The Living Room Times

This brief article by James Surowiecki is a must-read. It says just about everything I’ve been trying to say about the debt ceiling situation, but more succinctly and with less rage. It also includes a useful history lesson:

The truth is that the United States doesn’t need, and shouldn’t have, a debt ceiling. Every other democratic country, with the exception of Denmark, does fine without one. There’s no debt limit in the Constitution. And, if Congress really wants to hold down government debt, it already has a way to do so that doesn’t risk economic chaos—namely, the annual budgeting process. The only reason we need to lift the debt ceiling, after all, is to pay for spending that Congress has already authorized. If the debt ceiling isn’t raised, we’ll face an absurd scenario in which Congress will have ordered the President to execute two laws that are flatly at odds with each other. If he obeys the debt ceiling, he cannot spend the money that Congress has told him to spend, which is why most government functions will be shut down. Yet if he spends the money as Congress has authorized him to he’ll end up violating the debt ceiling.

As it happens, the debt ceiling, which was adopted in 1917, did have a purpose once—it was a way for Congress to keep the President accountable. Congress used to exercise only loose control over the government budget, and the President was able to borrow money and spend money with little legislative oversight. But this hasn’t been the case since 1974; Congress now passes comprehensive budget resolutions that detail exactly how the government will tax and spend, and the Treasury Department borrows only the money that Congress allows it to. (It’s why TARP, for instance, required Congress to pass a law authorizing the Treasury to act.) This makes the debt ceiling an anachronism. These days, the debt limit actually makes the President less accountable to Congress, not more: if the ceiling isn’t raised, it’s President Obama who will be deciding which bills get paid and which don’t, with no say from Congress.

Read the whole thing. And also read Felix Salmon’s take. And then weep. And #PANIC.

I have one additional thought on the debt ceiling, which I meant to include in my previous post, but which probably deserves its own post, so here goes:

I think politicians on both sides of the aisle — and more broadly, partisans on both ends of the ideological spectrum — are vastly underestimating the political downside risk of a failure to raise the debt ceiling, and the resulting default or semi-default. The political consequences for the current powers that be, Republican and Democrat alike, are potentially catastrophic. I don’t just mean suffering dips in approval ratings, or losing the 2012 elections. That’s small potatoes. Worst-case scenario, this could go much deeper. With unfavorable ratings for both major parties already nearing record highs, and vulgar anti-Washington hashtags making waves on Twitter, things are already approaching a boiling point. As I tweeted a few days ago, in the spirit of Harry Potter, the politicians engaging in this debt-ceiling brinkmanship aren’t just playing with fire. They’re playing with Fiendfyre.

If a deal is reached, or if a short-term semi-default happens but is quickly remedied and the negative economic consequences are relatively tame (and/or indistinguishable from the already poor economic climate), the current bout of voter anger will largely fade into the background noise of standard-fare anti-Washington sentiment. But if there’s no deal, and default or semi-default happens, and there are severe (and easily identifiable) economic consequences — real-world economic pain hitting voters, and flowing directly from the total dysfunction of our federal government — there is almost no ceiling to the potential political fallout.

If such a thing were to happen, all the back-and-forth talking points of the present negotiations would appear totally childish and ridiculous in retrospect; the only salient fact would be that Washington’s inaction caused a recession or depression. Voters’ rage would be unmeasurable, and rightfully so. To quote from another fantasy movie, their wrath would be terrible, their retribution swift. At a minimum, I think you would see a credible, and maybe successful, third-party candidacy in 2012 — I’ve already predicted a third-party victory if unemployment exceeds 13% in the wake of a failure to raise the debt ceiling — but that could be just the beginning, if things get bad enough. If a severe second recession, or even a depression, can be traced to a specific, identifiable failure of both parties to govern the country in a defensible way, it could conceivably be the end of one or both of the major parties as we know them.

I recognize that pronouncements of “OMG THE DEATH OF THE MAJOR PARTIES!!1!” are a dime a dozen from squishy No Labels-ish centrists like me, folks with a history of political love affairs with Lieberman and Bloomberg and their ilk. But this is different, I think. I’m not talking about a third-party (and perhaps fourth- and fifth-party) movement led by coastal, technocratic centrist elites, self-styled Good Government Types who think There Must Be A Better Way. I’m talking about a broad-based rage against the current governing parties that would awaken the sleeping giants of American politics: the largely unengaged, uninformed, low-information voters who don’t really know or care much about politics, but who would easily understand and care about such a simple, basic — and, in this scenario, true — storyline as, “You personally have been directly f***ed over by an abject failure of your entire federal government. We are now in a recession/depression because they, all of them, didn’t do their damn jobs.”

If you think the Tea Party was an example of the grassroots waking up and rising up, just wait until you piss off the Great Middle in this fashion. The momentum of the awakening I’m describing would be unstoppable; all nuance would be lost; everyone would be blamed. Even if the actual proximate-cause equation were to become complicated — for instance, if the downturn following a default is worsened by unrelated factors like, say, a collapse of Italy next month or whatever — too bad. These voters, once roused to anger, won’t care about excuses like that. They’d be mad as hell, unwilling to take it anymore, and who knows what our politics would look like by the time they’re done?

Nobody does. And I’m not sure this is a risk that anyone in power — Obama or Boehner or McConnell or Reid or Pelosi or Cantor or anybody else inside the Beltway — really appreciates adequately. The scenario I’m describing is unlikely to come to pass, but I’d say it’s more plausible than at any previous time in my lifetime to date. And if it does happen? Hold onto your seats.

