Friday, October 4, 2013

Beyond government by crisis: Fixing the leaks

The United States has a written Constitution that describes how the government works. We also have rules, not included in the Constitution, that affect how the government works. Some of these rules are causing extreme problems with basic governance. The political parties, primarily the Republicans at the moment, use these rules to stop government when it becomes apparent that the routine running of government goes contrary to their policies. These rules should be fixed when there is no crisis so that we can avoid similar crises in the future.

Crisis 1. The government cannot run without a budget

The Constitution states that any revenue bill must originate in the House of Representatives. The Framers apparently did not consider that the House might decide not to pass a budget and thereby bring government to a halt. The Framers believed in negotiated settlements. They did not foresee a group of representatives who would refuse to negotiate until their demands are met.

This predicament is not predetermined by the Constitution itself, however. The solution could be a simple law instead of a Constitutional amendment. This law would be a law that takes effect when certain conditions are met. For example, the order of succession to the presidency is set by law, not by the Constitution, and the selection of a new president is determined by a specific event, namely the death or incapacity of the current president.

The Congress could pass a law that goes into effect when a budget expires without Congress having agreed on a new one. The budget would be replaced, as currently, by a continuing resolution that continues funding a current levels until a new budget is agreed upon.

This automatic continuing resolution could run indefinitely, as seems reasonable, or it could expire after a set period of time. The effect would be the same in both cases, since a new continuing resolution would come into effect as soon as the old one expires, unless a new budget has been passed and signed into law.

Crisis 2. The government cannot continue borrowing money after the current debt limit is reached.

The debt limit is a relic of the nineteenth century when the government raised revenue by selling bonds or other financial instruments. The practice reached its current form in 1939, when all borrowing was consolidated into one package, called the national debt. Since then, the debt limit has periodically been used as a bargaining chip by one party or the other. The repercussions for allowing the U.S. Government to default on its debt are severe, however.

In 1979, during a similar debt ceiling crisis, as reported by the Washington Post, the U.S. Treasury actually defaulted on a small number of loans--about $120 million worth. This relatively small default caused a ripple effect in U.S. government debt because it raised interest rates by 1/2 of one percent, eventually costing the U.S. Treasury billions of dollars. This amount represented money that had to be repaid at higher interest rates as a result of the "micro" default.

The 2011 debt ceiling crisis was even more expensive, even though the Congress acted before any actual default. As reported in a study by the U.S. Treasury Department, this "near miss" led to a number of negative consequences, including a loss of household wealth of $2.4 trillion and a loss in retirement wealth of $800 billion. Although housing prices and the stock market recovered within a year, the losses sustained during that year can never be recovered. This is because the interest on those investments was lost and any interest that could have been compounded was also lost.

The costs of tinkering with the debt ceiling are grave. The U.S. should institute an automatic debt ceiling increase whenever the actual debt nears the official limit. This automatic debt ceiling increase would work like the automatic budget increase described above. The new law would assure that no irresponsible Congress could ever undermine the full faith and credit of the United States.

The automatic debt ceiling increase would not necessarily keep increasing U.S. debt indefinitely. Then, as now, the Congress has complete control over how much it spends and borrows. No law can force the Congress to behave responsibly, or we wouldn't be facing another Congressional extortion right now.

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