Five Myths about the debt ceiling: Bruce Bartlett explains

Jul 11, 2011

In his recent Outlook piece, former adviser to Ronald Reagan Bruce Bartlett debunked five myths about the debt ceiling. In his piece he writes, "In recent months, the federal debt ceiling - last increased in February 2010 and now standing at $14.3 trillion - has become a matter of national debate and political hysteria. The ceiling must be raised by Aug. 2, Treasury says, or the government will run out of cash. Congressional Republicans counter that they won't raise the debt limit unless Democrats agree to large budget cuts with no tax increases. President Obama insists that closing tax loopholes must be part of the package."

Chat about his opinion piece, the recent debt talks and more with Bartlett Monday, July 11 at 11 a.m. ET.

Have a question? Ask now.

I'm now here to talk about my article in Sunday's Post on 5 myths about the debt limit. I will also entertain questions on any aspect of the debt limit debate that I am able to answer in this format.

The tax payment to the US Treasury each month far exceeds the interest payment due, and is also sufficient to fund mandatory Federal Outlays. So why is there talk of default on the servicing of the National Debt when there are sufficient revenues to pay for it?

At some point the Treasury will have to decide whether to pay Social Security benefits or interest on the debt. 

Why are the Republicans so militant now while they voted seven times to raise it during the tenure of George Bush ?

Obviously, because there is a Democrat in the WH.

The debt ceiling deadline has been missed three other times in history with the most recent being in 1971. Does missing this deadline now carry consequences greater than the other times?

The deadline was back in May. The Treasury is just fiddling with the books to prevent a legal breach of the debt ceiling.

Why have you rejected conservatism in the last few years?

I still consider myself to be a conservative in the tradition of Edmund Burke, Russell Kirk and William F. Buckley. I don't think most of today's conservatives have any idea who those people were.

So if the debt ceiling isn't passed, President Obama can either spend money already appropriated and violate the law, or he can prioritize what debts to pay and violate the law by impounding moneys that have already been appropriated?

If the debt limit is not raised, the president will have to break the law by defaulting on the debt or not paying bills he is obligated by law to pay.

If 10 years of tax cuts are supposed to stimulate the economy and create jobs, where is that economy and where are those jobs?

The Bush tax cuts were economically worthless.

Given that no less a luminary on the right than Ronald Reagan has spoken of the dangers about failing to raise the debt, why have conservatives forced us down the very dangerous road we're currently on?

They are not driven by rational analysis, but by right wing dogma.

Ronald Reagan used to say that he didn't leave the Democratic Party, but instead the Party left him. If Reagan were alive today, would it be fair to say that the Republican Party has left him?

I think there is no possibility that Ronald Reagan could get the Republican nomination for dog catcher today.

In myth #5 you refer to "violation of laws requiring government spending" should the Obama administration "unilaterally slash spending to pay bondholders". Could you cite your best single example of such a spending law, (preferably one enacted more recently than the debt limit law)?

The Congressional Budget and Impoundment Control Act of 1974.

Are there any laws being proposed to limit the borrowing of Social Security funds? Is it true that these funds have been borrowed against in the past? And if so, were they ever repaid and how was that done? I feel there should be a firm law, even a constitutional law, that Social Security money not be touched to balance the budget or pay for wars, etc. This money removed from workers' paychecks without their consent by law, and it is criminal that now the funds are in question.

Excess Social Security funds are invested in Treasury securities by law. Whether this is done inside or outside the Treasury is irrelevant. 

Sir, On the morning after Speaker Boehner bails on an historic opportunity for a balanced approach to deficit reduction, we have the ideological tantrum throwers in charge. We have the lowest tax rates in 50 years, the most successful corporations in history getting huge, and unique, tax breaks, and the major source of income for wealthy people being taxed at a special low, low rate. But we want to cut everything that doesn't go to a wealthy person. When has this ever worked outside an oligarchic dictatorship with a strong internal security force?

Historically speaking, the political situation today is not dissimilar to that in the late 19th century. Eventually, there was a liberal backlash and we had the Progressive Era. I suspect the same thing will happen again, but I don't know when or how.

