By Anthony W. Hawks
This is the last in a series of posts about the recent debt ceiling debate. Although the national debt limit is a statute and not a constitutional requirement, I have tried to show in earlier posts that enforcement of any future Balanced Budget Amendment (BBA) will play out just as the debt ceiling did. Enforcement will fall short in both cases because of irresistible pressures to avoid what again will be characterized as Financial Armageddon.
This is true not only because the BBA has its own debt ceiling provision (requiring a 3/5ths vote rather than a simple majority), but also because its waiver provisions have the same “take it or leave it” quality as the debt ceiling statute. In the end, Congress will be forced to waive any balanced budget, spending limitation, or debt ceiling requirements in a BBA, or watch as the government shuts down or defaults on its debts and other payment obligations.
In either case, if there is no payment priority plan in place, uncertainty in the economy and financial markets will continue to prevail, and Congress will again back down rather than face the consequences of its own fiscal irresponsibility. President Kennedy was fond of saying that “to govern is to choose,” but this is precisely what the President and Congress refuse to do every time they raise the debt ceiling and talk of mythical spending cuts in the “out years.”
If Tea Partiers want to prevail in the next debt ceiling battle, then they need to force a debate over what a detailed and comprehensive payment priority plan would look like. Today, no such plan apparently exists within the federal government, although most departments and agencies have their own contingency plans in the event of temporary funding lapses.
The President’s annual budget proposal is thought to present his spending priorities, but in fact it only does so in the limited sense of which programs should get funding and how much. These budgets never contain priorities as to who should get paid if available funds are insufficient to pay everyone.
Congress, however, could change this process by establishing priorities for spending required by the Constitution and statutory entitlement spending, while requiring the President to assign a priority rating to every discretionary budget program or line item. The discretionary priority ratings would not be binding, but would allow for periodic revisions to reflect actual appropriations by Congress over the course of the legislative session or to accommodate genuine emergency spending that was not anticipated when the President’s budget was first released.
According to a recent Congressional Research Service report (Reaching the Debt Ceiling, p. 9 n.30 ), the Office of Management and Budget has prepared a list of essential functions that must be performed during government shutdowns. This list could serve as the foundation for a payment priority plan, but much more is needed to deal with a crisis situation in which money can no longer be borrowed to finance our annual deficit, which the Congressional Budget Office now estimates is 40% of the entire federal budget.
Think of it this way: every spending item in the federal budget falls either within the 60% that can be paid with current Treasury cash flow, or the 40% that can only be funded with borrowed monies. Let’s call the former “Priority Spending” and the latter “Non-Priority Spending.” The most basic question then for any payment priority plan is whether a particular budget item should be classified as Priority Spending or Non-Priority Spending.
Of course it is more complicated than this since cash flow fluctuates daily, as does the amount of payment obligations that become due each day. Thus, in practice there may not be enough cash flow on a given day to cover the Treasury’s payment obligations even if the only obligations for that day were among the Priority Spending items. This could be addressed by making such partial payments as immediate cash flow allowed, while paying the balance at a later time as additional revenue was received. Regardless, Non-Priority Spending would always be at the end of the line until higher revenues were generated to pay all Priority Spending in full, thereby decreasing the percentage of Non-Priority Spending from 40% to 39% to 38%, etc.
A more complex, but perhaps fairer, approach would be to adopt a classification system with numerous categories, instead of just two (Priority v. Non-Priority). You could have, say, 100 categories, with each category representing the percentage of the item to be paid from incoming cash flows. Thus, items in the “100” category would receive a 100% payment when due, while items in the “75” or “50” or “25” or “0” categories would only receive a 75%, 50%, 25%, or zero payment, respectively. In this way, more budget items would benefit from at least a partial payment with far fewer spending items in the “Non-Priority” or zero category.
For discussion purposes, however, let’s stick with the simpler case of establishing a payment plan that only distinguished between spending in the 60% Priority Spending v. the 40% Non-Priority Spending. Now the important question becomes what criteria should be used to decide what budget items go into which category. Regrettably, there was virtually no discussion of this issue during the recent debt ceiling debate.
