By Terry Connelly
While we are on the subject of banning assault rifles and machine-gun ammo clips, it might be good to take a quick second look, not only at the doomsday machine heretofore known as the “Debt Ceiling,” but also at its close relative, the “Sequestration” legislation.
The “Sequester” was the deal concocted in Congress to back its way out of the summer 2011 Debt Ceiling fiasco: to get the Republican radicals to give up their threat to put America into default unless the budget was cut by an mount equal to any Debt Ceiling increase, Congress agreed to $1 trillion in across-the-board cuts to military and discretionary domestic spending (not including most “entitlement” programs) over 10 years, starting with 10 percent of that in the very first year (2013). Thus, there would be no Sequestration but for the manufactured Debt Ceiling crisis.
Self-Inflicted Economic Suicide
Virtually every reputable economist who has studied the U.S. debt situation, including the Federal Reserve chairman, has suggested that the needed trillion dollar budget cuts should be “back-loaded” within the coming 10-year period to avoid putting the brakes on the currently emerging economic recovery from the Great Recession. But never mind. The theory was that by legislating a doomsday machine of cuts that undoubtedly would hurt the economy because of their “front-loading” and their meat-ax nature – butchering the “sacred cows” of both Republicans ( $46 billion from the Pentagon) and Democrats (deep cuts to government services like air traffic control and social programs like food stamps community health clinics) – Congress would be forced to either come to a true Grand Bargain on taxes and entitlements like Medicare, or adopt more targeted and better-timed budget cuts so as not to put the economy back into reverse.
It didn’t quite work out as planned, however. When Ben Affleck, after his success with “Argo,” directs the remake of “Dr. Strangelove,” it probably won’t involve fighting in the “War Room” at all, but rather the self-inflicted economic suicide pill we are about to ingest as a nation or around March 1. Unlike in another film of high irony, we will find that currency suicide isn’t “painless.” (and it won’t be as mordantly funny as “Mash,” either).
Congress Holds the Purse Strings
Like so many train wrecks before, this one we can see coming. It doesn’t have to happen in a sane world. But that is asking a lot of Washington D.C. and specifically the U.S. Congress just now. Just look at the underlying insanity of the Debt Ceiling law, which as noted is the primary cause of the Sequester plan.
Under the Constitution, the Executive Branch spends only what Congress directs it to spend and generates revenue to do so by taxation and fees only to the extent that Congress has authorized it to tax and charge. Obviously, if what the Government is entitled to collect turns out to be less than what it is obliged to pay out, it must borrow the balance to “faithfully execute” the laws of the United States. No President independently runs up the debt. If this President or any other is to be accused of an “addiction to spending,” then by necessity his drug dealers reside at the other end of Pennsylvania Avenue.
Accordingly, any attempt by Congress to purport of impose a “debt ceiling” that would prevent the Executive Branch from paying the obligations of principle and interest of the United States heretofore lawfully incurred (as they all have been) would seem to be unconstitutional on its face as exceeding the legislative powers enumerated in the Constitution.
A Nonsensical Attempt
Nor is it even logical to attempt to impose retrospectively a “ceiling” on the arithmetic consequences of mandates already written into law regarding spending required and taxes allowed. Ordinarily we get notice of our credit card limits before we charge anything, not after the fact. How would that work out in the real lives of you and me?
We wouldn’t do business with a credit card company that imposed a credit limit retroactively – and Congress is trying to do that after mandating the very spending and borrowing it apparently wants to have second thoughts about (or at least “have it both ways”) mandate the spending and then purport to deny accountability and leave the President powerless. But the President is not powerless; he used the “bully pulpit” to dragoon the house Republicans into putting off the Debt Ceiling crisis originally scheduled for January by “suspending” the ceiling a few months to give time to sort out the budget and the looming Sequester time bomb.
Some have suggested that the President should ultimately nullify any such debt ceiling by citing the 14th Amendment’s provision that the “validity of the public debt of the United States, authorized by Law… shall not be questioned.” But validity of debt is one thing, and having the funds to pay it is another. A President asserting the first proposition doesn’t reach the second. And relying on the Supreme Court to affirm the Constitutional nullity of a refusal by Congress to raise a Debt Ceiling already imposed by statute, as is the case now, would take too long to resolve to satisfy the financial markets, not to mention the rating agencies.
Fixing the Problem
What, then, can a President do to sustain the “full faith and credit” of the United States as to its public debt, as well as Social Security payments, veterans benefits, and other financial entitlements under law if Congress refuses later this year to actually raise the Debt Ceiling to a level commensurate with the projected US tax revenue shortfall against Congress’s mandated spending? Fortunately we don’t have to cross that bridge just yet; but the clock compels us to come to grips with the Debt Ceiling’s nefarious progeny -- the Sequester --which is an equally poisonous pill for the economy and even our national security.
The Tea Party wing of the Republican Party, reluctant collaborators in the Sequester deal (they actually wanted to get to debt default), has now overtly come out for letting Sequestration happen. In their view, any cut is better than none, and maybe the Democrats will cry uncle first when the economy tanks and the poor cry for their benefits. More traditional Republicans remain more ambivalent, even sharing the Obama Administration’s very real concern for the military cuts, which have already prevented deployment of a second aircraft carrier to the Persian gulf in the midst of critical instability in that region and their own Party’s cries for more U.S. military assets closer to besieged American embassies.
Obama has suggested a short-term fix to leave enough time for a renewed grand bargain over the budget, taxes, entitlements and the Debt Ceiling to come together during the summer – which was the basis of the deal in January to put off the Debt Ceiling issue itself until mid-May at the earliest. But Speaker Boehner got that deal done without Tea Party votes, depending on House Democrats for his majority. The Senate would probably go along with a parallel Sequester “suspension,” but the House Tea Party caucus will not, particularly if any such short term deal includes closing tax loopholes like the indefensible “carried interest” capital gains treatment for hedge fund managers performance compensation. Even Mitt Romney put this on his tax reform list, but now Republicans are back on their familiar “no new taxes” bargaining posture.
Is this really the scenario the Tea Party wants to start their second American Revolution? If so, they should indeed grab their muskets and three-corned hats. Our economy and our national defense structure are going to take on some late 18th-century characteristics in short order if the Congress doesn’t act sanely.
The Speaker of the House must again confront the possibility that any deal to avoid the adverse consequences of Sequestration will be dependent on Democrat votes. At the moment, doing so twice in one calendar quarter is such a galling prospect that he is fiddling with using the “leverage” of severe cutbacks in military readiness and social services – and maybe a total government shutdown by the end of March – to carry out the will of the roughly 20 percent of the American people who support the Tea Party “rule or ruin” philosophy. Time will tell if preserving the “carried interest” tax benefit for private equity and hedge fund executives, and showing the food stamp “takers” who’s boss, are worth an aircraft carrier in the Persian Gulf.
Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.