Sunday, July 3, 2011

Constitutional or not, Obama should ignore the debt ceiling

Here's a pretty compelling point that I've seen kicked around on a few other blogs:

Let's assume, just for the sake of argument, that constitutionality of the debt ceiling is not in question. And let's assume we hit D-Day on August 2, and Congress has, for whatever reason, failed to raise the ceiling.

What choices is the President left with?
  1. Continue paying social security, Medicare, etc. Fund the government. Stiff the bondholders. Nobody wants this (well, except maybe the millions of people who rely on government money for their health and wellbeing, but who cares about them, right?), and it seems clearly unconstitutional, besides. The US government is not allowed to default.

  2. Continue to borrow anyway. Hope that no one has standing to challenge the borrowing. Regardless, this is also unconstitutional, because if the debt ceiling has been validly passed into law by Congress, the President doesn't have the authority to unilaterally override it.

  3. Prioritize the debt. Continue to pay bondholders as long as he is able. Cut out military wages, social security checks, whatever. Shutter government offices and buildings. And here's the thing: this is also unconstitutional. Once again, you'd have the president overriding laws passed by Congress -- not the debt ceiling, but the appropriations bill.

    Imagine if, in the absence of a debt ceiling crisis, the president announced that he was withholding all military pay. Or that he was canceling funding to Medicare Part D. This new assertion of authority -- to choose budget priorities as he pleased -- wouldn't be remotely legal. It doesn't become more so if he's forced into it by Congress.

So which should he pick?

Virtually everyone agrees that Option 1 should be avoided. The prospect of default frightens people across the political spectrum.

Most everyone also agrees that Option 2 is substantively superior to Option 3. Only a handful of people believe that the government even can avoid default by prioritizing debt repayments -- and only a small subset of those people believe that we'd actually be better off if we stopped borrowing altogether. Everyone who isn't in that last, tiny group ought to prefer that the president keep borrowing.

The sticking point hasn't been practical, but legal. "Sure, we might be better off if Treasury just borrows the money, but unfortunately, it's not allowed to borrow anything until Congress says so."

Maybe not. But after August 2, the president literally won't have any legally valid options left! No matter which path he chooses, he's going to run afoul of the Constitution. So why would anyone prefer that he opt for the more fiscally ruinous path -- a path that also just so happens to leave millions of people without money they're owed?

The answer, of course, is that no one really does. When it comes right down to it, most Republicans hope that -- one way or another -- the debt ceiling doesn't take effect on August 2. But they can't admit that now, because it shows the inherent opportunism of their demands. The GOP's favored course might be no more legal than any other, and vastly more destructive, but they have to pretend to favor it anyway -- otherwise, their negotiating position collapses. They've dug their trenches and set up the barbed wire, and now they're hoping that the Democrats surrender before anyone notices that everyone is on the same side of line.

2 comments:

  1. ". . . Once again, you'd have the president overriding laws passed by Congress -- not the debt ceiling, but the appropriations bill."

    But see Train v. City of New York, 420 U.S. 35 (1975) (interpreting whether appropriation can be unallotted); Clinton v. City of New York, 524 U.S. 417, 467-69 (1998) (Scalia, J., dissenting) (listing historical examples of unallotment, authorized an not); id. at 446-47 (Stevens, J.). Probably won't last long, but appropriations that may be voluntarily unallotted exist, and presumably if Obama doesn't shove that money out the door before crunch time, the voluntary stuff has to stop before any of the rest of these things happens.

    The obvious advantage of Option 1 for Obama is stall time. If he's confident that this is a game of chicken, then he's got longer before he has to blink. The deadline for Congress is when the limit is hit, payments cease, the treasuries in the private market start selling at reduced price, and the calls come in. The deadline for the President is when the treasury has to hold it's next auction to roll over debt, or when the first lawsuits get their hearings. If Congress caves before then, he can call it "only technical default" wave that away as a complicated math thingee, and play a round of golf with John Boehner's balls.

    The issue with Option 2 is that Obama needs to make a choice. At the auction where he exceeds the debt limit, he's mostly going to be rolling over existing debt that is perfectly enforceable, constitutional debt, authorized by law and backed by the full faith and credit of the American government, but part of it is going to be the new debt that exceeds the debt limit, and (at least arguably) isn't lawful. The President can either sell them all as the same treasuries, or he can bifurcate them somehow. If he doesn't bifurcate them, then how do you know which you are buying? The interest rate on all the new treasuries is going to go up, because any of them might be found unlawful. But if he does bifurcate them into authorized and unauthorized debts, then he's opening up the possibility that it will be politically easy to default on those specific debts later, and the rates of interest on them are going to be very high.

    And if he's going to try to make sure no one has standing to sue, he's going to have to limit who can buy debt that might be unauthorized, because if banks, trusts, or certain corporations buy them, that's going to create standing for a whole mess of people to litigate the constitutionality of the debt. Cf. Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921) (litigating constitutionality of federal debt instrument in suit between company and shareholder). That is pretty much going to require that the unauthorized stuff be distinguishable, because institutional investors are most of the market for treasuries.

    But think about the prospects for political theater in that. You'll have people buying the things just so they can wave around an "Obama Bond" on camera and point to the part where it says "not authorized by federal law" or whatever. Not that following Option 3 and giving IOUs to public employees is that much different, but it might work better for the cameras.

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  2. I agree that, from the president's point of view, the set of options are not great. The problem is that Options 1 and 3 both require Obama to assert that default is possible, unless and until the GOP steps in to save his bacon by raising the debt ceiling. And since we're already past the point where some bills are not getting paid in order to keep paying other bills, Obama would be not only reaffirming the possibility of default, but would be actually acknowledging that the moment of truth is upon us, and that default could be very, very close at hand. Whatever weirdness is created by bifurcating (or not bifurcating) new debt, it's hard to think it would freak bondholders out any more than a straightforward acknowledgment that the only thing standing between their money and oblivion is the ability of the US Congress to resolve its gridlock -- not only this year, but over and over again, in perpetuity.

    Far better for the president to say that default won't happen, will never happen, can't possibly happen. (For instance, Geithner's sudden embrace of the Fourteenth Amendment is no coincidence.)

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