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Congress and The Debt Credibility Test

An oxymoron I think.

Amplify’d from www.msnbc.msn.com

In the debt ceiling impasse, the Moody’s bond rating agency added another improbable choice Monday to those facing Congress: why not get rid of the legal limit on federal borrowing altogether?

After all, the debt limit statute hasn’t had a restraining effect on spending or borrowing, as Congress’ fiscal watchdog, the Government Accountability Office, noted in a recent report.

To end the impasse, President Barack Obama and Congress will need to muddle through with a plan that commits them to cutting future spending as the price for getting enough votes to raise the borrowing limit.

Willing to compromise, but how?

One legislator who as a House member voted “no” to that Medicare expansion in 2003 was Jim DeMint. He’s now a senator and a leader of his chamber’s fiscal conservatives.

He seemed to hold out some hope for an end to the impasse on NBC’s “Meet the Press” on Sunday. “We certainly are willing to compromise,” DeMint said. “We’re willing to give the president an increase in the debt limit.”

DeMint supports a bill to enact a constitutional amendment to require a balanced budget and to limit spending to fixed amounts. But revenue isn’t on the table. The bill requires tax increases be approved by a two-thirds vote in both the House and Senate.

And DeMint said Democrats ought to agree with the GOP that “sometime in the next decade” that “we have to stop spending more than we’re bringing in.” But again, he didn’t specify when this ought to occur.

If Congress doesn’t raise debt limit

Critical to the outcome is the judgment that members of Congress will make as to how — if they don’t vote to increase borrowing — the Treasury could manage for a few days or longer.

The GAO said in a legal opinion in 1985 that the Treasury secretary has “the authority to choose the order in which the pay obligations of the United States” and the department can do this “in any order it finds will best serve the interest of the United States.”

“That is an open question. There is no statute that says if the executive branch runs short of cash, it can decide which of Congress’s binding spending laws it will carry out and which it will ignore,” said former Under Secretary of the Treasury Jay Powell, who is now a visiting scholar at the Bipartisan Policy Center. He also said there’s no law telling the Treasury secretary he cannot do this either.

Which bills to pay?

“There’s the legal issue and there’s the operational challenge,” said Susan Irving, GAO’s Director for Federal Budget Analysis. “You’re talking about intervening in an automated system that electronically pays about 80 million bills” — the approximate number of bills the Treasury says it pays per month.

The Standard & Poor’s rating agency reminded Congress last week that the question for investors isn’t so much whether Congress and Obama can find a stopgap solution to get past the 2012 election. The question is how credible the bond market will find a plan that would pledge to cut future spending.

“There is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling,” S&P said.

A nation which deserves an AAA bond rating doesn’t allow itself to reach this point, it implied. “We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a ‘AAA’ sovereign rating.”

S&P said it would downgrade Treasury bonds “if we conclude that Congress and the administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.”

Credible and creditworthy

The crucial question: Are Congress and the president credible enough for the U.S. government to be deemed creditworthy?

There’s plenty to reason to doubt: for example, since 2003, Congress has chosen to circumvent a law it had passed in 1997 to control the growth in Medicare outlays that pegged payments to doctors to the growth rate of the economy.

The credibility that would come from reducing the debt rests on someone, whether members of Congress or the members of IPAB, making exactly those kinds of decisions. It’s the actual decision to cut or restrain spending, and not the statutory debt limit, that will gain credibility and protect the government’s creditworthiness.

Read more at www.msnbc.msn.com



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