Sunday, July 24, 2011

Time To Give Republican Voters A Dose Of Reality

The only thing that will cause the Republicans in the House to pull back from the cliff is for their voters to start screaming at them. That will only happen when those voters understand how default will affect them personally, in the pocketbook. The President has talked in vague terms about those affects. But he has been trying to avoid panic in the markets as well as in the public. At this point, panic is the only weapon he has left.

People need to be told what payments will be delayed or not made. We are talking about checks for Social Security and veterans, to government contractors, to states for Medicaid and other things, just to name a few. They also need to know what federal services will be halted because of a lack of funding.

Starting week after next, if we cannot borrow, the Treasury will receive tax receipts that will only allow it to pay to about 56% of its expected bills for the month. Projections for the entire month show $210B of revenue to pay $375B of bills. That means for very $100 in bills only $56 will go out.

Most people don't understand or care about "the markets," interest on bonds and all that other stuff. They do care about their own checkbooks. Well, starting in the first week of August those checkbooks will all take a hit. There is hardly a person who will not be directly or indirectly affected when those checks are delayed or stop coming entirely.

There may be a few item, such as interest, that have a statutory preference for payment. For everything else the President has essentially three choices in distributing limited funds. He can decide on winners and losers by paying some and not others. He can pay them all on a pro rata basis. Or he can simply have them paid in the order they are due. My guess is that he will choose the last course.

Nothing will get the Tea Party voters calling their Members of Congress faster than to be told in explicit terms, with amounts and dates, that their August Social Security check will be three weeks late, their September check will be seven weeks late, and that Medicare payments for their Doctors, hospitals and medicines will not be paid on time and could be delayed months.

It is time to tell these people the truth. And if that causes panic, so much the better. Because it will take their panicked calls to the legislators to bring about a change.

One other thing. There are some who think that since moneys have been appropriated they have to be spent and that sets up a conflict between the appropriations laws and the debt limit law. No such conflict exists.

Appropriations acts tell the president to spend. The debt ceiling does not tell him not to spend, it merely prohibits him from borrowing. This is a critical distinction because each appropriations act begins like this,

"The following sums are appropriated, out of any money in the Treasury not otherwise appropriated."

The key words are "out of any money in the Treasury." The appropriations acts only direct the President to spend money that is in the Treasury. They do not direct that money be put in the Treasury. The laws that do that are the laws that impose taxes which are deposited in the Treasury and the laws that authorize borrowing, the proceeds of which are put in the Treasury. The debt ceiling operates as a limit on that borrowing power. Bottom line, if there is no money in the Treasury the appropriations act doesn't appropriate anything.

When you hit the debt limit the only money "in the Treasury" is money from tax receipts. And that money is all the money the Treasury can spend. This is not a situation involving impoundment of funds, whether by rescission or deferral. They are governed by The Budget and Impoundment Control Act of 1974 They involve situations where there is ample money in the Treasury, acquired by taxes or through borrowing, and the President decides to not spend some of it. In this instance there is insufficient money in the Treasury to pay the bills because tax receipts are too low and there is no authority to borrow more.

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