StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



14th Amendment Option: You Can't Demand Ransom If There's No Hostage

01 Jul 2011
Posted by Stan Collender

I have no doubt at this point that much of the talk about a 14th Amendment to the U.S. Constitution strategy to deal with the debt ceiling impasse is just being used for leverage. After all, we're still a month away from August 2 -- the date the Treasury currently says the finances of the United States will turn into a pumpkin and the country won't have enough cash to pay all its bills -- so there's still plenty of time to work out an agreement.

Because of this, some of the daily developments relating to Section 4 of the 14th Amendment...which until CG&G's Bruce Bartlett raised it back in April has never before been much of a topic of discussion for budgeteers...has to be considered as negotiating rather than just analysis.  Nevertheless, some of what's happening is clearly having an impact on current thinking.

Take this discussion of the legislative history of Section 4 by Jack Balkin that was posted yesterday.  The whole post is worth reading, but here's the money quote:

...the goal (of Section 4) was to remove threats of default on federal debts from partisan struggle. Reconstruction Republicans feared that Democrats, once admitted to Congress would use their majorities to default on obligations they did disliked politically. More generally, as Wade explained, "every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress."

Like most inquiries into original understanding, this one does not resolve many of the most interesting questions. What it does suggest is an important structural principle. The threat of defaulting on government obligations is a powerful weapon, especially in a complex, interconnected world economy. Devoted partisans can use it to disrupt government, to roil ordinary politics, to undermine policies they do not like, even to seek political revenge. Section Four was placed in the Constitution to remove this weapon from ordinary politics.

Or take this post by Ryan Grimm and Samuel Haass at the Huff Post that shows that Tim Geithner was thinking about the 14th Amendment over a month ago, and that Geithner absolutely wanted to make sure that others knew about it.

I've been in and around Washington too long to think that all of this is happening by accident.  Although I don't have a document that shows this to be the case, if the secretary of the Treasury is talking openly about it, you have to assume that a concerted effort is underway for a while to get the word out about the 14th Amendment. 

There were two likely reasons. 

First, the White House wants to make sure that invoking the amendment won't be a shock if it is used and that the bond market will be comfortable buying debt issued without specific congressional approval. 

Second, the White House clearly wants to show congressional Republicans that their plan to demand ransom for the debt ceiling might well be based on a completely incorrect assumption that they can hold the borrowing limit hostage.

 

Holding Each other Hostage

Of course, the purpose of section 4 of the 14th Amendment is to ensure that the federal government cannot default on its "public debt". But, that's not the point of the "hostage takers" (besides it is not clear to me who is being held hostage by whom on this 14th Amendment issue). The point is that the federal government can, and should, reduce other areas of spending rather than increase the deficit in order to satisfy that "public debt". Until those other non-deficit creating options are exhausted, the 14th Amendment does not say that an additional deficit has to be incurred to pay that outstanding debt. In other words, the 14th Amendment has nothing to say about how we finance meeting those "public debt" obligations.

An important issue under Article 14(4) is how, exactly, one defines "public debt" etc pursuant to that provision. Given the very specific concern as reflected in the legislative history as to "pensions" etc. in connection with "insurrections and rebellions" it becomes clear that the provision was directed specifically to ensuring payment of Union pensions and other war related obligations while denying those incurred by the Confederacy. Given this history, it seems likely the definition would be construed narrowly.

It is certainly true, though, that those currently advocating an expansive interpretation of Article 14(4) are holding others hostage to that view.

As a practical matter, if the administration were to actually pursue that expansive view and issue additional Treasury debt in excess of the debt limit, I would suspect that the interest rate on those securities would go through the roof. This would be much more serious than simply re-financing existing debt coupled with reduced discretionary spending to satisfy on-gong interest payments, because there would be no constitutional issue as to the validity of paper issued that stays below the debt limit. On the other hand, if the debt limit were to be ignored investors would be taking a risk that that new Treasury paper issued in excess of the debt limit was issued without authorization and therefore is not enforceable. This is not a route to be taken.


