Wednesday, January 16, 2013

A Priority List of the Available (All Bad) Choices in the Upcoming Deadlock

-- Posted by Neil H. Buchanan

Last Friday, CNN Opinion ran an op-ed that I co-wrote with Professor Dorf, in which we (in 850 words) summarized our argument that the President is constitutionally required to exceed the debt ceiling, should Republicans refuse to increase it to accommodate their own spending and taxing laws.  One of the things that we have been trying to say throughout this debate is that, if Republicans really had any fealty to constitutional principles of separation of powers -- to say nothing of fear of giving President Obama dictatorial powers -- then they would not want Obama to be able to cut spending at his discretion.

Of course, there is little if any evidence that leading Republicans have fealty to any principles other than satisfying their anti-government, seething base (along with, of course, their anti-99% financial base).  The echo-chamber media are, if anything, worse.  Unsurprisingly, an unknown writer at a Murdoch publication -- the kind of guy who uses the terms like "entitlement state" to invoke the specter of sinister big government, and who uses Nancy Pelosi as a bogeywoman in the first sentence of a column -- criticized our op-ed, claiming that the President "can't just ignore the debt limit."  Which, of course, [sarcasm alert] is exactly what we argued.   He can just ignore a statute, apparently because we just want him to.

All right, sarcasm aside, is there anything in that op-ed of value?  The writer makes one short legal argument that is simply incorrect (at a college Freshman level), and a longer economic argument with which we have already agreed (but that does not lead to the conclusion that the writer prefers).  The legal claim is that "there is nothing constitutionally objectionable about the president's making policy."  Actually, of course, the Constitution is all about limiting the President's role in making policy.  The same people who remind us that Article I gives the power to borrow to Congress conveniently forget that Article I also gives Congress the power to spend and tax.  The President is obviously a political force, and he can use his veto pen (and the threat thereof) to shape negotiations over legislation, but once the legislation is passed, he is not "making policy."  Making his own decisions about how, where, and when to cut appropriated spending is a usurpation of legislative power.  This is basic, basic stuff.

This guy's longer argument is that issuing bonds in excess of the debt ceiling might be a difficult sell in the financial markets.  If only we had thought of that!  Oh wait, we have, in nearly everything we've written on the subject, as co-authors and separately.  (See, e.g., here.)  It is unsurprising that a hack writer would not bother to do any further research before spouting off, but what makes this truly absurd is that his argument boils down to this: "If the debt ceiling isn't raised, and Obama avoids defaulting on our obligations by issuing debt, there would be bad effects on financial markets."  Right, and if Obama instead defaults, that would have bad effects on the financial markets, too.  The whole point is that there are nothing but bad choices.  Focusing on only one of them (especially in a column that claims to be making a real-world, policy-savvy assessment) is, at best, incomplete.

As it happens, I had already been planning to write my Verdict column this week in part about this very issue.  Before I got to that point, however, I decided to try to clear up the confusion about "the 14th Amendment option" and the Buchanan/Dorf "least unconstitutional option."  For one thing, it has become important to emphasize that these are two different arguments, either of which is sufficient (but not necessary) to legally nullify the debt ceiling.  For example, even after speaking with a reporter at a major international news agency for 25 minutes about this recently, she wrote an article that spoke about the 14th Amendment option as if that was the only "constitutional option" available.

The second purpose of today's column was, in turn, to defend the 14th Amendment option.  That news article not only ignored the trilemma, but it dismissed the 14th Amendment option superficially and disparagingly.  I have worried for some time that our enthusiasm for the trilemma-based analysis has caused us to ignore or minimize the 14th Amendment argument, and the White House's rejection of it last month reinforced that temptation.  Still, given how unbelievably weak (and minimal) the arguments have been against the 14th Amendment option, it was important (and quite easy) to defend it.

The "practical" half of today's column considered how to assess and compare the dangers of different possible responses to an ultimate political deadlock over the debt ceiling.  Professor Dorf and I have been saying that, given the constitutional requirement that the debt ceiling give way to the taxing and spending powers, the President should issue debt in sufficient amounts to execute Congress's duly-enacted budgetary priorities.  Again, we have acknowledged that the Treasury securities thus issued would have a (completely unnecessary and politically created) cloud over them, which is likely to require paying higher interest rates than should otherwise be necessary.  (One would think that fiscal conservatives would want to avoid increasing the costs of debt service.  Oh well.)

