Debt Ceiling Analysis

What will happen if Congress doesn't raise the debt ceiling?

One analysis was provided today in an e-mail from Congressman Walter Jones.

"The House Republican leadership recently invited Jerome Powell - former Undersecretary of Treasury in the George H.W. Bush Administration - to present members of Congress with a nonpartisan debt limit analysis, and to present a fact-based look at what consequences our country will be facing without a resolution to the current budget crisis."

Actually, I don't agree that we have a current budget crisis. What we have is an artificially-induced political crisis over a matter that should be treated as a routine housekeeping matter. This is what President George W. Bush's Director of the Office of Management and Budget, Mitch Daniels, called the debt limit. He was right.
Jerome Powell, George H. W. Bush's Undersecretary of the Treasury, provides a debt ceiling analysis here. Powell's analysis makes it clear that the consequences of a failure to increase the debt limit could be catastrophic. He describes the risks as serious. In my view, he understates the risk, because he doesn't address the cascading effects of resulting job losses, interest rate increases and contraction of the economy likely to result.

So read the analysis, but bear in mind the consequences of default could be very much worse.

Oriental Town Charter: More Info

For those following the saga of Oriental's 1899 charter and subsequent amendments, I now have a copy of the 1997 ordinance, entitled 'AN ORDINANCE TO AMEND CHAPTER 184, PRIVATE LAWS OF 1899 ("TOWN CHARTER OF THE TOWN OF ORIENTAL").

The operative portion of the document reads as follows:

"BE IT ORDAINED BY THE BOARD OF COMMISSIONERS OF THE TOWN OF ORIENTAL:

That Chapter 184, Private Laws of 1899 ("Town Charter of the Town of Oriental") be and the same is hereby amended by adding Section 16 as follows:

"Section 16. That the Town of Oriental shall operate under the council-manager form of government in accordance with Part 2 of Article 7 of Chapter 160A of the General Statutes of North Carolina and any provision of this act [the 1899 charter] not in conflict therewith."

ADOPTED THIS 12th DAY OF NOVEMBER, 1997

/s/ Sherrill Styron
MAYOR

/s/ William M. Crowe
TOWN ADMINISTRATOR"

The bottom line: Pretty much what I have been reporting for the last year, as summarized here. In other words, the board of commissioners makes policy and political judgements, and the town manager administers the town.

Annoying (and Erroneous) Bloviations - Summary

Relating to several of my recent posts, economist Jared Bernstein today brings clarity to many issues in his post, "Roundup of Deeply Annoying Stuff."

I particularly like his analogy of the sinking boat. I may try to rework that one for Pamlico Sound.

Deficit? How About Jobs

Yesterday I posted a link to a good article in the Washington Post about deficits and debt.

The Post article, however, left out the most important thing - why managing the federal budget isn't at all like managing a household budget. The reason is jobs and overall economic health of the nation.

The government manages our money. The public quite rightly holds the president and members of congress responsible for the economy.

Money is a creation of man. Whether gold, silver or paper, it is a social artifact that must be managed. Wisely.

Some fantasize that a return to the gold standard for our currency will bring financial stability, forgetting that we were on the gold standard in 1929 when the great depression began and for four years after that. It didn't help. Other proposed magical solutions for a financial utopia include a balanced budget amendment. After all, every state has to balance its budget.

But states don't have their own money.

The federal government does.

There are two ways the government uses money to maintain or restore the health of the economy:
(a) Monetary policy. The Board of Governors of the Federal Reserve System and the Federal Open Market Committee (FOMC) make key decisions affecting the cost and availability of money and credit in the economy. If the Fed determines that inflation looms, they increase the discount rate or reduce the money supply to cool down the economy. If economic activity falls below trend, it may reduce the discount rate or increase the money supply.

The statutory goals of the Fed's monetary policy are to maintain stable currency and full employment. That is already very different from managing a household budget.

(b) Fiscal Policy. On a day to day basis, the Department of the Treasury borrows and repays money as necessary to conduct government operations. Government receives its revenue sporadically, but has to pay its bills when they come due. It covers any shortfall by short term borrowing and repays the debt when revenue is received. This is very much the same way businesses operate. Payment to businesses for goods or services provided is typically received well after the goods or services are produced and delivered. The business in the meantime has to pay its employees, its suppliers and its contractors. To cover the delay in receiving payment, businesses establish lines of credit with a bank. The bigger the business, and the greater the resulting income, the larger the line of credit a bank is willing to extend. Nothing unusual here.

Bear in mind that every expenditure the Treasury covers has been authorized by the Congress and funds have been appropriated. Strict controls are in place.

That being said, it is possible that monetary policy, controlled by the Fed, may work against fiscal policy, controlled by the Congress and the president, since expenditures in excess of revenue can be expansionary, while revenue in excess of expenditures will be contractionary.

