Beyond being self-imposed, the debt ceiling may not even be constitutional. Why hamstring spending because of it?
Pat Toomey has called the Democrats' bluff by indicating that a failure to extend the debt ceiling does not automatically mean a default. He is making the point that because debt payments are an executive priority, and tax receipts are more than sufficient for interest payments, the government can continue to make them to bondholders. It will simply mean shutting down other parts of the government to offset those payments. This is in fact the dream of the Tea Party supporters and other fiscal hawks, who have long fantasized about ways to substantially reduce the size of government and roll back programs dating from the time of the New Deal.
The reality is that Senator Toomey is probably correct in his assessment that failure to raise the debt ceiling would not be tantamount to default. In fact, the debt ceiling is merely a foolish, self-imposed limit that severely constrains the efficacy of fiscal policy. What's more, there are arguments that it may even be unconstitutional. The best course is to simply ignore it or have the President challenge its constitutionality in the Supreme Court. But if Democrats continue to endorse "fiscal austerity lite" while subscribing to the notion that the US must "get serious" about reducing the government's deficit, they'll only make it easier for Republicans to get spending cut concessions and ultimately lose the argument.
Budget deficits per se have no ideological implications. They are accounting statements, plain and simple. The size of these deficits are non-discretionary in the sense that they are largely beyond the control of the government. Which is to say, the size of deficits is largely a function of private spending and saving decisions, not government spending, precisely the opposite way that most people view the process. To put it another way, the more the private sector spends, the lower a budget deficit the government will have (typically). So when budget deficits rise significantly -- as they have in recent years -- we know that this is because private spending is weak and output growth is contracting or weak. This is precisely when more government spending is needed, not the time for cutbacks.
In the event that the debt ceiling isn't raised, the government might, as Senator Toomey suggests, simply prioritize payments to bondholders and begin to reduce payments to seniors, Medicare recipients, etc. It would constitute another erosion of our democracy, in effect using a silly self-imposed constraint to do an run-around the budget process. Having failed to make the case for shrinking Medicare, Social Security and a host of other government programs, the fiscal austerians and radical conservatives (who are ideologically against any kind of government initiative) are now using the debt ceiling to achieve the same goal. Given the traction Senator Toomey's arguments are now gaining within the GOP and mainstream economics, it is clear what is going to happen: the debate will once again shift to how much government spending should be cut back, which will almost certainly create the very double dip recession conditions that Secretary Geithner is now warning about.
The irony is that the debt ceiling itself might be unconstitutional. Consider the analysis set forth by former Reagan official Bruce Bartlett, who has argued for some time that the statutory debt limit raises constitutional issues. If this sort of analysis gets broader traction, we could be in for some very interesting times:
The president would be justified in taking extreme actions to protect against a debt default. In the event that congressional irresponsibility makes default impossible to avoid, he should order the secretary of the Treasury to simply disregard the debt limit and sell whatever securities are necessary to raise cash to pay the nation's debts. They are protected by the full faith and credit of the United States and preventing default is no less justified than using American military power to protect against an armed invasion without a congressional declaration of war.
Furthermore, it's worth remembering that the debt limit is statutory law, which is trumped by the Constitution which has a little known provision that relates to this issue. Section 4 of the 14th Amendment says, "The validity of the public debt of the United States...shall not be questioned." This could easily justify the sort of extraordinary presidential action to avoid default that I am suggesting.
In support of his constitutional arguments, Bartlett cites Garrett Epps, a law professor at the University of Baltimore School of Law, who agrees that Section 4 precludes the debt ceiling. "'If a statute requires something that requires violating the Constitution,' Epps says, 'the Constitution always trumps a statute.'"
If Bartlett is correct, this should be viewed as a huge opportunity for the Democrats, not a source of hand-wringing. Indeed, progressives everywhere should celebrate it as the death of one more stupid constraint on our ability to help groups in society who benefit from government programs, such as universal health care, free education, and a job guarantee. Democrats who oppose the Republicans resisting an elevation of the debt ceiling should in particular avoid diminishing the force of their arguments by embracing a form of deferred fiscal chastity in which they fight over how much to cut in exchange for securing GOP acquiescence to raising it. By adopting this strategy, the Democrats inadvertently make common cause of the anti-tax tea partiers and threaten the very programs they claim to champion, such as Medicare and Social Security.
Today, we need government spending now more than ever. With the external sector in deficit (and likely to stay that way) and the private sector deeply indebted, the national government has to run a deficit to support growth. Deficit hawks will invariably be frustrated in their goal of shrinking the deficit because as the federal government tries to run a surplus (the stated policy aim), it will end up running a deficit anyway -- courtesy of the automatic stabilizers. Ultimately, though, it will oversee an even sicker economy than it already exists today.
Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.