Recently the 14th Amendment argument that failure to raise the debt ceiling would be unconstitutional (and therefore the President has the duty to order the Treasury to continue to issue debt) has become mainstream among legal experts. Yet Obama has dodged questions on this, and Geithner has been unequivocal that the 14th Amendment does NOT give the President such powers. This is very curious: ALL presidents, without exception, have ALWAYS used very generous (not to say dubious) readings of the Constitution to stretch the powers (particularly war powers --see Libya). Why in this one case does Obama make an exception? Is he a stealth Republican?

Unfortunately, in my view, Treasury has rejected the constitutional option as legally unsound. Therefore, as  a practical matter, the issue is dead.

a recent NYT article said that Obama has no financial advisors at this time - why is this and who is making decisions if not economists? isn't that dangerous?

He still has financial advisers. But he has lost most of the group that started with him at the beginning of his presidency. This is normal turnover.

If congress can just move the debt ceiling up or down as it sees fit, why have a debt ceiling at all? Wouldn't it just be easier to eliminate the ceiling?

I testified to that effect before the Senate Financial Committee 10 years ago. Bob Rubin, Alan Greenspan and others have called for abolition of the debt ceiling. But members of Congress like it because it allows them to vote for spending increases and tax cuts that increase the deficit and then pretend to be fiscally conservative by voting against the debt limit.

Obama has done a pretty good job of showing he is willing to compromise. If the gov't shuts down because of Republican intrasigence and you are a GOP senator or representative, what do you tell people back home if social security checks don't go out in August, or there is no money to pay military salaries?

Blame Obama. What else?

Could you explain, for those that aren't aware, why this is dramatic? Not raising the debt ceiling could more than double our outlays due to a rise in interest rates, could it not?

Interest rates on T-bills are literally close to zero.

Mr. Bartlett, Your book about the huge Medicare drug costs that President George W. Bush pushed the Congress to accept was very interesting. Do you believe that Obamacare will really save any money for the US taxpayer or just add more levels of bureaucracy to the system?

The Affordable Care Act was not designed to reduce spending. It's purpose is to expand health insurance coverage without increasing spending.

I think that's a factor but not the only one. From my reading about the GOP freshmen, the tea partiers, a great many of them seem to have little experience in any sort of lawmaking, and little knowledge in economics beyond the home or small-business level. They don't seem to realize that government economics doesn't work the same way. Instead of a coherent philosophy on the size of government, they espouse simple reactionary stances as if they ran for office as protest candidates. That's my impression, anyway, and whatever the cause, it's sad that this faction is holding the mainstream GOP and the government hostage to prove a point.

I think the vast bulk of Tea Party members are ignorant fools when it comes to understanding how government really operates. I have thought so for 2.5 years and see no reason to change my opinion.

I've read that rating firms in China having been factoring-in an increasing rate of US default risk. When scanning Chinese news publications, economic growth is visible and tangible in cities, roads, bridges, and services... The US, however, seems to be decaying in all areas ranging from public infrastructure to even nursing home care. Would just the act of increasing the debt ceiling at this point, signal to the global market that the US has lost the ability to manage public funds?

I think it is a tragedy that we have allowed our public infrastructure to deteriorate so badly. But Republicans universally seem to feel that all infrustructure spending is nothing but wasteful pork.

Is it to say that John Boehner has lost control of the room, at least with respect to his Republican colleagues?

He never had control in the first place. Increasingly, he looks like a figurehead, just like the last Republican speaker, Dennis Hastert.

Which political party do you think will experience the greater backlash at the polls in 2012?

I think Obama is in more danger of losing his base at the moment. If he supports a lot of social spending cuts a lot of Democrats are going to think they might as well have a Republican in the WH.

"Specifically" who benefits from failure to raise the debt ceiling?

Those who shorted government bonds, like Eric Cantor.

no other country has a 'debt ceiling' limit anyway. and it seems to be just a farce. but we REALLY need these discussions. doing what we have been doing will lead to a disaster.

It's true that no other country has a debt limit. I've checked with S&P about this.

Can you describe the process for enforcing the debt ceiling statute? Let's say that Treasury chooses to continue to make debt service payments as the Constitution requires after the ceiling is exceeded. What is the enforcement action? Is it a lawsuit against the POTUS? Who brings such a suit?

Good question. Some legal scholars argue that even if the Treasury's action was illegal no one would have standing to sue to stop it.

If payments are delayed for months instead of days what happens to interest rates?

If there is a default of any duration there is a great danger that the entire financial system will freeze up. Higher interest rates will be the least of our problems.

