Friday, July 15, 2011

Some Further Thoughts About the Debt Limit

-- Posted by Neil H. Buchanan

For an issue that I once thought could never become important enough to justify even one blog post, the federal debt limit debate just keeps on giving. With the deadline for default now less than three weeks away, and no deal in sight as of this moment (early Friday morning, July 15), no one knows what will happen. The bond rating agencies are threatening to downgrade U.S. Treasury securities, Chinese leaders are evidently using the U,S. political crisis to try to demonstrate their own importance, and almost any outcome seems possible.

It bears repeating that this is a political crisis, and an entirely self-inflicted one at that. There is nothing in the non-political world that would make early August 2011 a uniquely important time for the economy or the financial markets. If, the last time the debt limit was increased, it had been arbitrarily set at $16.3 trillion instead of $14.3 trillion, then early August 2011 would come and go with no more budgetary fanfare than, say, early February 2011 or any other date on the calendar.

If we had never even invented the contrivance of a debt limit, which purports to be able to undo what Congress and the President do each year in the budgeting process, then the next big political battle would be waged during the autumn budgetary debate. The scary outcome on the horizon would be a government shutdown, not default. (Shutdown bad. Default much, MUCH worse.) Instead, we are now seeing the consequences of having created a system in which one party -- or, as it now seems, one faction of one party -- is able to force a crisis in the name of ideological purity.

For the past few weeks, I have been one of the people arguing that the debt-limit statute is unconstitutional. One reason that readers should hope that this is correct is that a constitutional resolution is the best hope for preventing this circus from becoming a regular part of our political scene. There is no hope whatever that this or any future Congress would simply eliminate the debt-limit law, even though doing so would do nothing to limit Congress's ability to control the level of federal debt. It is simply unthinkable that any politician would be willing to be known as someone who "voted to let the debt go up without limit."

Fortunately, the Constitution does require that the debt-limit law be declared invalid. Section 4 of the 14th Amendment had the immediate effect of preventing politicians from playing games with the budgeting process to achieve inappropriate political goals. (The question was whether the post-Civil War federal government's debts could be defaulted upon, to prevent the losing side in the reunified nation from paying a share of the winning side's debts.) Under current circumstances, Section 4 prevents the debt-limit law (and politicians' refusal to raise the ceiling in line with their enacted budgets) from causing the federal government to default on any of its legal obligations.

Everyone agrees that, without the debt-limit law, current law would allow the government to borrow the money necessary to cover its obligations. If that were not so, then we would not be in danger of exceeding the debt limit. That is, if the spending laws had not been written to include the authority to increase borrowing, then those laws would currently not be enforceable even in the absence of an overall debt limit. The very premise of the debt-limit standoff, therefore, is that the otherwise-valid spending laws would lead to an increase in debt above $14.3 trillion. The debt-limit statute purports to prevent the government from paying those other obligations, which violates Section 4.

Because of problems with standing, justiciability, and other issues, however, it is highly unlikely that the Third Branch will declare the debt-limit law unconstitutional, meaning that the ongoing political process -- the very source of the crisis -- must somehow find a way forward. The constitutional argument is unappealing to President Obama and most/many Democrats, because they worry that they could pay a price for "wanting" to have more debt. As Professor Dorf pointed out yesterday, this is all about who will be blamed, and divided government makes it too easy to try to make bad things happen in the hope that the other side will pay the price.

Even though the constitutional argument is appealing, in that it would remove the political roadblocks standing in the way of a (slightly) more sane budgeting process, we cannot simply rely on a constitutional solution because it negates insanity. There are plenty of insane things that the Constitution not only cannot prevent but affirmatively protects. (Insert name of least favorite musician here.) Moreover, we should always hesitate to invoke constitutional limits on law-making, because those limits are so powerful. Therefore, many people (both on the Dorf on Law comments board, as well as in the political debate in Washington) have understandably been asking probing questions about the details of the constitutional argument.

One question involves what is now being called "prioritization." That is, if we were to find ourselves on a given day with $1 coming into the Treasury and $3 in legally valid payment obligations due that day, is there not some way to separate the $3 into two parts -- $1 that is really, truly required, and $2 that are somehow not necessarily as big a deal? Cannot we not then pay the $1, refuse to pay the $2, and still say that we have not "really defaulted"? Applied to the current situation, the suggestion has generally been that, so long as there is enough revenue arriving to pay interest on the existing debt, then we can still pay our real debts, and any remaining excess can be used to pay some of the other ongoing expenses of the federal government, at the discretion of the Executive Branch. This argument, then, says that interest on the national debt is the only payment obligation covered by Section 4 of the 14th Amendment.

As I have argued, however, the designation of debt payments as super-obligations seems not to have a basis in the law. That is, even though the government could decide to pay debt-holders while stiffing military veterans (setting aside the political firestorm that would surely attend such a statement of priorities), doing so would not avoid being in default. The Supreme Court has said that Section 4 is about "obligations," not just debt, and we are talking about people who are currently owed money under valid laws. Not making legally required payments is, under both common sense and the law, defaulting.

That means that the debt limit forces the Treasury to choose among obligations, all of which it is legally required to pay. Any choice -- which would be necessary because the debt limit prevents borrowing to cover the difference -- involves a default on government obligations. That is, the debt limit does not (as is often thought) require Congress to make policy choices about the future levels of spending and taxing, but instead requires the President to make choices about which current legally-due bills will be paid.

It is true that the law gives the Executive Branch the authority to engage in administrative practices that can forestall a default. This, however, is a prudential rule that exists essentially to allow the Treasury to prevent a default because of some entirely avoidable mismatch in the law. (For example, if tax revenues were to be delayed because of a glitch in the payments system, we would not want the government to default on some obligations because it had to wait for the tech support guys to show up.)

