LL: What do you think of Michele Bachmann and Tim Pawlenty's claims that say Treasury could pick and choose what to pay in order to make debt service payments. Like taking money assigned to Social Security and making debt service payments. Is this in violation of the United States Constitution?
DP: There are certainly several creative ways to avoid defaulting on U.S. debt, and it is unlikely that any Constitutional issues would be raised in doing so. But the debt ceiling issue is just a symptom of a larger disease, and that is the inability of Congress to constrain spending and place the country on firm financial footing. Today’s deficits will seem tiny compared with what we will face in coming years without significant reforms to all federal spending programs, especially entitlements.
LL: House Majority leader Eric Cantor (R-VA) just committed to bringing up for a vote in the last week of July H.J. Res. 1 which is the constitutional balanced budget amendment. It is important to get the rules right when crafting such an Amendment. What principals should members follow when achieving fiscal discipline?
DP: There are three key principles that are crucial for achieving fiscal discipline. First, the rules have to address the entirety of the federal budget, not just a portion of the budget. Then, Congress can debate what the federal government’s spending priorities ought to be, given the constraints on overall spending. Second, the rules should be free of loopholes. Otherwise, these loopholes will be exploited whenever the temptation to overspend arises, which in Congress is quite often. Third, the rules should have carefully constructed “exit options.” Congress shouldn’t be able to waive the rule on a regular basis but, rather, only in truly extraordinary circumstances.
LL: What do you say to those who say a Constitutional amendment give too much power to the U.S. Supreme Court over budgetary matters?
DP: These fears are overblown. If Congress adheres to the rule and does not engage in budgetary chicanery, the Court would be very unlikely to intercede on spending and taxation issues. It’s a positive sign that many members of Congress loathe the idea of Court involvement, since hopefully that will spur careful adherence to the Constitutional amendment.
LL: Does a Constitutional amendment shift the fiscal burden to the states?
DP: To the extent that the amendment limits spending growth at the federal level, there will certainly be pressures at the state and local levels to pick up the slack. But, these pressures will be offset by the reality that the states have to balance their budgets.
Moreover, decisions made more locally will tend to be more efficient, because spending can’t be paid for by taxes coming from residents of other states, as occurs with federal spending.
LL: The House and the Senate have tried to tackle spending and can create internal enforcement rules, such as the 2007 PAYGO rules or a statute with enforcement mechanisms, as with Gramm-Rudman-Hollings legislation in the 1980s. Given the hole we are in, these rules have been proven to be ineffective. Can you explain how these rules can be codified in the Constitution?
DP: Placing any budget rule in the Constitution gives it “bite” that internal rules simply can’t have. The U.S. Constitution explicitly gives Congress the right to make its own rules, and with this right comes the right to break its own rules. A Constitutional rule would be different. (PAYGO and Gramm-Rudman-Hollings were dealing with specific sets of problems and so aren’t good candidates for placement into the Constitution.)
LL: A Constitutional rule is meant to be permanent and Congress needs to get it right. What should the amendment focus on?
DP: The focus needs to be on spending, since that is the root cause of our fiscal problems. A balanced budget amendment is one way to constrain spending, since tax increases are difficult to implement and that will place downward pressures on spending. A more direct way to address spending is simply to cap spending and peg spending growth to population, inflation, and/or GDP growth. It’s important to remember this: you don’t need an additional dollar of revenue if you don’t have an additional dollar of spending. A spending cut is a very powerful thing.
LL: Why should a Constitutional amendment avoid focusing on specific government programs such as Medicare?
DP: Constitutional amendments have to stand the test of time.
Politicians are always going to have an incentive to overspend, given the nature of representative government. But Medicare may disappear tomorrow and be replaced by a new government program, one that might not be covered by an amendment that focuses only on that program. A Constitutional amendment focused on total spending forces Congress to budget responsibly but leaves decisions about how to spend up to legislators, which is the way it should be.
LL: Will it be hard for Congress to create such an amendment that doesn't have loopholes?
DP: It will be difficult, because many members are fearful of losing some control over federal purse strings. That’s my one big fear about a Constitutional amendment: that in the name of political compromise, the resulting rule is so riddled with loopholes that it makes a mockery of the Constitution. I have faith, however, that members of Congress advocating for Constitutional budget reform or that the states, which would have to ratify the Amendment, would pull the plug on such a rule.
A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
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