Can you think of a time when a majority party was so opposed to raising the debt ceiling?

No

Given the Republicans opposition to raising revenue do you expect President Obama is going to settle for a deal without revenue increases; will some Republicans will settle for closing tax loopholes, or are is the gap so vast that we're going to see the nightmare scenario (no agreement to raise the debt ceiling) play out?

I don't see any possibility of Republicans agreeing to so much as one cent of tax increases. I expect Obama to fold.

What do you think about administration responses to questions about ignoring or bypassing the debt ceiling in order to honor US debt? Has there been any official reponse that reflects their opinion about this?

It's been rejected by Treasury.

Bruce: Is it correct that if interest on the national debt is paid first from incoming receipts no default occurs on 2 August? Then like a household all other expenses are paid in priority of importance. The House of Representatives gets to do the prioritizing. Would not this be the answer to Republican dreams of cutting spending?

It's more complicated than that. For one thing, the Treasury needs $500 billion in new cash next month to repay bonds that are maturing.

Bruce, I am of the latter generation of "gen y" and wanted to get your input regarding the future of American politics. Can one assume that the overall integration of ideas in the political arena will not be as polarized as they are now when the "young folks" step in?

Young people have little influence on politics because they don't vote. Old people have all the power because their numbers are large and growing and they vote in large numbers.

Mr. Bartlett, Are we headed for a default (if so for how long). Or will the Republicans finally come around and sign a sane agreement to raise taxes on the wealthy. Things really do not look good here.

My assumption is that either Obama will cave to Republican demands or both sides will agree to a temporary rise in the debt limit while talks continue through the August break.

we need to stop the federal govt from being so large. it's crazy. the federal government has proven over the years how horrible and inefficient it is. how lousy central planning is. leave things to the states - not the best solution, but better than what we have, which is utter disaster. why should i have to send money to the feds (in form of taxes) so they can dole out money to the states? it makes NO sense.

The debt limit has nothing whatsoever to do with the size of government.

If the debt limit is not raised, what are the estimates as to what the new interest rate would be on our debt?

The estimates I have seen suggest an immediate rise of about six tenths of a percent across the board.

Bruce: Thanks for trying to thread the needle here. However, please, whatever you allow the GOP to call their rejection of removing Bush's tax breaks for the wealthy please just don't call it "Parity". I pay 28% of my yearly income to Uncle Sugar to keep the Federal government solvent each and every year (which represents a sizeable amount of my tolal wealth). What percentage of their total yearly income do you think the well off pays into the Treasury? And please don't try and tell me that the Bush Tax cuts have generated more jobs since they were implemented, because they obviously haven't.

Effective tax rates on the wealthy have fallen for some years. You can find the data at www.cbo.gov.

Forgive my cynical question, but is the endgame here to force the President to break the law in order to begin an impeachment process?

Since we are so close to a presidential election I don't think anything Obama does will lead to impeachment.

One of your "myths" is that raising the debt ceiling is a partisan issue. You point out that both parties have opposed raising the debt ceiling when the other party is in the White House. Isn't this the very definition of "partisan"? Wouldn't it be more accurate to say that raising the debt ceiling is not an *ideological* issue, which is another matter entirely?

That "myth" was probably not well phrased.

Alexander Hamilton knew how useful US sovereign debt would be for market development. The markets today use Treasury debt as a critical instrument in portfolio management. They understand how critical a AAA rating for Treasury debt is in maintaining that role. Our political leaders, however, trot out false analogies to credit cards limits etc. to reinforce their foolish notions. Why have market leaders been so unsuccessful in educating political leaders on these issues? Have they not tried or have they not been heard?

People in markets just assume that our political leaders are not so stupid as to risk a default. I am not so sure.

Hi again, I'm well aware that interest on Treasury Bills is nearly zero, but what are the implications for the debt and deficit should a failure to raise the debt ceiling result in a backlash from the markets. If interest rates rise for the governments borrowing, does the future deficit and debt problem not compound automatically?

The debt is about $14 trillion. Do the math.

I find it interesting we are the only country with a debt limit. What were the political reasons that led to the original creation of a debt limit, and what validity do you see these reasons having in the 21st century?

Until 1917, Congress had to authorize every Treasury bond issue individually. During WWI Congress decided it was easier for everyone to just set an overall limit on borrowing.

Do think any Republicans will listen to your arguments to raise the ceiling?

