When it comes to the debt ceiling, perhaps we should adopt that wise and time-honored maxim: don’t hate the player, hate the game.
With a hat tip to Self-Evident, David Greenlaw & Ted Wieseman from Morgan Stanley on Tuesday released a handy timeline detailing what to expect during the coming showdown.
A quick reminder: the ceiling is a statutory limit on the amount of federal debt outstanding and covers marketable issuance, non-marketable securities (such as state and local government securities), and intragovernmental obligations (such as Medicare, which comprises about one-third of the full whack).
And here’s how it’s been raised since 1970, courtesy of the OMB:
The peculiar peccadillo that allows Congress to vote separately on increasing deficit spending and authorising debt limits — the subject of James Hamilton’s erudite befuddlement — means that fans of political posturing are in for a real treat in the months ahead. As Morgan Stanley predict (our emphasis):
The debt ceiling showdown amounts to a high stakes game of chicken. Obviously, Treasury officials want to avoid default at all costs. But, at the same time, they don’t want to make it appear that they can easily skirt the constraints imposed by the debt ceiling and allow the key players to continue bickering in a seemingly unending manner. Such a scenario could disrupt the standard and predictable cycle of debt issuance and raise borrowing costs. Since it often seems that Congress won’t act until forced to – and since a vote in favor of a hike in the debt ceiling is politically unpopular – the threat of default needs to be taken seriously enough to spur action. Hence, a game of chicken ensues. We expect to see an extended period of threats and counter-threats play out over the course of the spring and summer, leading to auction delays, shortened when-issued trading periods and investor uncertainty.
We’ve been here before, of course. Most famously between 1995 and 1996. And it’s worth remembering that the March 4 deadline that is currently focusing minds is for the expiration of a Continuing Resolution rather than an imminent debt ceiling constraint. As Morgan Stanley explain, this matters because the former only affects discretionary spending and contains exceptions for some “essential” services.
Learning from history, the Treasury has honed a set of accounting tricks to get round the statutory limit. According to the Committee for a Responsible Federal Budget (CRFB), these include:
- Suspending the reinvestment of government securities in federal trust funds – such as the Civil Service fund and the G-Fund for federal employees’ Thrift Saving Plan – in order to prevent the growth of intragovernmental debt.
- Suspending the investment of the Civil Service Retirement and Disability Fund.
- Delaying or suspending the auction of Treasury securities, which would prevent the growth of debt held. Before doing this the Secretary must determine that a “debt issuance suspension period exists,” which basically means the Secretary has determined that the obligations of the U.S. cannot be issued without exceeding the debt limit, and allows the Treasury to suspend or redeem investments in two trust funds to help provide funds for government operations during this period.
- Redeeming government securities held in the Civil Service Retirement and Disability Fund.
- Redeeming the securities of other trust funds at an earlier date than they would otherwise be redeemed.
- Ceasing to provide state and local governments with non-negotiable U.S. federal debt for escrow accounts.
- Selling part of dollar holdings on the Exchange Stabilization Fund.
- Selling holdings in Fannie Mae and Freddie Mac debt and stock, or assets held by the Treasury through the TARP program.
We’re no experts in enforced accounting gimmickry, but it is doesn’t appear ideal that GSE or other asset sell-offs would be imposed upon the Treasury by the fiscal circus. Morgan Stanley are also mildly worried about its impact on the bill sector and wider money markets if the Supplementary Financing Programme had to be temporarily wound down.
All this seems an awful lot of inefficient and farcical effort to compensate for an odd way of doing fiscal business. Of course, lawmakers should take ultimate responsibility for their spending decisions, but the game don’t help the players either.
The process is too piecemeal and too incremental, and probably not helped in the long-run by the availability of continuing resolutions to kick the can down the road. As mentioned above, deficit and debt ceiling decisions should not be divorced, for it reduces accountability and fuzzies transparency.
We don’t have the answers, but a good place to start would be the following ideas from the CRFB, summarised by Greg Ip (full discussion in the post):
1. The president and Congress should establish a target level and date for the debt and incorporate it into their budgets each year. They suggest 60% of GDP by 2018.
2. Create triggers that, in the event budget targets are not met, would automatically cut spending and raise taxes, with spending and taxes each contributing half of the shortfall. The prospect must be unpleasant enough so that both party labours to avoid it happening.
3. Put the leadership of both the Senate and the House and the chairmen and ranking members of their appropriations and tax-writing committees on their budget committees.
4. My personal favourite: require all budget proposals to be scored against a baseline that consists simply of this year’s actual taxes and spending. This conforms much more closely to the average voter’s common sense definition of a baseline.
The strongest enforcement mechanism should be the ballot box, obviously — but in the meantime a move toward multi-year plans with stronger accountability mechanisms appears wise. The Congressional cycle might have to limit these at two years (below that of other countries such as the UK with its spending reviews) but it sounds like a step in the right direction.
Then we could get back to hating the players, as per politics as usual.
Related links:
James Hamilton on the strange politics of the debt ceiling – FT Alphaville
New Congress, old deficit – FT Alphaville