Investors might be reluctant to buy new debt issued under questionable authority, particularly fund managers charged with buying a certain level of safety. Or maybe there will always be enough demand; I don’t know enough about the bond market.
When a government does not pay civil servants and SS benefits because the debt limit has not been raised, what do you call this? If it is not called a default, if it does not impugn the “full faith and credit of the United States”, can you tell me precisely what what is it called when the government cannot pay benefits to people who put into the system? I understand it’s not default, but tell me what it is. Thank you.
- Honesty
I’m having cognitive dissonance here. One hand, benefit payments hinge on the statutory debt limit being raised. On the other, benefit payments are not considered debts. This seems contradictory, because if the latter were true, benefit payments would continue unabated from its own piggy bank. No snark here, I genuinely want to know the difference.
Thank you.
- Honesty
P.S. Maybe this thread should be moved to GQ?
Not making payroll, basically.
It’s the difference between GE failing to make payroll and GE failing to make its bond interest payments. One is default, one isn’t. [In my example the employees of GE can sue and are protected to a degree by DoL regulations. SS beneficiaries and Federal employees don’t have the same protections. Federal contractors would probably eventually be owed penalty money as per the contract.]
We borrow money, which we then use to make the benefit payments.
Think of it like renting an apartment. We are obligated to pay that rent every month. We signed a contract, in fact, requiring us to do so. So each month we get a cash advance on our credit card to help us pay the rent.
The money we owe the credit card company is debt. We borrowed in, on our credit.
The money we owe for rent every month is an obligation, but not a debt.
Now we’ve reached out credit limit on the credit card. We can get a higher credit limit merely by asking for it – and we should, because if we don’t, we can’t pay our rent and we’ll be evicted. But legally, we could let that eviction happen. We don’t have to keep paying rent.
We can’t legally avoid making the minimum payments on the credit card. That’s debt, and it “cannot be questioned.” But the rent … that’s just our sense of needing a place to keep the rain off our heads. Plus we agreed to the rent at the beginning of the year.
Now, a wise manager would perhaps realize that this strategy of asking for a higher credit card limit has to end sometime. And its end will involve either getting more sources of income (like that second job at the video store) or cutting out dining out and clubbing expenses, or perhaps both.
But rather than have that hard conversation when we were planning our nights out, we’ve waited until the rent is due, and decided at that moment to make a pious stand about the use of credit.
Does that help?
The government - benefit recipient relationship is not a contractual one. It exists only at the government’s whim and can be terminated at any point, unilaterally by the government, and such a stop would not be a “default”.
The government - bond holder relationship is a contractual one. If it is unilaterally terminated by the government, that’s “default”.
I would go a step further: the relationship between the government and its workers or contractors is contractual, but it is not the subject of a specific constitutional provision. The government’s duty to fulfill those agreements is subject to contract and fiscal law.
The government’s relationship to bondholders is contractual, AND subject to a specific provision of constitutional law. It’s special because of a plain reading of the 14th Amendment.
I understand Honesty’s underlying point that it is paradoxical and bizarre that Congress can require taxes to be “x”, borrowing shall be “y”, and spending shall be “z”, even if those don’t all add up.
But if they don’t all add up, there’s no logic that the President is free to issue additional debt because of a math error. If one contends that the President is free to issue more debt, why can’t the President’ simply choose to unilaterally raise taxes in order to make the numbers balance and avoid national ruin?
Yes, “default” and especially “sovereign default” are just financial industry terms with a long historical background. It basically means “not honoring your bond payments.” It can be more expansive, usually including concepts like “inflating away your bond payments.” Even restructuring your bond payments can be considered default.
The U.S. has under those more expansive definitions probably defaulted at least once. Hamilton paid down our debts without just abandoning them, but the mechanism he used was a negotiated reduction, so bond holders were not “made whole” but walked away with pennies on the dollar. Many would consider that a type of default. In the 1970s a glitch in our payment system caused us to miss bond payments by a bit, and that was technically a default as well–but one based on a payment system error and not an inability to pay.
None of this is to say that failing to make payroll or not paying out Social Security benefits is good, they could even be worse than default on a personal level for many people. Default is just a more specific term and things that aren’t defaults can still be very bad or even worse.
Honesty has got me thinking about this. Obligation v. debt. We have made a contract with workers since the 1930’s: You pay us X% of your income until age 62 or 65, and we pay you Y amount per month until you die.
Th workers paid until age 62 or 65. We now have a contractual obligation to pay them Y until death. Just like we have a contractual obligation to pay bond holders.
If the argument is that in the former, we can change the legislation and not call it “debt” for 14th amendment purposes, then what would be different about doing the same with the latter?
