Does not raising the debt ceiling really mean default?

I keep seeing and hearing this not just argued in the media but stated as fact, essentially taken as a given. But I do not understand why that would be the case. Tax revenue would still be coming in; why couldn’t the federal government simply pay interest on the debt first, then take what is left and spread it around to the rest of the government as desired? Either cut everything an equal percentage across-the-board based on how much revenue there is versus how much spending has been planned; or, choose more essential services to get funding similar to the situation during the so-called government shutdown.

What am I missing here? Or have the media just not thought this through?

The President doesn’t have the explicit authority to selectively choose which bills to pay and which to ignore. Virtually all government costs – Social Security, military pay, EPA regulation enforcement, National Park operating costs, etc. are equally valid funding obligations of the Federal government.

(I’m simplifying somewhat, as there are rules under a government shutdown (in which the government has no authority to spend funds due to the failure to pass a budget) to prioritize some things, but there is no similar guidance in case of a lack of borrowing authority.)

ETA: I overstated one item.

A lot of people have thought it through but there is little clear guidance on what would actually happen. Probably the safest “assumption” and the legally most appropriate thing to do would be for the Federal government to continue to operate as it always does.

It isn’t like once a month the government’s checking account is hit with a big paycheck, and then it has a bunch of bills to pay. There is a huge amount of money coming in all the time, and a large amount going out all the time. Certain dates have more concentrated outflows than others and the Treasury can use those payment schedules to come to a decent idea as to when we’ll both have no money and have extended as much debt as we legally can extend. Note that even the Treasury just offers decent guesses, and it can change (the debt ceiling was pushed back a bit because of unexpectedly large dividend payments dropping into the Federal coffers from Fannie Mae and Freddie Mac, IIRC something like $60bn worth in a quarter or something.)

So if the government just continues to operate as always, it will continue to collect money and continue to pay bills as they come due. Except as we run up against our debt ceiling we’ll hit points in time where we can’t pay stuff. So whenever that happens, bills will stop getting paid until more money rolls in, then we could resume paying bills where we left off. Then we’d be out of money again, then we would get more money and resume paying bills where we left off. Probably fairly early on, at least some of the bills we missed paying on time would be interest payments on the debt. Of course also as we get money in, and make payments in the order they came due, the debt goes down as we’re occasionally making payments on it, so then we can actually issue new debt to hit the debt ceiling again.

I wouldn’t be surprised if various automated payment processing procedures in the Federal government aren’t all that well set up for such a scenario, so on top of the messy situation I’m describing I’d imagine a lot of bureaucratic snafus would be going on as well. The Federal government and its payments processes are like a massive train going down a steep grade, you can’t just slam the brakes on it without making a mess.

A government shutdown is actually cleaner, because instead of the assumption the President should continue operations as usual, with a shutdown much of the Federal government has no legal authority to remain open. People are sent home and certain other parts of the government continue to come to work but they do not receive pay. Hitting the debt ceiling is messier because the legal assumption is the President doesn’t have the legal authority to unilaterally shut down portions of the Federal government to avoid bouncing the checkbook–so while it isn’t 100% resolved legal theory, the assumption is he’d have to try to keep everything running as it always was with the understanding periodically we’d go past due on various bills until more money rolled in.

Something would have to give. Without authority to borrow, everything simply cannot be paid. The President would either have to default on the debt (not permitted by the Constitution) or not pay for validly enacted laws (not permitted by statute or case law). That was one of the arguments in favor of Obama having the power to unilaterally raise the debt ceiling by himself. (not that I agree with it)

If you have $10 in your pocket (and no debit or credit cards and no way to borrow) and your boss tells you to fill up the company car with gas, buy all 30 employees lunch, and be back in an hour, you simply won’t be able to do it.

Personally, I don’t think the President has the legal authority to pay any heed to the debt limit. If Congress tells the government to spend a certain amount of money, and Congress also tells the government to collect a certain amount of revenue, then the government must do both, and there will of necessity be debt as a result. By making the debt inevitable, Congress has authorized it.

Alternately, one could take the interpretation that Congress has authorized the President to take over its power of the purse. This is a very dangerous interpretation, since it gives the President a great deal of power. If Obama were sufficiently bold, he would demonstrate just how dangerous it is, by selectively cutting off all of the federal spending that’s going to the districts of those legislators who voted against the debt ceiling raise.

One cannot, however, take the interpretation that Congress has authorized the President to not pay the nation’s debts, because nobody can authorize that. The Constitution prohibits calling into question the debts of the United States.

But despite some similarities in logical terms, laws in their actual RL application are not code in a machine. So let’s say that the president directs the Treasury Department to always reserve enough money on hand to pay interest payments on time. For it to actually matter that this is technically illegal, if it really even is, someone would have to sue to try to force the government to default instead, right?

Assuming someone with actual standing (perhaps someone who was affected by another program that got less funding) was willing to file such a suit, the courts and ultimately* the Supreme Court would have to declare that the government must default rather than choosing where to put its money. I wonder if five of them would really be willing to do that.