Yes, and beyond that I think

Yes, and beyond that I think that specific debt issues beyond the legal debt market would embolden primary dealers to pressure any administration trying to sell them: "You'd like me to be a dealer on these bonds that Congress hasn't authorized? Well, I might, provided x, y and z..."


I'm not in Con Law, but I

I'm not in Con Law, but I don't think your interpretation of the plain language is correct.

It states that legally authorized public debt of the US, including that raised for pensions, etc. shall not be questioned. In other words, the clause about pensions and the insurrection is an example of the type of debt not to be questioned, not a exclusive limitation clause...

In any case, the other expenditures of the Federal gov't have been legally appropriated by Congress as well. If Congress appropriates $10B for the Department of the Interior, the executive branch cannot use it for the DoD, or credit it towards Social Security remittances, or to pay interest on Treasury debt. There are some short term cash flow management tactics that the Treasury could employ, but short of issuing new debt, there is no alternative..

I suppose this is the point about the silliness and constitutionality of the Debt Ceiling in the first place. If Congress creates a deficit by legislation (by not raising enough in taxes to cover what they mandate should be spent), where else is the money supposed to come from?

The Republicans can stop appropriating, lower expenditures or raise taxes by passing legislation, but this particular strategy doesn't look like it's going to end well for them.

What if the President decides not to press the 14th Amendment issue, and just states that he has been forced to stop all Social Security, Medicare payments and Congressional salaries because Congress won't do what it's supposed to do and pass either a budget or a debt-limit increase?


Make my Day

So, in other words, you don't think that once Congress has passed legislation authorizing social security, medicare, ethanol subsidies and most of the rest of the "primary budget" (i.e., other than the outstanding Treasury debt), it cannot say that borrowing is not the means to pay for it? It seems pretty clear to me that these type of spending programs don't rise to the level of "public debt" or similar obligations as foreseen by the 14th Amendment. If they did, progressives would not be arguing for reneging on the implicit promises to the "rich" regarding their social security and medicare benefits. I think it is pretty clear that even these type of entitlement programs don't rise to the level of a contract, much less "public debt" as envisioned by Art 14(4). Obama in his recent press conference tried to make the argument that we have no choice but to pay for all the expenditures foreseen in the current budget trajectory by arguing "that money has already been spent" ( I assume he was referring there to the $1 trillion ten-year bill for the ACA). He tried to present it as a choice between paying one's mortgage and paying for food on the table. That's a specious argument. If a typical family has the type of budget problems the US has, they are first going to cut out vacations, restaurants and maybe the third car and cell phone. Indeed, money is fungible.

The case cited here earlier for the expansive view of Art. 14(4) was from PERRY v. UNITED STATES, 294 U.S. 330 (1935)
294 U.S. 330. That case involved the issue of whether the US could pay previously issued "Liberty gold bonds" in something other than gold (i.e., devalued US currency). The court held that the US was obligated to live up to its contract and pay in gold. Any language that suggested Art 14(4) would apply to something other than US issued bonds would, in legal parlance, constitute "dicta" or even in this case "obiter dicta" which is certainly not binding today on the Supreme Court.

And, as noted above, the issue here is not whether the US has to pay its "public debt". Certainly, outstanding Treasury obligations and interest thereon need to be paid. Rather, the issue is whether the US is obligated to pay future agricultural subsidies for ethanol and a host of other stuff like the ACA and to borrow for it to boot. And, importantly, the issue is the interaction between the Congressional "power of the purse" under Art 1(9) as well as the Anti-Deficiency Statute and Art 14(4). The latter cannot be read in isolation, and it won't be.

The bottom line is that these type of arguments are a useless distraction from the real issue. Both sides need to grow up and compromise for the sake of fiscal responsibility and the future of our nation. Using the 14th Amendment argument is, as the article in the main suggests, not a serious legal argument, but an argument made solely for the purpose of gaining political leverage. To this, the natural inclination of the opposition almost certainly is: "make my day".


