The entrance to the Senate Appropriations Committee room in the US Capitol, surmounted by Bellona the Roman goddess of war. (It used to be the Military Affairs Committee room.)
Under our consititutional system and current law:
- Congress appropriates money to be spent on its programs by passing laws, and the Treasury is required to spend it.
- Congress lays taxes by passing laws and the Treasury collects their revenue.
- To the extent that the amount required to be spent exceeds the revenue that comes in, the Treasury typically sells bonds (i.e. borrows money) to cover the difference.
- Congress also sets an absolute maximum on the amount the Treasury is permitted to borrow (the Debt Ceiling).
Assume for a moment that the only ways the Treasury can raise money are either collecting taxes or borrowing. In that case, items 1-3 above are a closed system. That is, Congress determines the amount that Treasury will borrow by setting mandatory spending and tax levels. In such a closed system, the Debt Ceiling law is either superfluous or inconsistent.
As the national debt has grown, the Debt Ceiling has begun making the ominous transition from superfluous to inconsistent, and free-for-all of a public debate has arisen over how to resolve the problem. What follows is an attempt at a taxonomy of those solutions.
- Increase tax revenue or decrease spending on programs. Congress has undertaken both tax increases and spending cuts, but all agree that the measures Congress has taken will not be sufficient to resolve the problem. There does not appear to be political will to do more (moreover, either or both courses of action may be economically inadvisable).
- Break one of the laws — either: (a) fail to make some required payments or (b) borrow money in violation of the debt ceiling. The only legal justification for option (a) other than the impossibility of following both the spending and tax laws and the Debt Ceiling law. Option (b) could be justified on the same “impossibility” grounds; defenders of option (b) could also rely upon an interpretation of the public debt clause of the 14th amendment, which was intended to prevent Congress from reneging on duly authorized civil war debt. That theory is generally regarded to be shaky and the White House has ruled out using it (I think it has some merit). Any failure to make payments, per option (a), would lead to bad economic consequences, but there is a spectrum of seriousness depending on what payments the government fails to make: bond payments (apocalyptic), entitlement payments (really really bad), federal contractors and employees (really bad)). Option (b) would more or less maintain the economic status quo.
- Open up the closed system via seigniorage. This is the idea behind the trillion dollar coin. The Treasury Secretary would use an arcane statute to mint currency that would be used to satisfy the Treasury’s spending obligations without further borrowing.Platinum coin seigniorage is the only solution that appears to comply with current law in all respects (without changing any laws). Seigniorage is also, I think, the idea behind the Treasury IOU solution that some have proposed—though that solution sits on much shakier legal ground.
- Abolish the Debt Ceiling. This is the best solution of all.