Right now, with the Fed’s interest rate set as low as it can go (the zero bound), there is nothing more the Fed can do to stimulate the economy. Businesses and banks are awash in cash, interest rates are as low as they can be, but businesses aren’t borrowing to expand capacity. They already have excess capacity as it is. What they need are customers.

For the foreseeable future, only the government can act as a purchaser at the scale needed to get the economy going again.

The last thing we need is reduced government spending.

What Is This Deficit and Debt Stuff?

There's a lot of nonsense, hype and hyperbole being bandied about concerning the annual federal deficit and the national debt.

One of the problems for members of the public trying to cut through the hype is, what do the words mean? The Washington Post has provided a public service by explaining in pretty clear terms what the basic concepts are describing. The article is worth reading.

The Post could have done a better job, though, of explaining why managing the federal budget isn't like managing a household budget. I'll give that a try tomorrow.

Town of Oriental Referendum 1993

The North Carolina Legislature in its 1991 session passed An Act to Set a Referendum on Possible Changes in the Electoral System for the Town of Oriental (Chapter 878, Senate Bill 968). That act is posted on the Town of Oriental's web site at pages four and five of "town charter and amendments" under General Ordinances and Town Charter. The 1991 act scheduled a referendum for a special election to be held November 3, 1992.

Anyone reviewing the 1991 Act can see immediately that each of the three choices to be presented to the voters begins: "(a) Sections 3 and 7 of Chapter 184, Private Laws of 1899 (the original 1899 charter) are repealed."

Section 3. of the 1899 charter stipulates: "That the officers of the town shall be a mayor, three commissioners, a constable, who shall be elected by the commissioners, and such other officers as the commissioners may deem necessary and proper, as provided by said chapter sixty-two of The Code [of 1883]; Provided that no person shall be a mayor, commissioner or other officer of said town unless he be a qualified voter therein."

Before the special election was held, the state legislature passed "An Act to Make Technical Corrections to a 1992 Charter Amendment to the Town of Oriental, and to Reschedule a Referendum. The act rescheduled the referendum for November 2, 1993, modified option B to provide for a five-member rather than a six-member board and stipulated that whichever choice received a plurality of votes would go into effect beginning with the 1995 regular municipal election. That act is not posted on the town's web site, but is posted on the web site of the North Carolina Secretary of State.

The Pamlico County Board of Elections conducted the referendum at the same time as the November 2, 1993 municipal election. Sherrill Styron was elected mayor with 265 votes. Commissioners were Radford Lewis (265 votes), Joe Harris (249 votes), and Dave Nelson (185 votes). A plurality of voters voted for question 'C', a mayor and five member board of commissioners with the mayor voting only in case of a tie (218 votes). Question 'A', keeping a three-member board received 73 votes and question 'B', a five member board with the leading vote getter serving as mayor, received 69 votes.

The Pamlico County Board of Elections retains a copy of the abstract of canvassing (the vote count) for that election, as well as a copy of the ballot used for the election.

The 1993 repeal of sections 3 and 7 of the 1899 charter had no immediate effect. The town continued to have a "mayor-council" form of government, which gave the board of commissioners as much operational control of day to day operations, including hiring, as the board wanted to exercise. But in 1997, the town amended the charter by ordinance, changing to a "council-manager" form of government. Under that form, the commissioners have no day to day administrative powers - only the right to establish general policies and exercise general oversight.

North Carolina General Statutes establish the duties and responsibilities of the manager by law.

Paper Money: Let 10,000 Banknotes Bloom

If you are a businessman, how would you like to operate in a country with 10,000 different kinds of banknotes?

Sounds pretty chaotic, doesn't it? How would you know which banknotes were issued by sound banks and which were not?

That's what we had in the United States in 1860. Samuel P. Chase, Secretary of the Treasury during the Civil War, brought some order to that system.

Oriental Town Charter Loose Ends

At the end of the Oriental Town Board meeting/press conference last Friday, Commissioner Venturi announced that she had asked town employee Lori Wagoner to compile the 1899 town charter and all amendments.

It's a really good idea to have and to publish on the town web site an annotated charter. The annotations should include not only the two amendments (November 4, 1993 by referendum and 1997 by ordinance), but also all changes dictated by changes to state law and annexations not listed in Section 2 of the 1899 charter.

This won't be a simple task. A cursory perusal suggests that, in addition to the repeal of sections 3 and 7 by referendum, Sections 5, 6, 8, 9, 10, 12, and 14 have been amended or replaced in whole or in part by subsequent changes to North Carolina law. It would be helpful to the public for these changes to be annotated on a public copy of the charter.

I propose the board of commissioners appoint a citizens committee empowered to contact the state legislative library, the Secretary of State's office and the School of Government to develop an accurate annotation.