Debt and Spending Obligations

I don't disagree that the 14th Amendment was intended to apply to Treasury Bonds and not general spending obligations. I also don't disagree that this is not a good alternative- there will almost certainly be a risk premium for debt issued under any sort of legal uncertainty (though given the situation in Europe, there are very few alternatives for safe harbor, and the risk premium won't be as high as ppl seem to think). However, as a fallback position, it's better than the alternatives.

What I don't get is why you don't think that the other money that Congress has appropriated is a legal obligation of the government. If the Executive Branch has the sole discretion to decide what to spend on program x, agency y or party z, how is this different than giving the President an effective line item veto over appropriations bills? Can any future President decide what to spend Tax revenue on? How does this not conflict with the power of the purse and the the take care clause?

My understanding is that Congressional appropriations are law that the President is obliged to follow, and while it isn't covered by the 14th Amendment, it certainly is by Article II... Again, not really into Constitutional Law, so will defer to any scholars/experts!

Anyway, given the alternatives, not sure there's a rational alternative if Republican leadership can't deliver the necessary votes in the House.


You are advocating for impoundment

Your proposed course of action for President Obama is to impound (refuse to entirely disburse) appropriated funds allocated by Congress for purposes other than paying for debt obligations. It is illegal for the president to impound funds necessary for the faithful execution of programs for which they are allocated (see Train v. City of New York for example).

As far as I'm concerned, there is no "legal" course of action for Obama once the treasury reaches the borrowing limit. Rather, we have a series of mutually exclusive laws. Congress has passed laws appropriating funds for various programs, Congress has passed laws requiring the executive branch to disburse those funds, but Congress has also passed laws that forbid the treasury from raising sufficient money (either through revenues or borrowing) to disburse funds and make good on its obligations. At this point, the question should not be whether or not a given course of action is illegal, but which course of action is most faithful to the current body of constitutional and statutory law. An interpretation that would provide the treasury with the authority to continue borrowing in order to raise money for funds it is legally obligated to disburse is the least outrageous scenario I can imagine. As mentioned previously, the alternative you're suggesting is giving the president authority to arbitrarily choose funding levels for existing government programs. This is an unprecedented level of executive power, especially when you consider that any president can choose to veto a bill raising the debt limit and thus preserve such a power indefinitely.


The argument is moot

It shows that the whole charade being played out in Congress is pointless. Article 14(4) was clearly intended to prevent exactly the situation the House is trying to create. Ironically, the party that's heir to the drafters of that amendment, now heirs to the political culture of the south, are the ones being hoist on their own petard.

If Congress fails to increase the debt ceiling, the President should simply invoke the 14th amendment and make the payments as if they had. Then Congress can petition to the Supreme Court, and the Supreme Court can be the ones who ignored the constitution and blew up the world economy, if they're fools. More likely, they'd make the wise choice that the 14th amendment prohibits this debt ceiling nonsense, and we can all move on.


A Solid Negotiating Position

The discussion above is far better than most I read, so I'd like to add my thoughts. I just starting reading about this novel interpretation of 14(4) -- if it is indeed new -- and at minimum it seems like a solid negotiation position for President Obama to put forward. It certainly provides a backstop to market concerns about US default brought about by an intransigent minority in Congress, and if forced into use by their continued refusal to agree to fund obligations Congress already passed (even without the tax revenue to support them), that outcome, even if uncertain, is definitely better than default. So the first comment above is cogent, but ultimately compares apples to oranges.

But more compelling is the notion that Congress can refuse to authorize paying its obligations already passed simply by NOT passing a separate measure to fund those payments should revenues not be sufficient to meet those obligations. That's why government debt is authorized in the Constitution and the full faith and create of the United States -- we, in effect -- backs that debt. If one Congress wants out of obligations they or a prior Congress authorized by law, then they can pass a new law to end it. Instead, a portion of this Congress wants to FORCE passage of the new law by simply refusing to allow the current government to abide by those laws. One can argue that 14(4) is specifically designed to prevent that tactic.

