America’s gross federal debt is already bumping up against the national debt limit of $14.3 trillion. But with the federal government already running a deficit of 43 cents out of every dollar of federal spending, if President Obama’s budget of $3.8 trillion, or $3,818 billion, is going to be financed, clearly a lot more national debt is going to be needed.
Speaker John Boehner, however, is holding firm on his position to allow a debt limit increase only to the extent of agreed cuts in future spending. If President Obama wants to increase the debt limit by $2 to $3 trillion, then he will have to agree to $2 to $3 trillion in spending cuts.
President Obama and the Democrats counter that refusing to raise the debt limit would result in default on the national debt, trashing America’s credit rating, and maybe the dollar as well. They are demanding what they call a “clean” increase in the national debt limit, which would mean Congressional authorization to add trillions more to the national debt, with no cuts in future planned spending of any sort, or any other limitations on future spending, such as a balanced budget amendment to the Constitution.
But as I demonstrate in my new book, “America’s Ticking Bankruptcy Bomb,” the argument that failing to increase the debt limit would result in any default on the national debt is a phony scare tactic.
Reaching the debt limit just means the federal government cannot borrow more. The government can still roll over debt and cover any debt that becomes due with new borrowing, which would not require increasing the total outstanding national debt.
The federal government could even easily continue to pay any interest due on that national debt, without increasing the debt limit. That is because federal tax revenue would continue to roll in as required by law. President Obama’s own 2012 budget specifies net interest spending for this year at $206.7 billion. But individual and corporate income taxes, and excise taxes, for the year are estimated to be over 6 times as much, at $1,257.5 billion, or $1.3 trillion.
Also continuing to flow in would be Social Security payroll taxes. Social Security is implicated in the debt limit fight because the so-called Social Security “trust funds” are rightly counted as part of the national debt subject to the debt limit. All the government bonds in those trust funds are just a statement of the legal authority that Social Security has to draw from general revenues, in addition payroll tax revenues, to pay Social Security benefits.
Those bonds were issued to Social Security in the past in return for the Social Security surpluses over the years given to the federal government for its general spending programs, and used to pay for everything from foreign aid to bridges to nowhere. The bonds represent a promise to pay Social Security the money back if it is ever needed to pay promised benefits.
Taxpaying workers and retirees were repeatedly assured their benefits were perfectly safe relying on those trust fund bonds, which were supposedly backed by “the full faith and credit of the United States.” But once the debt limit is reached, and Social Security turns in a trust fund bond because it needs the money to pay benefits in full, the government cannot issue new debt to the public to get the money to pay back the Social Security trust fund bonds, as it would routinely otherwise do. So the Obama administration is threatening to cut off Social Security benefits as well unless they get their “clean” debt limit increase without any spending control.
But that would only be by the choice of President Obama, because cutting off Social Security benefits in any way would not be necessary even without a debt limit increase. Social Security payroll taxes would again still continue to be paid in full, which the Social Security Administration estimates would total $564.7 billion for this year. Social Security benefit payments are estimated to cost $727.3 billion for the year, leaving a deficit of $162.6 billion to be covered if benefits are to be paid in full.
The federal government, however, doesn’t have to borrow from the general public, increasing the national debt, to cash out the Social Security trust fund bonds necessary to cover this shortfall. It can pay off the bonds out of other incoming tax revenue as well. With federal individual and corporate income tax revenue, and excise taxes, totaling $1,257.5 billion, even with $206.7 billion going to pay debt interest, that still leaves $1,050.8 billion, or over $1 trillion, more than enough to cash out $162.6 billion in Social Security trust fund bonds without any additional borrowing.
During the threatened government shutdown earlier this year, when the federal government was in danger of running out of authorization for any more spending because the Democratically-controlled Senate never passed a budget or appropriations bills for this year, President Obama threatened to cut off paychecks for troops and their families unless the Republicans caved in and authorized President Obama’s demanded spending. So we can expect President Obama to do the same thing as well unless the Republicans cave in to his demand for trillions in additional national debt with no spending controls.
But even with spending $206.7 billion on debt interest, and $162.6 billion to cover the Social Security revenue shortfall, there is plenty of money to continue paychecks for troops and their families as well. Indeed, there is still enough money to pay the entire Defense Department budget of $739.7 billion for the year out of the continuing incoming tax revenues.
So we are left with President Obama threatening to default on national debt interest, Social Security benefits, and paychecks for troops and their families if Congressional Republicans do not go along with his demand for trillions more in additional national debt with no spending controls, even though there is plenty of money in incoming tax revenues to pay all of these most urgent obligations. Pretty ugly conduct in my opinion.
This is why Sens. Pat Toomey, Jim DeMint, and David Vitter, along with Rep. Tom McClintock in the House, have proposed the Full Faith and Credit Act of 2011. That legislation would direct President Obama, who is obligated under the Constitution and his oath of office to take care that the laws be faithfully executed, to pay debt interest and Social Security benefits out of continuing incoming revenues, if the federal government reaches its debt limit, and cannot borrow any further.
The Republican-controlled House should pass this measure, adding a requirement to pay the troops and their families as well. And then go on recess, with Republican members fanning out across the country to explain in their districts exactly what President Obama’s threats are, how their legislation has already dealt with it, and how the question of defaulting on the national debt, Social Security benefits and paychecks for the troops and their families is now up to Senate Democrats and President Obama.
Peter Ferrara is the Senior Fellow for Entitlement and Budget Policy for the Heartland Institute and Director of Policy for the Carleson Center for Public Policy. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of "America’s Ticking Bankruptcy Bomb," now on sale from HarperCollins.
Peter Ferrara formerly served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush. He is presently Senior Fellow for Budget and Entitlement Policy at the Heartland Institute, and at the National Tax Limitation Foundation.