Pay the Rich and the Foreigners First: Republicans Reveal Their True Priorities, as They Plan to Hold Everyone Else Hostage to the Debt Ceiling, Yet Again

Posted in: Politics

After the political traumas of the misnamed “fiscal cliff” at the end of 2012, and the automatic spending cuts known as “the sequester” that took effect on March 1 of this year, the two sides in Washington’s budget wars took a brief break from brinksmanship.  Rather than fighting over a new “continuing resolution” to fund the government through the rest of the fiscal year—where a failure to do so would have resulted in a government shutdown in late March—Republicans and Democrats simply renewed all of the spending and taxing laws that were already on the books.

This was not, however, evidence of any reduction in the extremism of House Republicans that has created two years of endless budget disasters—cuts in spending when the economy needs increases, and political grandstanding that undermines the confidence that people need to move forward in rebuilding the economy.  Instead, the Republicans’ decision not to threaten a government shutdown two weeks ago simply reflected a decision to fight later, from what they take to be a much stronger position.

Although many of us anticipated that this was precisely what the Republicans had planned to do all along, there was at least the possibility that they might have decided that the public had tired of the debt-ceiling gambit.  Now, however, Republicans are being very clear that they will refuse to raise the debt ceiling unless they get their way.  They were wrong to try to do this in the summer of 2011, and again this past December and January.  They will be wrong again if they refuse again to increase the debt ceiling late this summer.

Senator Rob Portman of Ohio recently urged Republicans to “use the debt limit as leverage, and the leverage is that the American people think it’s crazy for us to continue to borrow more without any end in sight.”  Portman’s comment was especially astonishing, because he is a former director of the Office of Management and Budget, and thus ought to know how much damage a default—or even the threat of a default—could cause for our economy.  Even so, he was merely echoing recent comments from Senate Minority Leader Mitch McConnell and other Republicans, who are gleefully looking forward to a debt-ceiling showdown this summer.

Therefore, just when people were beginning to forget about the debt ceiling, and the threats by Republicans to force a first-time-ever default by the federal government, we now learn that Republicans are planning to use the debt ceiling once again to try to extract concessions from Democrats by again taking the economy hostage.

In this column, I will briefly explain why the Republicans are not only wrong on policy grounds, but also on constitutional grounds, in refusing to increase the debt ceiling.  Those arguments are, by now, somewhat familiar to many readers, but in briefly reviewing those arguments, it will become clear that nothing has changed since December that would somehow make this gambit less problematic.

What is new this time around, however, is that the Republicans are now admitting indirectly that the laws that they have passed would require President Obama to make impossible choices.  Acknowledging that their strategy would require the President to decide who will be paid and who will not, Republicans are now admitting who truly matters most to them: wealthy investors, foreign banks and governments.  Everyone else, the Republicans are saying, can wait.

The Return of the Trilemma: Republicans Again Refuse to Pass Logically Consistent Laws

Back in January, Professor Michael Dorf and I co-authored a column here on Verdict, summarizing our analysis of the President’s options when the spending laws, tax laws, and debt ceiling are in conflict.  Referring to scholarly articles that we had published in the Columbia Law Review, we noted that the existence of the debt ceiling potentially puts the President in the position of having nothing but unconstitutional options: being forced either to collect more in taxes than Congress has authorized him to collect, to spend less money than Congress has ordered him to spend, or to borrow more money than Congress has purported to allow him to borrow.

For reasons that are entirely unclear, the presumption in Washington throughout the endless battles over the debt ceiling has been that the President would cut spending, in the face of a trilemma.  This would seem to comport with the current claims from Republicans that “the problem is too much spending,” but the reality is (unsurprisingly) not so simple.  What the Republicans are telling the President he must do, after all, is not to agree to cut spending in budget negotiations over future spending priorities, but to cut spending right away below the levels that Congress has already ordered him to meet.

In simplified terms, Congress is simultaneously telling the President to spend $10, collect $6 in taxes, but to borrow no more than one dollar.  Something has to give.

The argument that Professor Dorf and I have made is based on the fundamental separation-of-powers principles embedded in the Constitution.  For the President to follow the conventional wisdom and refuse to carry out the duly-enacted spending laws of the United States is actually the worst possible choice, because setting priorities in spending is quintessentially a legislative responsibility.

When a President replaces Congress’s priorities with his own, he arrogates to himself the ability to say which spending programs are more important than others, which upsets the delicate balance of priorities that is the result of bipartisan negotiations within and between the two houses of Congress.  By contrast, if a President obeys Congress’s orders regarding spending and taxing by disobeying Congress’s debt limit, his decision is not only one-dimensional but also easily reversible.

In February of this year, Professor Dorf and I extended our analysis with a follow-up article on the Columbia Law Review’s website, showing that nothing would change if—as actually ended up happening—both sides passed another continuing resolution that set us on another collision course with a trilemma.  Even though everyone knew then that the debt ceiling was—as it still is—a time bomb that would go off sometime late this summer, Congress again passed budgetary laws that will give the President nothing but unconstitutional options.  His least unconstitutional choice will, once again, be to obey Congress regarding taxing and spending, and to disobey Congress’s debt ceiling by borrowing exactly as much as Congress’s own laws require.