So I say President Obama or his staff can and should buttress their negotiating position by taking away their opposition's current tactical advantage, or at least adding uncertainty to whether their foundation is solid or not. The GOP leadership will scream and holler, no doubt, but only because they had been outflanked. They can then try to get the Administration's position overruled in the Courts -- a tedious and uncertain process to be sure -- or turn it into a political argument in the 2012 election. Since that's what they want anyway, they will let President Obama take the heat then blame him for anything bad that happens, just as they do now.


Responsibility

I don't understand why Obama doesn't make it clear that it's the responsibility of the Congress to take the next step. If Congress passes an increase in the debt ceiling—with no poison pills attached—he will certainly sign it. Why doesn't he point that out? Instead he lets the Republicans accuse him of not leading, etc. He should issue a statement outlining the possible consequences of not raising the debt ceiling and then say that he expects Congress to have a bill to do so on his desk immediately.


He Did

"I don't understand why Obama doesn't make it clear that it's the responsibility of the Congress to take the next step."

This is exactly what he told Congress to do during his press conference, in blunt language that upset the GOP quite a bit. I'm no fan of the President, but people really should give him more credit.

http://blogs.wsj.com/washwire/2011/06/29/transcript-of-obama-news-confer...

"And I’ve got to say, I’m very amused when I start hearing comments about, well, the President needs to show more leadership on this. Let me tell you something. Right after we finished dealing with the government shutdown, averting a government shutdown, I called the leaders here together. I said we’ve got to get done — get this done. I put Vice President Biden in charge of a process — that, by the way, has made real progress — but these guys have met, worked through all of these issues. I met with every single caucus for an hour to an hour and a half each — Republican senators, Democratic senators; Republican House, Democratic House. I’ve met with the leaders multiple times. At a certain point, they need to do their job."

"And last point I want to make about this. These are bills that Congress ran up. The money has been spent. The obligations have been made. So this isn’t a situation — I think the American people have to understand this — this is not a situation where Congress is going to say, okay, we won’t — we won’t buy this car or we won’t take this vacation. They took the vacation. They bought the car. And now they’re saying maybe we don’t have to pay, or we don’t have to pay as fast as we said we were going to, or — that’s not how responsible families act. And we’re the greatest nation on Earth, and we can’t act that way."


14th Amendment

It's been a long time since I studied Con Law, and what I know about Civil War pensions can be summed up by saying that I always enjoy visiting The National Building Museum when I'm in The Federal City. That said, I don't think I'd attach much weight to it were I in the negitiations. I expect neither party really wants a definitive answer from the Court.


Legoland

Perhaps more people should visit that National Building Museum because you are exactly right.


Standing

It seems the Congress would have standing to sue if this option were invoked. However, the Congress would have to vote as a unified body, House and Senate, to even present such a case. To think that the Senate would go along with such a thing is very dubious.


Laurence Tribe Chimes In

Laurence Tribe, Harvard Professor and author of the most cited treatise on Constitutional Law has stepped into the discussion in a NYT op-ed piece. Tribe basically says that the claim the President can ignore the debt limit is pure bunkum:

http://capitalgainsandgames.com/blog/stan-collender/2293/14th-amendment-...

He also says this:

“Once the debt ceiling is breached, a legal cloud would hang over any newly issued bonds, because of the risk that the government might refuse to honor those debts as legitimate. This risk, in turn, would result in a steep increase in interest rates because investors would lose confidence — a fiscal disaster that would cost the nation tens of billions of dollars.”

Perhaps he should have cited my comment here on July 1:

“As a practical matter, if the administration were to actually pursue that expansive view and issue additional Treasury debt in excess of the debt limit, I would suspect that the interest rate on those securities would go through the roof. This would be much more serious than simply re-financing existing debt coupled with reduced discretionary spending to satisfy on-gong interest payments, because there would be no constitutional issue as to the validity of paper issued that stays below the debt limit. On the other hand, if the debt limit were to be ignored investors would be taking a risk that that new Treasury paper issued in excess of the debt limit was issued without authorization and therefore is not enforceable. This is not a route to be taken.”

http://capitalgainsandgames.com/blog/stan-collender/2293/14th-amendment-...

Perhaps we should give the 14th Amendment a much needed rest.




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