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.