-defense spending including entitlement spending while raising defense spending, rather than reducing federal debt by raising taxes, is a nonstarter. As Nate Silver pointed out in an article in the New York Times earlier this week (see http://fivethirtyeight.blogs.nytimes.com/), most types of federal expenditure have not grown faster than the economy in the last forty years and as a result have not contributed to a debt crisis. The big exception is the growth in entitlement spending, a growth due to a considerable extent (about half) to growth in outlays for medical expenses. Entitlement spending is very difficult to cut as a political matter. That would not be a problem if non-entitlement spending could be cut, but that is very difficult to do as well. Every federal expenditure program is walled and moated by the interest groups that benefit from the program. 

Some cutting is probably politically feasible, such as closing some tax loopholes and cutting some deductions, reducing social security and Medicare for people who have a high income, reducing (rather than increasing, as conservatives want) our enormous military budget, and laying off supernumerary civil servants. But the aggregate savings are likely to be smaller than the annual growth in Medicare and social security payments and the federal share of Medicaid payments. So the amount of federal debt will grow, and if it grows by more than 3 percent a year it will grow faster than the economy, though the annual deficit will continue to shrink as the economy improves and therefore tax collections increase while outlays for unemployment benefits and other “automatic stabilizers” (spending programs that expand during a recession or depression in order to reduce its adverse effects) decrease as an additional consequence of an improving economy. Rising debt will at some point result in higher interest rates, which will further increase the expenses of government and hence the debt. And those higher rates, which will spread to all borrowers, will reduce the capital available for business growth. If I am right that realistically government expenditures can’t be cut enough to offset growing entitlements expense, the only answer to the growing debt is higher taxes, though there are of course political obstacles to raising taxes. Assuming those obstacles can be overcome, the social costs of higher taxes would then have to be compared with the social costs of higher government debt to determine whether taxes should be raised or the debt increased. 

I want to close by returning for a moment to the issue of entitlement spending, to underscore my conviction that such spending will continue to grow faster than the economy. The term “entitlement”
is unfortunate, as it gives rise to phrases like “entitlement society.” To claim an “entitlement” sounds like something only a person who is spoiled would do. But we don’t speak of contracts in general, including health insurance policies, as creating “entitlements,” but rather as creating legally
enforceable rights. The “entitlement” programs are different only because they are forms of insurance that are highly subsidized. They are forms of redistribution. But all modern societies engage in redistribution, thus rejecting social Darwinism, and have been doing so for some time. Bismarck was the pioneer, pressing successfully for the enactment of publicly financed health, accident, and disability insurance, and retirement benefits—and he was no socialist! 

The elderly are a powerful political bloc (relative for example to children) in the United States and other wealthy countries, and, despite the nation’s wealth, because the wealth is very unevenly distributed most of them couldn’t enjoy a comfortable old age if they didn’t have Medicare and Social Security. As the population ages because of increased longevity attributable in significant part to advances in medical technology, outlays for Medicare and Social Security will increase. (While it is true that the growth in Medicare outlays has slowed since the recession began in 2008, this is because of falling incomes, which make co-pays and deductibles seem more costly, and thus reduce consumption of medical services. Rapid growth of medical outlays can be expected to resume as the economy improves; and feasible fiscal reforms—moderate and therefore politically acceptable economy measures—are unlikely to reduce the rate of growth enough to allow the government’s debt to be controlled without any increase in tax rates. Higher taxes or higher debt: those I think are the alternatives to focus on.

Comments

[Thomas Rekdal]

Judge Posner claims that it is neither possible nor desirable to reduce the growth in entitlement spending below the long-term rate of growth in the economy. Of course, if that is true, he must also be right that our only realistic choice is between higher taxes and higher debt. But I thought that is exactly the contested point, namely whether entitlement spending can be restrained without serious sacrifice to our national well-being. I am no expert on the subject of entitlement growth, but I am a little disappointed to see Posner's assertion offered as a fairly obvious fact, rather than the conclusion of an argument.

Whether the current contention over the debt ceiling is an absurd and illegitimate exercise depends crucially on whether Posner is correct in claiming that there is no acceptable way to reduce entitlement spending. If that is true, the absurdity lies not in Congressional efforts to block borrowing to pay for expenditures already authorized, but in attempting to solve a problem that cannot be solved.

[Terry Bennett]

Sometimes laws conflict directly with other laws. Such is not the case here. Rather, one law acts as a collateral constraint upon the other, but both laws can be followed up to a point, and that is apparently what was intended by lawmakers. Rules of construction dictate that both laws are to be construed on the assumption that Congress and the President are aware of both of them and mean them to exist in tandem.

New Jersey has a law that says the county tax administrator shall manage the affairs of his office in such a way as to minimize the number of real estate tax appeals. New Jersey also has a law against homicide. The tax administration statute does not specifically forbid the county tax board from shooting people to keep them from filing tax appeals. The homicide statute acts as a constraint upon the tax administrator, limiting his power under the other statute. That hardly makes the homicide statute illegitimate. What Congress and the President are saying is that we shall pay for people's retirement and health care, as long as we don't spend more than a certain amount. The debt ceiling statute predates the Medicare statute, and could have been repealed when Medicare was passed but lawmakers did not choose to do so. If anything, Medicare is an illegitimate means of pushing us past the debt ceiling.