The “debate” between Democrats and the Anti-Arithmetic Right over whether or not the nation should be economically ruined now seemingly boils down to three options:

1) John Boehner’s utterly disastrous plan, which I hereby dub the Omnibus Kick-The-Can-Down-The-Road Act of 2011, to pass a short-term debt ceiling increase, then re-run this entire charade in the middle of an election year, when it will surely be much easier to put aside naked partisanship and reach a mutually acceptable bipartisan deal (!?!?!) … really, we should call this the “Make Obama Veto A Debt Ceiling Bill So He Can’t Blame Us For The Crisis We Caused” plan, since that’s all it’s intended to accomplish;

2) Harry’s Reid’s plan to cut $2.7 trillion in spending without any revenue increases, which is such a complete capitulation to the Republicans’ core demand that it will undoubtedly be rejected by hardline Republicans and Tea Partiers, who wouldn’t know a favorable deal if it smacked them in the face and dumped tea on them while waving a Gadsden flag and reading aloud the collected works of Ayn Rand;

3) Default. Or technical default. Or “semi-default.” Or whatever you want to call it if the United States government is unable to make payments required by law — probably not including debt interest or principal, though that can’t be guaranteed because it depends in part on how the markets react, which cannot be confidently predicted because this is a completely unprecedented circumstance brought about by fuzzy math and right-wing nutters — and is forced to operate on a daily (not monthly! not yearly!) cashflow basis and shut down 40+ percent of its operations instantly, including a wide variety of services that everyone regards as essential.

Regarding option #3, it’s not clear that next Tuesday, August 2, is the actual date on which this would happen, as we’ve been hearing for months. That was Treasury’s estimate back in May of when the money would run out, but we may have an extra week or so:

In a note published Friday, the Barclays Interest Rates Research team wrote that “the date on which the Treasury will run out of cash to pay its obligations might not be August 2; it might be around August 10 instead.”

Why the change? The note explains that previous projections showed the Treasury running out of money on the morning of Wednesday, August 3. On that day, it was predicted, the Treasury would need to spend $32 billion, including $22 billion in Social Security payments — and it was only projected to have $30 billion at its disposal.

That projection was made on July 13. But since then, the researchers say, the Treasury has taken in about $14 billion more than expected, and paid out about $1 billion less than expected. Hence, the deadline date might actually be August 10, a week later than previously believed.

Other reports suggest August 9 might be the “real” deadline. Either way, August 2 is Treasury’s story, and it’s sticking to it, presumably for the rather obvious reason that if you tell Congress that it has an additional week to dither, delay, grandstand, posture and bloviate, Congress will proceed to dither, delay, grandstand, posture and bloviate for an additional week. I imagine Treasury will announce this “extra week” at the moment it becomes clear Congress is going to miss the August 2 deadline, and not a second sooner.

Anyway, I have a question, and it’s an honest one — I’m not trying to make a rhetorical, partisan point here; I really don’t know the answer to this. But it’s been perplexing me for a while now. The debt ceiling is a federal law saying Treasury can’t borrow more than X amount. But there are also lots of other federal laws saying Treasury must spend money on various things — paying prison guards, funding air traffic control systems, sending out Social Security checks, etc. If the money runs out, and Treasury can’t borrow any more money because of the debt ceiling, then it can’t do some of the spending required by law. So, if the debt ceiling isn’t raised, Treasury will be required (by arithmetic) to violate federal law, one way or another. Why does everyone assume that Treasury would necessarily violate the various federal laws requiring it to spend money? Why is that any more justifiable than violating the debt ceiling law? They’re all federal laws, presumably of equal weight, right? Mind you, I’m not talking about the 14th Amendment argument, which I believe is bunk. Rather, I’m merely talking about conflicts among federal statutes. It’s not like there’s 40+ percent of federal spending that Treasury can just discretionarily choose, without violating the law, to stop overnight. (Or is there?!?) I’m not advocating one course of action or another, I’m just saying I don’t understand why the debt ceiling is presumed to take priority over the countless other federal laws that I imagine Treasury would necessarily violate by failing to make required payments (of various sorts; I’m not just talking about debt interest payments, I’m talking about everything Treasury does, all of it pursuant to laws passed by Congress). What am I missing here?

P.S. For the record, among the three options listed above, my order of preference is: #2, then #3, then #1. Yeah — it’s a close call, but ultimately, I’d rather risk the consequences of a brief semi-default (and hope those consequences finally set the Republicans straight before things get too bad) than go through this nightmare again next spring. Partly because I suspect the market consequences of such a punt would be pretty bad in and of themselves. And partly because, at some point, you have to stop giving ever more power to economic hostage-takers. They cannot be allowed to pull this stunt again so soon, and certainly not in the midst of a presidential election, when everyone will have more motive than ever to be intransigent and inflexible. Really, it’s insane that anybody is even proposing such a ridiculous option. But then again, this whole situation is insane, so I guess I shouldn’t be surprised.

CNN Breaking News:

House Speaker John Boehner has ended debt talks with President Barack Obama, telling fellow Republican House members in a letter that he will “begin conversations with the leaders of the Senate in an effort to find a path forward.”

The president said his administration had offered “an extraordinarily fair deal” to cut expenditures and raise revenues, in return for Congress agreeing to hike the nation’s debt ceiling. [Per a Washington Post breaking-news alert, Obama added that “if it was unbalanced, it was unbalanced in the direction of not enough revenue.”] But he said that Boehner “left (him) at the altar.”

Obama says he called congressional leaders from both parties to the White House on Saturday morning to “explain to me how we are going to avoid default” on the nation’s debt.

“We have run out of time,” Obama said.

We are so screwed.

P.S. Couldn’t the talks have broken down before the markets closed for the weekend? A drop of, oh, I don’t know, 500 points in the Dow in the final hours of trading on a Friday might have gotten Congress’s attention heading into the weekend…