The rent is a obligation, but say you have leased the apartment for 15 years (straining the analogy to be close to social security). If you quit paying on the lease, the landlord will sue you for damages. You will get a judgment against you and owe a debt. I’m really not seeing the vast difference.
Social Security is a statutory obligation, not a contractual one. I don’t mean to be all sovereign citizen on you, but when, precisely, did you agree to be part of the Social Security system? Because you can’t just decide that you’d rather not be part of that contract and stop paying FICA.
From what I understand, it’s not just speculation as I believe the issue was also considered in Perry v. United States. However the problem is that since that case isn’t directly on point, if the president did in fact decided to issue debt pursuant to the 14th amendment, there would be enough legal uncertainty around its validity that world markets wouldn’t view that new debt as being on the same footing as previously issued debt.
Right. The problem is not that we are spending too much, or that taxes aren’t high enough, or that we aren’t borrowing enough. All those things might be true, but they aren’t the root of the debt crisis.
The root of the debt crisis is that Congress has legally set spending at X, and taxes at Y, and borrowing at Z. The president does not have the authority to lower spending, or raise taxes, or increase borrowing on his own, those are the prerogative of Congress. The problem is that at current levels X>Y+Z.
So congress must either lower X, or raise Y, or raise Z, or some combination of all three. Cutting spending is unpopular because all the Tea Partiers need their social security and medicare. Raising taxes is unpopular because obviously. So the real world solution is to raise the amount we borrow.
But that has to be authorized by Congress, it cannot be done by the President. And Congress might refuse to do so–it hasn’t happened yet, but we are expecting some sort of brinksmanship where the House refuses to increase the debt ceiling unless it gets $Some_Concession from the President and the Senate.
But obviously the amount we borrow has some limits, because debts have to be paid back with taxes in the future. So if our debts increase faster than our ability to pay our debts, then we’re in a death spiral where we need to borrow more just to pay interest. Eventually what will happen is that we default on our debt, our creditors get screwed. Or since we control the supply of dollars, we simply devalue the dollar to whatever level we want and give all our creditors a haircut. All these “solutions” are horrible.
So just increasing the debt ceiling is not a real answer to our budget problems. The real answer is cutting spending and/or increasing revenues. Note that we can increase revenues without raising taxes if our economy grows, and that’s the hope that lots of people have–we can keep spending at current levels, and taxes at current levels, but we’ll get more revenue in the future because our economy is larger.
But note that the President on their own can’t authorize raising or cutting spending, or raising or cutting taxes. That requires Congress. This is how a bill becomes a law. So if House Republicans want lowered spending, they need to pass a budget that includes lowered spending. Just talking about how we need to lower spending isn’t enough.
That’s the thing. There is no contract. None. No piece of paper signed by two parties. The whole scheme exists at the whim of Congress and can cease to exist (or be modified) any time. It has already been modified (that 62 or 65 you mentioned is not 62 or 65 anymore) several times.
The bond holders have a contract that cannot be unilaterally changed. Social Security recipients don’t.
That’s bullshit. You’re obviously not familiar with the legal principle of reliance. That’s not to say SS is binding contract in the same sense but that it creates a moral obligation founded on the same principles we use in our legal system.
The rest of Terr’s post is important , he goes on to say “no piece of paper” so no explicit contract, and he’s correct on that. And of course he’s not saying it isn’t a moral obligation, only that it is a statutory one. I’d argue it is both moral and statutory, but the reality is also that the statute could be changed to reduce or even eliminate benefits. It has been changed in the past, many people who were working before the mid-80s changes were announced/made were born in 1960 or later, and thus do not get to retire when they were “promised” when they started paying into the system.
In a thread where someone is looking for clarity on what “default” means, I think it only fair that we keep it clear cut that most people (I’m sure a few outliers exist) do not consider failure to pay payroll or make benefit payments to be a credit default.
There is no justifiable reliance in this case. All the recipients know they have no contract, and all the recipients know (and have seen it happen) that the terms can be changed, unilaterally, at any time.
Plus, the Federal government generally has sovereign immunity from citizen suits. It has made decisions about when and how it waives that immunity to allow suits against it in the common interest of fairness or what have you. I don’t believe a Social Security beneficiary would succeed if they brought suit against the Federal government demanding a certain amount of benefit payment under the doctrine of reliance.
Making changes to a social contract are one thing. Saying someone has no legitimate expectations under it though - that’s what is bullshit and typical of GOP pretzel logic.
You guys are missing a second point, which is that the .gov can pay interest on the debt AND SS benefits without raising the debt ceiling. There’s more than enough federal revenues to cover both, and then quite a bit left over to do other stuff.
No, that’s a fallacy because you still have debt redemptions to deal with and you can’t roll debt over in time to cover the redemptions so you’re still screwed.