The Prioritization Debate: What Are Republicans Hoping to Accomplish By Telling the President Whom to Stiff?

The Buchanan/Dorf argument, therefore, amounts to saying that the President must spend as Congress ordered him to spend—neither more nor less than the law requires, on the projects for which Congress appropriated funds.

Whether or not they have read our argument, Republicans have apparently concluded that they need to say something about spending priorities.  They know that their strategy of refusing to increase the debt ceiling would—assuming that President Obama refuses to issue additional debt—force the President to choose which pending obligations he must refuse to pay.  How can they take that power away from him?

The only honest answer to that question is, of course, quite straightforward: Never put the President in a trilemma in the first place.  If, at this point, Congress decided to change the taxing and spending laws, so that the Congress (and not the President) decides how to reduce spending and increase revenues enough to stay under the debt ceiling, then the President would have no choice.  He could follow all of the laws that Congress has passed, and there would be no debt crisis.  (There would be economic damage from Congress’ refusing to stimulate the economy, but that is a different matter.)

Congress decided last month to pass a continuing resolution that guaranteed that we would exceed the debt ceiling, however, and Republicans are not now proposing a deal that could obviate the trilemma.  Instead, they are discussing the possibility of passing a resolution telling the President how he should set his spending priorities, in a situation where someone will not be paid the money that the government legally owes them.  Who would be the lucky winners, under the Republicans’ plan?  The people who are wealthy enough to own government bonds.  Who would lose?  Everyone else.

House Majority Leader Eric Cantor recently sent a memo to his membership that says that a group of House Republicans has “introduced legislation that in the event the statutory debt ceiling is reached, the Secretary of the Treasury would be required to pay principle [sic] and interest due on debt held by the public before paying anything else. I expect the House to consider legislation in this area in the near future.”

Let us imagine that the House passes that legislation, and that (for some reason) the Senate agrees, and the President signs the legislation into law.  At best, all this would do is to tell the President to pay in full the people who have loaned money to the government.  It would do nothing to change the trilemma’s impact on the President, except by forcing him to make even harsher cuts in all of the other legally-appropriated spending programs.  Medicare providers might not be paid for services rendered; military pension checks might not be issued; and so on.

In short, the only thing that the proposed legislation would do is to guarantee that bondholders are paid in full, shifting the pain onto everyone else.

There is, in fact, a decent economic argument in favor of just that strategy, based on the idea that bond markets would react especially badly to the news that “the full faith and credit of the United States” no longer guarantees that lenders are paid, in full and on time.

The problem is that the people who work in bond markets happen to live in the real world, where news sources would be reporting that the full faith and credit of the United States government was being shredded elsewhere, as the President was forced to default on other obligations.  Even as a strategy of calming financial markets, therefore, the “pay the lenders first” approach is merely a risky way to buy time.

Will This Be Known As the “Pay China First Act”?  It Should Be the “Pay the Rich Guys First Act,” but No Matter What It Is Called, It Will Reinforce the Public’s Negative Perception of Republicans

Of course, neither the Senate nor the President will ever agree to this legislation, even if it passes in the House.  In that case, this becomes a simple matter of public relations.  If the Republicans carry through on their threats to put the President in a trilemma, they can then say that they at least told him to pay our IOU’s.

The problem with this strategy, however, is that the holders of U.S. bonds are not a diverse group.  The vast majority of Americans never have enough money to lend to their government directly.  Some of us end up owning some bonds through our pension funds, however, and we would certainly be glad to know that the government was going to make its periodic payments.

Most of the people who would be made whole by the Republicans’ prioritization law, however, would be the people and organizations who have extra money to invest.  This includes the major players on Wall Street, wealthy domestic and foreign investors, and foreign governments.

Yes, foreign governments loan money to the United States government.  Most people know about this through occasional frantic alarms from Republicans claiming that “China owns us!”  Even non-conservative sources, however, have picked up on this meme.  Earlier this week, for example, Jon Stewart commented darkly on The Daily Show that China is in a position to bully the United States, because we owe them $1.2 trillion.

That amount of money, of course, is less than ten percent of total U.S. debt, and China stands to lose much more than we do, should they try to use our debt holdings for political advantage.  Even so, a Republican effort in a previous debt standoff to give priority to debt payments was informally scoffed at, with wags calling it the “Pay China First Act.”

If Republicans want to defend themselves by saying that they are not really paying China first, because it does not hold all that much debt, then that undercuts a favorite Republican talking point.  If, on the other hand, they want to say that they are not really paying China first, because they are guaranteeing that other bondholders—mostly wealthy investors—will not be touched by a debt crisis, then they will simply reinforce the idea that they are the party of the one percent.  For a party that has recently gone through a post-election “autopsy,” trying to understand why they lost so badly in 2012, this is not exactly the public relations message that they should be hoping to send.

The only responsible approach remains for the Republicans to stop using the debt ceiling as a weapon.  It is an unnecessary law that makes a default on government obligations possible.  Republicans have plenty of other ways to use their gerrymandered House majority to harm the economy.  Their attempt to protect their financial sponsors from the consequences of a self-inflicted debt crisis simply exposes the politically dangerous game that they are playing—a game that all of us might lose.

Posted in: Politics