As for Bismarck, socialist is as socialist does.

I have written elsewhere of the capitalism-communism contimuum. If a culture leans too far toward individual responsibility, lesser advantaged people suffer. If it leans too far toward collective responsibility, freedom suffers (taxation is a limit on freedom). How much freedom shall we take from the able, to comfort the less able? That is a question all modern societies must answer for themselves. The rich tend to vote for less, and the poor for more. In our time we are facing critical mass, when the rich are villified and the poor are poised to vote themselves a raise. Right now the compromise is, as George Will has pointed out recently, to keep paying Paul but not bother robbing Peter. With all the suckers lining up to lend us money, we need not worry about raising our collective productivity to pay our debt. The scam can't fail.

[Rcfwilmette]

I agree with Judge Posner and would recommend that the President and every Democrat on Capitol Hill adopt his argument forthwith.

I do not agree with Terry Bennett on how statutory construction should work in this matter. While statutes should be construed to minimize conflict, a later passed statute controls over an earlier one if there is a conflict. Thus, budget bills or continuing resolutions passed since the last debt ceiling bill should control, even if there is a conflict. If I were the president, that is what I would tell the GOP and dare them to shut the government down or challenge me in court.

[Terry Bennett]

In further support of my position, I note that Congress and the President ARE expressing respect for the debt limit statute. I have not heard Con Law Professor and President Obama try to make the argument that the Medicare statute preempted the debt limit statute.

These statutes do not conflict. One merely constrains the other. If one statute says traffic entering a circle has the right of way and another statute says traffic leaving a circle has the right of way, that's a conflict of laws. They can't both be right, and "conflict of laws" rules do indicate that the later statute controls. That's not the situation we're discussing here. These statutes can and do simultaneously each have meaning and purpose.

Still, in case Rcf is right, henceforth I shall carefully screen my visitors - it might be the tax board coming for me.

[Neilehat]

When it comes to "Debt Ceilings" there is an issue being overlooked and that is the idea of "Good Governance". Such that, by establishing a "Debt Ceiling" per se, it introduces a form of inflexibility into Government operations and constrains it's ability to respond to problematic Socio-economic conditions. More often than not in a negative fashion. There is also the problem of "inflation" and it's negative impact on budgeting. Which is part and parcel of the current Budget "Crisis". Especially in the "Big Three" Line Items in the Federal Budget (Defense, Medicare and Medicaid). So the question comes down to, "Do we want a flexible Government that can respond to the conditions of the times or do we want an inflexible Government who's raison d'etre is "Balanced Budgets above all else"?

As for our current "Crisis", my suggestion is an across the board line item cut of approx. 10 to 15 percent, coupled with a closing of tax loopholes. If this is not enough, then in the next budgetary cycle, an increase in the tax rate of approx 10 to 15 percent across the board. By doing such, it requires all players to take on the burden of austerity/funding and "Good Governance".

[Sequel]

I agree with Judge Posner that the debt ceiling law is an inherent violation of separation of powers.

While I also agree that Bennet's argument that collateral constraint is an appropriate approach to Congressional intent, I disagree that it applies here, since a debt ceiling, once breached, imposes on the Executive Branch the requirement to decide which bills to pay, hence which laws to consider intact, and which to consider dead. This effectively nullifies prior Congressional action without benefit of a vote, a law, or a veto.

As reductio ad absurdem I would submit that if the current Congress passed a law invalidating all acts of the 73'd Congress (including the repeal of Prohibition), that law -- even with a Presidential signature -- would be unconstitutional and invalid on the same grounds, and at the same time would permit no reasonable way to apply the principle of collateral constraint.

[Terry Bennett]

I would suggest that with passage of the debt ceiling statute, the intent of Congress was that the ceiling not be breached. I will leave it to the SCOTUS to decide someday whether later laws authorizing spending have in fact preempted the earlier law. If that was indeed Congressional intent, it would have been nice of them to say so.

Unlike the Prohibition amendments, the debt ceiling is not part of the Constitution. It is just a run-of-the-mill statute that can be undone by the same process that created it. In a head to head conflict, the Constitution trumps a statute. So, I agree that Sequel's example would be unconstitutional, for the simple reason that Congress does not have the enumerated power to change the Constitution. That is, again, an example of a conflict rather than merely a constraint. I continue to see the debt ceiling and subsequent spending laws as not in conflict. Both can have meaning and purpose at the same time.

It seems we have wandered away from the point of the original post. I was just pointing out in response to Judge Posner's assertion of its illegitimacy that it was a duly enacted law at the time, and did not reach beyond the enumerated powers of Congress, and every Congress since has had, as our current Congress has, all the necessary and proper authority to repeal it, and they haven't explicitly done so. It would be just fine with me if Congress repealed the debt limit - or better yet, repealed some of the spending.

[Sequel]

Salutations, Bennet. Agree with your reasoning ... but with one footnote.

I proposed the 73d Congress because it approved the 21st Amendment to repeal Prohibition. I still presume that invalidation of all the acts of the 73d Congress would extend to that action, raising yet another (tho admittedly absurd) SCOTUS question regarding limits on Congressional power to repeal otherwise permissible prior acts.