US Government Debt Different - Finance Department - University of ...

58 The 2011 Debt Ceiling Impasse Revisiteddollar specimen for deposit at the Federal Reserve. As coins do notcount towards the public debt ceiling, this tactic would have producedthe mother of all exempt obligations albeit with potentiallyconsiderable political repercussions and adverse market reactions. 3A Phase Two Debt Crisis begins when Phase One maneuvers runout and the debt ceiling becomes a binding constraint on governmentactivities because the government’s projected commitments topay cash exceed its ability to make those payments. At that point,the implacable logic of cash-flow accounting poses a dilemma forfederal fiscal management. In ordinary times, the federal governmentturns to the capital markets to manage imbalances betweencash inflows and expenditures. When the government runs net cashsurpluses, it can retire public debt; when it runs net cash outflows,public borrowing fills in the gap. In recent years, federal expenditureshave substantially exceeded revenue. August 2011 is illustrative. Inthat month, the government received cash payments of $186 billionand paid out expenditures of $314 billion. In other words, inflowsfrom sources of revenue covered slightly less than 60 percent of expenditures.The dilemma of a Phase Two debt crisis is devising a cashpayment plan under these circumstances when access to public debtmarkets is precluded.As Professor McConnell succinctly summarizes in his companion essay(Chapter 5), the complexity of Phase Two Debt Crises is that theConstitution vests the key fiscal powers with Congress: the powerto spend, the power to tax, and the power to borrow. A Phase TwoDebt Crisis occurs when Congress has exerted those powers into amathematical inequality: authorized expenditures exceed authorizedtaxes plus permissible new borrowing. Under these uncomfortablecircumstances, the Executive is forced to consider what options (ifany) remain open and what discretion (if any) is available for choosingamong those options.A final characteristic of a Phase Two Debt Crisis is that the crisis ispresumed to be temporary, to be followed in short order by a politicalcompromise that restores liquidity to the federal government3 See Appendix A at note 163.