As far as I know, the only detailed payment priority analysis presented during this debate was a report issued by the D.C.-based Bipartisan Policy Center (BPC) in July 2011 titled Debt Limit Analysis, although a number of media organizations developed “Do It Yourself” Internet tools for deciding who gets paid, found here, here, and here. The BPC plan, however, does not make priority recommendations, but merely shows what would not get paid if certain programs were fully funded. Thus, if you prioritize and pay all Treasury securities, Social Security, Medicare/Medicaid, defense contractors, and unemployment insurance benefits, then according to the BPC there would be no cash flow to pay such items as military active duty pay, veterans services, federal salaries and benefits, and a slew of programs at the Education, Energy, HHS, HUD, Labor, and Justice Departments.
Knowing the potential trade-offs is certainly helpful, but establishing criteria for making these trade-offs is what any payment priority plan must ultimately address. Should they be economic, political, or moral? A business or individual would probably start with economic criteria, asking which creditor is needed to keep the business operating or the mortgage paid? Under this standard, Treasury bondholders and government contractors would probably come first. From a political standpoint, Social Security and Medicare would doubtless be at the top, while from a moral perspective those with the greatest need (e.g. Medicaid recipients) or who have made the greatest sacrifices (e.g. active military) would have the strongest claim to priority.
From a legal standpoint, however, the answer would be that payments required by the Constitution must be made first, as explained here by Professor Rob Natelson (“Can the President Raise the Debt Ceiling Unilaterally?”, beginning at 10:30 minutes). This is strongest reason why payments on the national debt (14th Amendment, Section 1) and payments to ensure national defense (Article IV, Section 4) have the highest priority, along with constitutional duties to keep essential aspects of the federal government operating.
Regardless of the criteria followed, it is easy to understand why neither the President nor Congress would ever want to offend millions of voters by picking winners and losers in such a budget lottery. But this is precisely why conservative and libertarian think tanks should begin presenting their own priority plans, and why Tea Partiers should press for such a plan if they want a meaningful debate over the debt ceiling or any future BBA. It would not only spur debate over true budget priorities, but also expose the weaknesses of the class warfare arguments that we are hearing today.
When President Obama calls for increasing taxes on the rich, the first question to be asked is whether these new taxes are intended to pay for a program that should be classified as 60% Priority Spending or as 40% Non-Priority Spending. Surely President Obama would not concede that a program designed to help the poor such as Medicaid is in the Non-Priority Group. But if Medicaid is considered Priority Spending, then no new taxes are needed to fund Medicaid because, by definition, the Treasury already has the cash flow to pay for programs in the 60% Priority Spending group!
Inevitably it turns out that new taxes are being demanded for something that is properly placed in the Non-Priority Spending category, which is a much harder argument for supporters of higher taxes to make. Why, for example, should the wealthy be asked to provide funding for National Public Radio surely a Non-Priority Spending item? This is precisely the point that former chairman and CEO of American Express Harvey Golub was making in his recent Wall Street Journal op-ed rebutting Warren Buffett’s call for higher taxes on the rich.
This is the debate we need if the debt ceiling or a BBA is to become real, and Tea Partiers should try and force the issue over the next 14 months until the 2012 election. Senator Orrin Hatch (R-UT) has already called on Treasury Secretary Geithner to furnish a payment priority plan, and Tea Partiers should be supporting this effort, while pressuring House and Senate Republican leaders to coalesce around a consensus payment priority bill. Each Republican presidential candidate should then be asked to pledge their support for such bill or to present their own plans if elected.
Just imagine the pressure on Congress to cut spending during the next debt ceiling debate if the next President not only refused to ask for another debt ceiling raise, but actually promised to veto any increase passed by Congress. It would be irresponsible to do so without first having presented a priority payment plan, but not if such a plan were disclosed months ahead of time, so that the financial markets have plenty of time to adjust and were assured that payments on the public debt would be paid first and in full.
Copyright © 2011 Anthony W. Hawks. All rights reserved.