Ever since we reached the debt limit in May, Treasury has been using exactly those powers to try to delay default long enough to allow the President and Congress to raise the limit. There are, however, limits to this administrative juggling act, and the early August deadline is when even those extraordinary measures will have run their course. There is no budgeting version of Zeno's Paradox, allowing us to continue to approach but never reach the limit. At some point, all options have been exhausted.

If we reach the end of the line, the President will have to choose whether to enforce the budget, or the debt limit. It is a clear choice.

18 comments:

egarber said...

As an economic matter, the real debts / obligations distinction is somewhat meaningless.

The ratings agencies don't care who gets paid first in downgrading us; they've said so. And further, we saw yesterday that thousands of municipal bonds will also be downgraded, because cities depend on federal funding generally to make ends meet.

To me, the real issue here is the utter lack of economic saavy among tea-partiers. Their actions are tantamount to wrapping yourself with dynamite during a temper tantrum.

Another ironic part of this plays to the notion of responsibility. Given that the debt limit is about meeting *existing* obligations, default is the equivalent of an individual walking away from his mortgage, even though there are ways to stay current. Well, I thought conservatives were all about that kind of "responsibility". I guess not, if it means making a millionaire hedge fund manager pay the same tax rate as the guy taking out his office trash can.

Hashim said...

I don't think you answered either of my questions from your prior post:

1. Even assuming dubitante that 14A debt includes all legally-mandated expenditures, what about non-legally-mandated expenditures? Are you really contending that legally-mandated expenditures, by themselves, exceed current revenues? For example, if Obama immediately ended the wars in Iraq and Afghanistan -- which neither the 14A nor any other law legally mandate -- are you arguing that the resulting cost-savings, when added to the elimination of all other such discretionary spending (national parks, govt buildings, etc.), still wouldn't be sufficient with current revenues to cover our legally-mandated expenditures? I find that hard to believe. Likewise, since no one seems to think that govt shutdowns during a budget impasse violate the 14A, why can't the govt shut-down all operations that aren't needed to make legally-mandated expenditures? Finally, you didn't address my point about the Executive Branch's ability to raise additional revenues through administrative mechanisms, including by selling govt property.

2. I also still find unsupported your claim that a spending authorization implicitly carries with it the power to borrow. You say that must be the case, because otherwise there'd be no reason for a debt-limit statute in the first place. But that doesn't logically follow. There could be, and I'm assuming there is, a separate statute that authorizes borrowing, and which the debt-limit statute constrains. Think of it this way -- in 1789, if the first two laws that Congress passed were a tax to generate some revenues and a spending bill that legally required funding a certain program, I highly doubt that anyone would take the position that Treasury had inherent authority to borrow money to pay for the program if the tax revenues came up short. And that would be equally true even if the 14A was on the books at the time. Rather, I'm pretty sure that Treasury can only borrow money because Congress has passed a law specifically authorizing it to do so. And the debt-limit statute validly caps that authorization. The 14A shouldn't be able to override Article I's placement of borrowing authority with Congress. Or would you say in my hypo that the 14A authorized Treasury to borrow money to pay for the legally-mandated program even though Congress had *never* authorized borrowing?

egarber said...

Just a random thought on the constitutional dynamic:

Is a debt ceiling law inherently unconstitutional, or only as applied? Meaning, suppose Congress passed a new tax increase today to cover all the gaps. In that case, all obligations would be met, even though the debt ceiling meant no more borrowing could occur.

If the violation is only as-applied, then it seems any law that has the effect of triggering default could be unconstitutional. But that begs a bigger question: how does a court or the president decide which law really caused the tilt? After all, maybe it was the Medicare prescription package that made Aug 2 the drop-dead date.

I guess what I'm asking is: even if default is unconstitutional, why do we think the 14th compels additional borrowing, vs something else (maybe even spending cuts)?

Don't get me wrong, as a policy decision, failure to raise the limit is completely self destructive. I'm just not convinced the debt limit is unconstitutional.

tcole said...

So if the Executive Branch is hesitant to challenge the constitutionality of the debt limit law, are there not others with standing who could challenge the law's constitutionality? Any citizen who owns US Debt (e.g., savings bond), a retired military officer receiving a government pension, a state AG. Why has this not happened?

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toryburchflats said...

Another ironic part of this game concept of responsibility. Since the debt limit is about to meet its obligations, default is the same as a walk only in his mortgage, even if there are ways to keep up. Well, I thought conservatives were all about that kind of responsibility. I think not, if it means a hedge fund manager millionaire will pay the same rate the boy to take the garbage out of his office

I also always find your unsupported assertion that authorizes a user implicitly performs with the power to borrow. You say it must be, otherwise there would be no reason for a statute of limitation debt first. But that does not logically follow.

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prince wei said...

It has saying that this is a politics problems, and an entirely self-inflicted one at that. There is nothing in the non-political community that would create earlier May 2011 a slightly significant time for the economic climate or the areas. If, the before the debts control was enhanced, it had been randomly set at $16.3 billion instead of $14.3 billion, then earlier May 2011 would come and go with no more pricing excitement than, say, earlier March 2011 or any other time on the time.
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Toray Parker said...

seo博客:I extremely question that anyone would take the location that Treasury had normal specialist to take a loan to pay for the method if the tax income came up shorter. And that would be likewise real even if the 14A was on the guides sometimes. Rather, I'm fairly sure that Treasury can only take a loan because Our elected representatives has approved a law especially authorizing it to do so. And the debt-limit law validly limits that endorsement. The 14A shouldn't be able to bypass Post I's keeping credit specialist with Our elected representatives.

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