Another Super Committee?

Update: The Obama Administration has issued a veto threat for the bill, instead preferring that Congress pass a clean CR and debt ceiling increase.

As a solution to the shutdown and debt limit impasse has proved elusive, the House has begun considering a twist on one of Congress's moves back in the 2011 playbook: a bicameral working group.

Granted, there are notable differences between what's being discussed today in the House and the so-called "Super Committee" from back in 2011, but the overarching feature of a joint committee of House and Senate lawmakers discussing the budget would be similar.

According to the text of the legislation, the bill would call on a bipartisan group of 10 members of the House and 10 Senators (each composed of 6 members from the majority party and four from the minority) to begin meeting to find a resolution to the current impasse over ending the shutdown and raising the debt ceiling. With only 9 days remaining until October 17 -- the date that Treasury Secretary Jack Lew has said the government will exhaust the use of extraordinary measures to stave off default and will only have $30 billion of cash on hand -- such a bipartisan group would have only a short period within which to meet unless stopgap measures were passed. The legislation call for the group to:

  1. Recommend overall discretionary spending levels
  2. Recommend changes in the debt ceiling
  3. Recommend "reforms in direct spending programs"

The group would have to garner the support of a majority of working group members appointed by the Speaker of the House and a majority of members appointed by the Senate Majority Leader in order to make any recommendations.

Although its been about two years, readers of The Bottom Line may recall the instructions given to the Super Committee -- a bipartisan group of 18 lawmakers: identify $1.5 trillion in savings over ten years or else sequestration would go into effect.

But the proposed working group would have several key differences from the Super Committee that will make it weaker and less likely to produce a bipartisan agreement that would responsibly deal with the debt. First, the mandate of the committee is limited to discretionary spending levels, increases in debt limit and changes in direct spending, leaving revenues off the table for discussion. By contrast, the Super Committee’s mandate allowed it to consider changes in all parts of the budget. Second, unlike the Super Committee the proposal does not include a savings target or other fiscal goal. Third, the plan would only have to receive majority votes from the majority party's appointments in each chamber, rather than the majority of overall members. Finally, the recommendations of the working group would be referred to committee with no procedure to ensure they received a vote in the House or Senate like the expedited procedures for consideration of Super Committee recommendations.

The desire to work on a bipartisan bicameral basis to begin addressing some of our fiscal issues is encouraging, and some type of special process to do so could be an important element of any deal. However, smart and comprehensive deficit reduction is likely to require tackling both sides of the fiscal ledger – or at least putting both sides on the table for consideration. With time running short, it time Congress and the President work constructively to open the government and avoid default, and to also work out a deal to achieve both tax and entitlement reform.

Extraconstitutional Mechanism for Enforceable Budget Balancing

 

So, we can all agree that Congressmen serving two year terms seem to have no commitment to deficit elimination absent a constitutional amendment requiring a balanced budget.  As an economist, I'm not even certain that I'd support the requirement of a balanced budget each and every year.

 

However, it is equally clear that kicking the can down the road a spell and then spending like drunken sailors the very next day is not working.

 

Suppose there were a mechanism which confronted Congress and the White House on a constant, rather than occasional, basis with the prospect of default directly proportionate to the expected cumulative result of fiscal decisions over an intermediate timeframe which spans overlapping congressional and even presidential terms?

 

But wouldn't that require the elussive and laborious constitutional amendment?  No.

 

How to do it?  Consider Odysseus at the Mast. 

 

An example of such a commitment device is the tale of Odysseus ordering his men to lash him to the mast of the ship so that he would be able to resist jumping overboard after hearing the sirens' song.

 

So, how might this be implemented in a fiscal setting?

 

1)  Do NOT raise the debt ceiling on general obligations of the Treasury with the full faith and credit of the United States.

 

2)  Authorize instead the issuance of perhaps $1.5 Trillion (my eyes roll at that) of Nonrecourse Revenue Anticipation Notes due maybe in 2018-19 which are subordinated to payment of principal on general Treasury obligations and are secured by revenues in each year of the loan term only to the extent that they exceed expenditure.  That is, these Notes are payable only out of annual surplus.  The are NOT direct obligations of the Treasury, which is only the agent for payment.

 

By the terms of their issue, redemption out of nonsurplus general funds is a misappropriation of the highest order and unlawful.

 

These are then a derivative security which internalizes unto itself all of the incremental default risk associated with higher debt level, leaving the general taxing capacity unencumbered to service debt held by prior obligees/bondholders.  This protects bondholders, social security recipients, and future generations of taxpayers from the drunken sailor excesses of Congressmen.

 

If Congress and the White House do not make the responsible decisions during the term of the Notes to control spending, then at maturity the Notes default and cease to plague subsequent generations of taxpayers and politicians, presumably, are tarred and feathered on the spot.  So,... they have an incentive not to let that outcome come to pass.

 

One would expect that these securities will carry higher yields as they are first in line to default, but one would expect as well that other General Obligation treasury securities would .be rewarded with correspondingly higher market values as they are then more nearly a riskless asset once again.  In competitive markets, the sum of the prices of derivative slices of a security should approximate the price of the whole.  (arbitrage condition)

 

Another feature of this approach is that the fluctuating market price of these Notes encapsulates the market assessment of the change in fiscal effect asssociated to any policy action.  (see Shadow Prices)  In effect, you can simply look up the change in Note prices before a federal activity and read off the change in the market discount associated thereto.  An economist's wet dream.

 

All this without a Constitutional Amendment.

 

Think about it.

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