And in any case, I still see no justification for media reporting that the moment the debt ceiling is not raised (after a Treasury-declared deadline, that is), the government goes into default. Shouldn’t they instead be saying “it’s not clear what would happen, but many experts believe it could result in default on our debts”? Or at the very least, shouldn’t there be an occasional reference to “some believe that it would not necessarily mean default per se”? Instead, it is presented as though the vote to raise the debt ceiling is literally exactly the same as voting “not to default”.

Look, I’m a Democrat and I recognise that this is of benefit to our side if it is framed this way; but there is some small part of me that still prizes accuracy over partisan gain. Besides, what if the House GOP does not blink in this game of chicken, and then it turns out the president and Treasury Department “suddenly figure out” a way to keep from defaulting? It will really make the media look like they were Democratic dupes, and “the boy who cried Wolf” effect will come into play if there is some truly catastrophic situation facing us in the future based on a congressional decision.

Besides, there is plenty of real pain that could come out of such a situation and force the GOP, or at least a large enough percentage of it including the leadership, to back down. I think one of the most justifiable ways of approaching this would be to pay the interest on the debt, then pay everything else at the exact ratio of remaining government revenue to legislated outlays. I’m guessing this might be somewhere around half?

So the president and his staff (top staff anyway), and whatever other politicians value their skin, volunteer not to take any salary until the debt ceiling is raised. But then anyone who does not so volunteer gets a half paycheck, and vendors get a half payment plus an IOU, and decide whether to be willing to provide goods and services on that basis. Similarly, Medicare would pay out half of its already low doctor payments; and, most significantly of all, members of the armed forces and Social Security recipients would get half their normal checks. How many hours would that last before the Republicans crumble?

*Or maybe it would go directly to the SCOTUS?

What everyone else is saying seems basically correct.

If the President took it upon himself to become the unilateral appropriator in chief, he would be accused, perhaps with some justice, of acting in a dictatorial manner.

Soverign default is not all that rare. One reason is that alternatives may be worse. Should promising cancer studies be ruined by being stopped in the middle? Should prisons shut their doors (I hope after allowing the prisoners out)? Lay off our military? Stop tax law enforcement, making everything worse in the future? No food stamps? No social security? No medicare?

While satisfying bondholders is important, it isn’t the most important function of government. Historically, as in my link, governments faced with such impossible choices did not necessarily favor creditors.

But you could still choose how to allocate that $10. The question here is whether the Treasury Department can do the same. Actually, the real issue is whether or not there even is a question as to whether they can do the same. Currently, the media is acting as though there is no question even to discuss.

ETA:

This is a perfectly valid argument. The federal government is often compared to a household and in a household, it is often medical debts and credit cards that go by the wayside rather than more basic things like rent, utilities, and food. But your argument assumes that the president could choose not to default, but likely decides default is better than the alternative. Whereas the media reportage is assuming that default is unavoidable in technical terms if the debt ceiling is not raised.

This is a common liberal fantasy, but probably the least likely scenario. Bismarck, when faced with a legislature that refused to agree on a budget just collected funds and appropriated them himself. That’s one of many reasons Prussia and later Imperial Germany were not democracies, not even constitutional monarchies, but unfree States. No one should speak approvingly of Obama going down the same path.

In this case though, there’s literally nothing he can do that would not be against the law. He can’t raise more money through debt, he can’t raise taxes, he can’t stop spending, he can’t cease debt payments and he can’t suspend the laws of arithmetic.

In that case the only real question for him is which law he should break.

That is not correct. The Constitution is very clear that the power to raise taxes, the power to spend money, and the power to borrow money are three different and distinct powers of Congress. A law requiring the expenditure of funds is no more an implicit authorization to borrow money than it is an implicit authorization to raise taxes.

The idea that Congress implicitly authorizes debt by directing the expenditure of funds has no legal basis in the Constitution, Federal law, or historical practice.

I think the defense of impossibility would apply to any refusal to fund a law just like it would for conflicting laws for private citizens. If one law said that it was illegal to go slower than 70mph and another said it was illegal to go faster than 65mph, no jurisdiction in the country could convict you of breaking either law because of impossibility.

But I don’t think Obama has the authority to affirmatively correct the problem on his own by raising taxes or borrowing money. He would be forced by the law to spend only what he has in a good faith manner.

Can we mint that trillion dollar coin this time around?

Can we all agree that the media is doing a piss poor job of describing the dilemma we confront? I know it’s strange to ask for agreement on GED; but honestly, does anyone really want to stand up for the position that if the debt ceiling is not raised it will straightforwardly force a default that no one can stop in any other way than to pass the debt ceiling extension, and that is the end of the question?

I can’t believe everyone missed the most obvious problem - retiring debt that comes due. We run a deficit boys and girls - remember? That means debt doesn’t go away, it just sheds its skin and gets reborn as fresh, shiny new debt.

The problem is, that w/o an increase in the debt ceiling, there is no authority to issue more debt. You become Wile E Coyote falling into a canyon while being chased by an angry anvil.

And if you think that a default wouldn’t have consequences, you’re an idiot. I’ll let Mohamed El Erian of PIMCO explain why. If you don’t know who that is, you can stop reading now.

