Debt Limit Options
For more than I year, I have been warning about the danger of a debt default resulting from Congress’s failure to raise the debt limit in a timely manner. Now, we are getting close to the 11th hour and it is clear that there are many Republicans willing to risk a default to achieve their ideological goal of slashing government. Although they say they are motivated by a concern for the nation’s finances, their total unwillingness to consider so much as $1 of tax increase proves that such claims are hollow.
As a consequence, I continue to believe that a debt crisis is imminent. I have serious doubt that Congress will raise the debt limit in time to prevent the Treasury from running out of cash to pay its bills, including interest and repayments on the debt. And since the ultimate crisis may come during Congress’s August recess, the Treasury may have no recourse except to consider radical options for preventing default.
One idea comes from Peterson Institute economist Joseph Gagnon, a former Federal Reserve official. He suggested to me that the Federal Reserve could temporarily buy some of the Treasury’s $300 billion stock of gold. This would allow the Fed to create cash that the Treasury could use to pay its bills until the debt limit is increased, at which time Treasury could simply buy it back. It would be a purely paper transaction that would have no real effect on the price of gold or anything else. The Fed could simultaneously sell an equal amount of securities from its portfolio to prevent the money supply from rising more than it desires.
A more radical solution would be to simply disregard the debt limit altogether on constitutional grounds, an idea I suggested in the Fiscal Times on April 29. University of Baltimore law professor Garrett Epps made a similar suggestion in The Atlantic on May 4.
The essence of the argument involves section 4 of the Fourteenth Amendment to the Constitution, which reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
In my view and that of Prof. Epps, this means that the president would have constitutional authority to take extraordinary measures to protect the public credit and prevent a debt default even if it means disregarding the debt limit, which is statutory law subordinate to the Constitution.
Since my article appeared, I have had the opportunity to do further research on this topic and now feel even more strongly that the Fourteenth Amendment trumps the debt limit. I found strong support for this position in a law review article by George Washington University law professor Michael Abramowicz. Writing in the Tulsa Law Journal (“Beyond Balanced Budgets, Fourteenth Amendment Style,” 33:2, Winter 1997, pp. 561-612), he concludes that any government action “making uncertain whether or not a debt will be honored is unconstitutional.” As Abramowicz explains:
“A debt does not become valid or invalid only at the moment payment is due. A debt’s validity may be assessed at any time, and a debt is valid only if the law provides that it will be honored. Therefore, a requirement that the government not question a debt’s validity does not kick in only once the time comes for the government to make a payment on the debt. Rather, the duty not to question is a continuous one. If as a result of government actions, a debt will not be paid absent future governmental action, that debt is effectively invalid. The high level of generality recognizes that instead of referring to payment of debts, the Clause bans government action at any time that affects the validity of debt instruments…. Moreover, there is no such thing as a valid debt that will nonetheless not be honored; a debt cannot be called “valid” if existing laws will cause default on it. So as soon as Congress passes a statute that will lead to default in the absence of a change of course, the debt is invalid (or at least of questionable validity) and Congress has violated the original meaning of the Public Debt Clause.”
To my mind, this means that the very existence of the debt limit is unconstitutional because it calls into question the validity of the debt. So would any other provision of law. That is a key reason why Congress created a permanent appropriation for interest payments at the same time that the Fourteenth Amendment was debated. Previously, Congress had to pass annual appropriations for interest.
Of course, if the administration takes my position and ignores the debt limit to prevent a default on constitutional grounds, there are certainly those who would claim that it has violated the law. However, Jonathan Zasloff, a professor of law at UCLA, raises an interesting question: who would have standing enjoin the administration’s action?
The Justice Department would certainly not sue the president or the Treasury secretary under these circumstances, so who would? Zasloff thinks only the Congress as a whole would have standing, which means that both the House and Senate would have to pass a joint resolution condemning the president’s action and authorizing a law suit, something that would be very unlikely given Democratic control of the Senate.
According to a June 28 report in the Huffington Post, Democratic senators, including Chris Coons of Delaware and Patty Murray of Washington, are warming to the constitutional option for breaking the deadlock on the debt limit and preventing a default. At a press conference on Wednesday, President Obama was asked directly about this by Chuck Todd of NBC News and he refused to rule it out.
It goes without saying that provoking a constitutional crisis over the debt limit is a bad idea, but a debt crisis would be worse. At a minimum, the Fourteenth Amendment greatly strengthens the president’s hand in getting the debt limit increased in a timely matter. He should not be afraid to use it.
Since I wrote this, I discovered that Prof. Abramowicz has posted an even stronger article arguing for the unconstitutionality of the debt limit. It is available at SSRN. Prof. Jack Balkin of Yale has posted a legislative history of sec. 4 that supports a broad reading of its applicability to the debt limit issue.