I think there are a lot of sensible Republicans left in Congress. The problem is that they are scared to death of a primary challenge from some idiot Tea Party member.

When Paul Ryan dismisses bond holder's concerns or Jim DeMint or Rand Paul say they will filibuster any raising of the ceiling, why aren't they listening to the financial experts or look at past history, whether it be 1937 or 1982?

Never underestimate the power of wishful thinking.

it's not the president who spends anything. all spending starts in the house (or is supposed to). The president doesn't or shouldn't be making those decisions on where the checks go...

Congress often delegates its power to spend, as it has done with entitlement programs.

You state, if the debt ceiling is not raised, the President will have to break the law and not pay debt. Is the reverse possible: could the President amd Federal Reserve go ahead and print more money to pay the debts?

The problem would be how to do it in a way that didn't increase indebtedness. One possibility would be to sell some of the Treasury's gold to the Fed.

there are many other nations out there, greece is one in the news a lot, that are in an economic crisis. are we just one of many, or are we setting the standard?

The difference between us and Greece is that all of our debt problems are purely political in nature.

Do you believe the present debt ceiling limit debate will result in Congress finally dealing with Entitlement spending programs such as Medicare?

Not really.

Mr. Bartlett, hello. is there anything you feel the american people can do to convince congress to work on job creation and protect our economy by increasing the tax burden on the wealthy?

Fire all the Republicans next year.

Just to drill down: If "At some point the Treasury will have to decide whether to pay Social Security benefits or interest on the debt," when is that date? August? Sometime after?

I don't know offhand. The Bipartisan Policy Institute has made some calculations. Check their web site.

as a historian, i think the cold war ideology that anything that amounts to wealth sharing is communist or socialist. but don't we need something like that in order to get past these impasses? don't we need to spread the debt?

I think the growing inequality of wealth and income distribution is both a moral and economic problem.

Do you see any realistic possibility of getting the Federal Government budget back to balanced over the next ten years?

No

I believe you mentioned that Reagan faced opposition when similarly faced with raising the debt ceiling. with so many forced Reagan/Obama comparisons- what do suppose Reagan would do to with this congress. am I wrong to think that RR used public sentiment to end run the congress, and Obama has ceded this power to the GOP who control the message the public is hearing

Reagan was much better at using the bully pulpit than Obama is.

Assuming there is a deal based on cuts only, doesn't Obama then turn around and say he is willing to extend the Bush tax cuts for the middle class but his price on doing that is to let them expire on the wealthy and then let the GOP squirm?

I don't think Obama has the guts to say publicly that he will allow the Bush tax cuts to expire. Even if he believes it would be a good idea, which I doubt, his political advisers will never allow him to say it going into an election year.

your ideas and advice appear to be very sound. has anyone from either party asked for your advice? do you think they would listen?

I spoke to some House Democrats last week.

I'm not a Tea Partier by any stretch, but their "throw the scoundrels" out mentality makes some sense. How do we get our representative democracy to start working for us?

We do need political reform in this country, but I doubt that anything worth doing is politically possible.

...could anyone stop them? Or punish them?

The Fed cannot help the Treasury if it lacks the ability to borrow.

Do you still consider yourself a Republican?

No. I identify myself as an independent.

Really? You don't think Democrats would still vote to reelect Obama (or vote for another Dem.) in 2012 if only to prevent the GOP from naming any more Supreme Court justices?

At the rate things are going I think a lot of Democrats will stay home on election day.

Ultimately, do you feel, as I do, that the President's failure to reinvigorate the economy or get Congress and the American people to move forward with him is a result of his inability to take as aggressive with the bully pulpit an approach as he has in recent days?

I think there was a very narrow window of opportunity in early 2009 to do stimulus. Unfortunately, the stimulus package wasn't large enough or properly designed. It's now politically impossible to do more.

If you were President Obama, what would you do at this point?

I was hoping he would use the constitutional option to avoid Republican extortion. Unfortunately, he rejected that idea and is now at their mercy. That was his only way out.

My time is up. Thanks for the good questions.

In This Chat
Bruce Bartlett
Bruce Bartlett, a former adviser to President Ronald Reagan and a Treasury official in the George W. Bush administration, is the author of "The New American Economy: The Failure of Reaganomics and a New Way Forward." He is a columnist for the Fiscal Times.
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