You’ve been saying “why doesn’t the president just spend what he can and wait for more money to come in?” Isn’t that default on U.S. gov’t debt? The only way to avoid default is for Obama to issue debt that he legally can’t–ignore the debt ceiling, basically. Any other course besides spending the money he’s obligated to spend is a default, isn’t it?

Look at it from the perspective of a creditor of the U.S. gov’t. Obama owes you money, but because Congress refuses to up the debt ceiling, he says “make a line over here to get paid with what we have: seniors and soldiers first, IRS employees seconds… and you, SlackerInc, at the back. You’ll get paid when we’re liquid again, maybe next week, maybe next month.” Isn’t that the U.S. gov’t defaulting on its debt to you? Indefinite, arbitrary deferment of repayment doesn’t seem very different at all.

In a general, informal sense you could call it that. But “default” in the more narrow sense of “sovereign default” is described as follows by Wikipedia:

“Most authorities will limit the use of ‘default’ to mean failure to abide by the terms of bonds or other debt instruments.”

So as long as all the interest payments are made and other terms of the “bonds or other debt instruments” are followed to the T, not being able to spend as much in the current fiscal year as appropriation bills called for would not qualify (though it is *something *weird, no doubt).

ETA: Rereading your post, I’m not sure you’re clear on what I was suggesting in my OP: namely, that the president and Treasury could use tax revenues to service debt first (meaning that if I am a bondholder, I would not have to get in the back of the line), and then spend what’s left on other things. (Social Security checks, regardless of what the average person believes, are not a repayment of debt for what retirees “paid in” earlier, but a massive welfare program for senior citizens paid for by today’s workers.)

I understand that your basic contention is that the end of borrowing authority for the government does not directly equal default, and that the media are over-hyping the risks. Am I correct in characterizing your views?

Then let’s just exclude the media entirely. Here is a report from the Congressional Budget Office. It concludes:

You are correct that the end of borrowing authority does not equal instant default. However, you fail to recognize the huge risk and severe impacts that end of the borrowing authority will mean: there is simply no way to manage through this with cashflow.

To compare it to the threat of a government shutdown: in a shutdown (due to lack of appropriations), a good number of things continue to happen: Social Security recipients continue to get checks (though perhaps delayed), the military continues fighting the war, and so on.

With no funds in the Treasury, the government is simply unable to pay for those things. Look at the list of big things the government has to pay for in that cite I provided: each month, the government is supposed to spend money on:

  1. Social Security ($25 billion for retirees plus $36 billion for other benefits)
  2. Medicare, government employees, and SSI recipients ($42 billion)
  3. Many billions on debt servicing (range from $6 billion to $30 billion)

So that’s just a rough scope of various must-pay bills: and the CBO projects that on October 17, the Treasury will only have $30 billion in cash available to it.

You cannot make the math work. Nobody can. In contrast to a government shutdown, the whole wheels of government grind to a halt, and it’s inevitable that if it goes on for long enough (days? weeks? who knows!) that the government won’t be able to service the debt.

Slackerin is correct. hansel and other seem to be confusing debt with all other types of government payments.

When you buy a Treasury bill, you lend money to the United States. The United States owes you that money back, plus interest. This is debt. How much of it we can assume is the subject of the debt ceiling.

When the United States decides it wants to build a new aircraft carrier, and fund dental care for the poor, the Congress appropriates money to fund programs to accomplish these goals. The Executive branch then has the legal authority to enter into a contract with a shipbuilding company and a cadre of dentists to provide those services. But if, halfway through the year, the money runs out, and the executive is forced to tell the shipbuilding company, “Stop building the ship,” and the dentists, “Stop drilling those molars,” this is not a default. In fact, by law, pretty much every contract the government enters into contains clauses that say that payment under the contract is subject to the availability of funds, and can be terminated for the convenience of the government.

I fully agree that contracts are not instruments of debt in any sense we’re talking about here. But you’re missing a couple things.

For the government to be able to enter into a contract, it must have the legal authority to obligate money for that purpose. That legal authority is an appropriation. An appropriation is not an actual amount of money in the Treasury, it is simply the legal authority for the government to incur a financial obligation of a specific amount.

So, as long as there is sufficient appropriations, the government can continue to sign contracts for the obligation of those funds – however, that does not mean that there will be any funds in the Treasury to liquidate those obligations when the bills come due.

So, in the case of the aircraft carrier: if the government signs a contract for a $10 billion carrier, that only means that there are sufficient appropriations to fund the necessary costs of the government for building that carrier. It does not mean that the government has the cash. If the government decides to delay payments, or cancel the contract for the convenience of the government (such as for the fact that there are appropriations, but no funds, available for the carrier) the government will be liable for the cost of work incurred under the scope of the contract. In other words, the government would pay termination penalties, probably very substantial in this example.

The fact that the contract is not a constitutionally protected debt doesn’t mean that the government will end up paying out a lot of money for termination costs and penalties, and not get anything substantial for the funds (should they be available).

It’s a terrible, wasteful way to run the government.