The alternative, however, has always been unambiguously worse, as an economic and financial matter: defaulting on the government's obligations.  And to be clear, it is not enough to say (as, for example, we heard during Professor Dorf's appearance on NPR last week) that the government is not repudiating its obligations, but is merely delaying paying them.  Financial obligations carry with them due dates, and not meeting those dates is material to the obligation.  (Is it really necessary even to write this basic stuff down?!)

In today's column, I then broadened the range of options, in two ways.  Both were based on the NYT op-ed by Professor Edward Kleinbard that I discussed briefly in my Dorf on Law post this past Friday.  Kleinbard proposed issuing some kind of scrip, like the "registered warrants" that the state government of California used during a budget crisis in 2009.  Although the headline-writers for the Times described Kleinbard's proposal as an "escape hatch" from the debt ceiling, in a subsequent exchange of friendly emails, I learned that Ed's proposal is not intended to avoid the debt ceiling, but simply to manage the default in a more orderly way.  That is, the government would not guarantee the IOUs that it issued, but would simply send people an official-looking piece of paper that said, in essence, "Dear Person-who-was-supposed-receive-$X-today, We're sorry to inform you that we don't have enough money to pay you.  We'll get back to you with the money as soon as we can.  Love, Your Government."

Although it is easy to make fun, even this non-guaranteed scrip could do something very important to make the default more manageable.  That is, rather than just being stuck with one or another way to prove that the government owes them money, people would be able to show other people something from the government that says, "We owe you $X."  Moreover, the government would allow/encourage people to exchange the scrip, declaring the papers to be officially transferable (i.e., ultimately payable to the holder, not the original obligee).  Banks might accept the scrip in deposit, allowing people to take out cash or write checks.

Again, this is a government default, which would still have disastrous effects on the world's assessment of the full faith and credit of the U.S., and seriously increase the cost of borrowing money for the government.  Still, it has promise to reduce some of the damage.  My suggestion in today's column, however, was to issue scrip in a form that (by design, given the constitutional analysis) exceeds the debt ceiling.  The scrip would become obligations of the U.S. governemnt, in the sense that they would be guaranteed and thus count against the debt ceiling.

The advantage of this would be to make the scrip less subject to the whims of the banks and other people, in terms of their acceptability in payment of obligations.  The more the scrip is backed by guarantees, the more people will use it.  This, of course, would simply make the scrip a shadow currency, which is also illegal.  As Professor Dorf argued at the end of his post on Monday, however, that might not be the worst possibility.  If we have really thought about minting trillion-dollar coins, maybe the least bad practical option is to issue almost-real currency.

There are plenty of practical aspects of any scrip program that would need to be worked out (most obviously, dealing with counterfeiting), all of which I think cut against actually choosing to issue scrip in either form (guaranteed or non-guaranteed).  At this point, among the bad options, I think the priority is, from least bad to absolute worst: (1) Issue normal Treasury securities to breach the debt ceiling, (2) Issue guaranteed scrip to breach the debt ceiling, (3) Issue non-guaranteed scrip to default, and (4) Have the President pick and choose who will not be paid during a default.  These are all bad options.  Thanks, Republicans!

6 comments:

Paul Scott said...

Why, on your list, is there no mention of the, to me, most obviously cheapest option: expand the money supply?

I don't care whether it is trillion dollar coins (which has at least some textual support, even if it is decided that ultimately fails, for being legal) or printing tens of billions of $100 bills. Why is that not our best option - legal or otherwise - in a host of options that everyone does or should agree are illegal and/or unconstitutional?

Paul Scott said...
This comment has been removed by the author.
Paul Scott said...

For that matter, what about the guaranteed scrip puts it below issuing treasuries? Issuing guaranteed scrip is effectively a zero interest loan (or, a loan a a rate set by the issuer of the scrip). The cost with the scrip is getting banks to treat it like cash - which was no problem at all for California.

So it seems to me the list should be: 1. print/mint money, accepting the mildly inflationary effects, 2. print guaranteed scrip, 3. issue (high interest) treasuries, 4. all the various forms of default.

curious said...

Why isn't the Federal Reserve subject to the debt ceiling? Where does the Fed get the money from to exchange for Treasuries or platinum coins or to purchase other bonds or otherwise engage in QE or monetary policy generally?

Neil H. Buchanan said...

Curious's question is a good one, which I'll try to answer in a post next week.

Cicy said...

For that matter, what about the guaranteed scrip puts it below issuing treasuries? Issuing guaranteed scrip is effectively a zero interest loan (or, a loan a a rate set by the issuer of the scrip). The cost with the scrip is getting banks to treat it like cash - which was no problem at all for California.

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