-- Posted by Neil H. Buchanan
In my first column for Verdict, published yesterday, I endorsed the argument that the debt limit statute is superseded by Section 4 of the 14th Amendment, which says that "[t]he validity of the public debt of the United States … shall not be questioned." The basic idea, which has been advanced most aggressively by Bruce Bartlett and Garrett Epps, is that Section 4 requires that the government's debts be paid, making the debt limit statute constitutionally invalid. When a statute collides with a constitutional requirement, of course, that statute -- even if it was duly enacted and is of long standing -- must give way. (See, among a zillion examples, anti-miscegenation laws after Loving v. Virginia, outside spending limits after Citizens United, and so on.)
One of the responses among skeptics to this argument is that Section 4 applies only to the government's debt instruments (U.S. Treasury bills, notes, and bonds -- collectively Treasury securities, or simply "Treasuries," as I discussed yesterday in my DoL post), not to the payment of ongoing government obligations under other statutes, such as Social Security payments or any other government promise to make a payment. If that argument were correct, it would suggest that we could, as some Republicans have argued, prioritize debt payments over the day-to-day bills of the federal government, which would give the government plenty of room under the current debt limit to continue to honor the Constitution's requirements, while still keeping the aggregate national debt below $14.3 trillion.
Here, I will offer a political observation, some economic perspective, and a response to the proposed legal distinction between "debt" and "obligation."
First, the political observation. If taken seriously, the debt/obligation distinction would have the government pay its bondholders while stiffing Social Security recipients, doctors and hospitals that have applied for reimbursement of medical services provided to Medicare and Medicaid recipients, military contractors, soldiers, etc. In the public's mind, we have come to think of the public debt as being "owed to the Chinese." Much of this story is mindless fear-mongering, as I have argued here on DoL. Even so, for political purposes, paying the public debt now seems to mean "paying the Chinese." To the extent that people do not think of the debt as being owed to China, it is owed to banks, corporations, and rich people.
The choice to pay the holders of Treasuries first, therefore, would play into precisely the same populist fears that made the various bailouts so unpopular. Banks and automakers get bailed out, while regular people are laid off and foreclosures mount. The argument for paying the holders of U.S. debt, while telling everyone else to get in line and hope, would thus require arguing that the debt-holders are somehow more important than everyone else. Such an argument would sound eerily similar to "too big to fail." One never knows how political spin will play out, but I would not want to try to explain to an angry public why foreign governments and global financial institutions are being made whole, while regular Americans are out of luck.
Second, the economic arguments for making such a distinction are weak, at best. As I suggested in my Verdict column, if the idea is that you pay the debt-holders first in order to maintain their confidence in the U.S. government's full faith and credit, then this seriously underestimates people's powers of observation. As the economist Barry Eichengreen has argued: "Evidence that the inmates were running the asylum would almost certainly precipitate the wholesale liquidation of US Treasury bonds by foreign investors."
Investors, in other words, are unlikely to be mollified by being put first in line. The spectacle of the U.S. government engaged in fiscal triage would undermine confidence in the ability of our politicians to meet its obligations. Even if scheduled interest payments on the debt are paid, any sensible investor would engage in a fire sale. At best, short of Eichengreen's "wholesale liquidation" scenario, prioritization of debt would cause foreign and domestic investors to add a serious default-risk premium to Treasuries, raising interest costs to the U.S. government and exacerbating all of the problems that led us to the current situation.
Finally, consider the legal/Constitutional arguments for a distinction between debt and other federal obligations. There are countless examples where the law recognizes distinctions that economists find meaningless (tax cuts vs. spending increases, for example), so it could well be true that Section 4's meaning of "debt" is narrower than I have suggested.
What would be the basis of this distinction? As a technical matter, Party A is "in debt" to Party B if Party A owes something to Party B. The argument would have to be that the government is only required to make payments on those obligations that take the form of Treasuries, but not any other otherwise-binding legal obligation that the federal government has undertaken. This would mean that a dollar owed to a Social Security recipient would not be protected, but a dollar that was borrowed to pay a Social Security recipient would be protected. The arbitrary timing of the transition of the government's obligations from "payable to non-bondholder" to "payable to bondholder" would thus nonsensically drive the legal result.
Even in the immediate context of the enactment of the 14th Amendment, where the concern was that Southern senators would force the federal government to default on its obligations to those who had financed the winning side in the Civil War, the distinction between money owed directly to a creditor (such as a munitions manufacturer that had an account receivable, payable by the U.S. Treasury) and money owed to bondholders would be meaningless.
Specifically with regard to the suggestion that Social Security recipients could be stiffed, Epps points out this clause within Section 4: "including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion." Epps's point is that Section 4, by its own terms, protects two groups: pensioners (Social Security recipients) and non-soldiers who helped win the Civil War. (I can imagine an argument over the presence or absence of a comma in that clause, but my argument below is broader than Epps's and does not depend on that distinction.)
In fact, this phrase within Section 4 protects more than just "pensioners" but all who are owed money by the federal government. The words "debts incurred for" tell us that the framers of the 14th amendment understood the word "debt" to mean obligations broadly construed, not "Treasury security." Why? Because there is no reason, once an obligation to, say, a pensioner has been transformed into an obligation to a bondholder, to specify the source of the original obligation. It is only possible to give meaning to the concept of incurring debt for a particular purpose if we include in the notion of debt those obligations that are not yet in the form of existing Treasury securities.
But why speculate about any of this, when the Supreme Court has already spoken on the issue? The Perry case, the only U.S. Supreme Court decision to reference Section 4, includes the following: "Nor can we perceive any reason for not considering the expression 'the validity of the public debt' as embracing whatever concerns the integrity of the public obligations." The Court did not say "the integrity of the national debt," or "the integrity of Treasury securities." It said "the integrity of the public obligations." The Court used the broader term obligations, not any of the more specific terms that would identify a distinction between obligations on Treasury securities and every other obligation. This, moreover, is in the context of a case that was specifically about "government bonds." The Court could hardly have been unaware that it could have said "government bonds" to mean something more specific than "the public obligations."
The Constitutional argument regarding the debt limit statute is new and unfamiliar, making it understandable that people would be skeptical of it. The argument is only coming up now, however, because this is the first time that we are facing the serious possibility that the federal government will fail to meet its obligations in full. It would be both bad policy and bad law to pretend that we can selectively default on our public obligations.