If the Debt Ceiling Is Reached, the President Will Be Forced to Go It Alone, But the Fed Could Save the Day
Editor’s Note: A non-final version of this column was posted in error earlier today. This is the final version.
Suppose you are driving down a highway with your family. Suddenly, the truck in front of you slams on its brakes. In the fraction of a second before you have to make a decision, you realize that you have three options.
First, you can slam on your brakes, too, but you know that doing so will not stop you from hitting the truck, or from being hit by the cars behind you. Second, you can try to pass the truck on the left, even though you are approaching a blind curve. Third, you can swerve onto the road’s shoulder, hoping that the truck is not obscuring your view of any obstructions that might be lurking there, and that you will not lose control of the car when it hits the gravel.
All three of these choices would violate the law, under ordinary circumstances. All three carry different degrees of risk of injury. None of the three is a choice that you were hoping to face, except that someone else’s stupidity has left you with nothing but bad options.
This simple little analogy occurred to me as I was trying to understand the failure of so many journalists, politicians, and commentators to understand the nature of the bad choices facing the President if the debt ceiling is reached (next week, or thereafter). Indeed, the widespread lack of comprehension of the President’s impending nothing-but-bad-choices situation is actually rather astonishing.
For example, last week, I was interviewed by a reporter for a top global news organization. He was somewhat familiar with my many writings on the debt ceiling, and with the work that Professor Michael Dorf and I have published in Columbia Law Review and here on Verdict.
Even so, the reporter began the interview by asking me why I thought that the President could “go it alone” if Congress refuses to act. He began another question by describing my position as “having the President ignore Congress and do what he wants.” Each time, I tried to explain what it means when the President has no good choices and is forced to violate one of Congress’s laws, not because he wants to ignore Congress, but because Congress has (to continue my analogy) slammed on the brakes of the truck in front of us.
Similarly, when people respond to the Buchanan-Dorf suggestion that the President (reluctantly) issue sufficient debt beyond the debt ceiling to avoid defaulting on the government’s obligations, they often ignore the context, asserting—as if it were a major insight—the trivial fact that the Constitution gives only Congress and not the President the power to authorize debt.
In this column, I will explain how people’s failure to understand the context of the impending debt-ceiling disaster causes them to misunderstand both the President’s choice between defaulting and not defaulting, and his possible strategies if he chooses to avoid default.
Perhaps even more importantly, I will explain how the Federal Reserve could play the ultimate savior’s role in this national crisis.
The Trilemma (Yet Again), and the President’s Lack of a “Do Nothing” Option
What Professor Dorf and I have called the “trilemma” is not a legal theory, but simply an observation about arithmetic: If, say, Congress orders the President to spend $100, but only instructs him to collect $80 in revenues, and then forbids him from borrowing any more money, logic dictates that the President will have to violate at least one of Congress’s statutes.
A surprisingly small number of commentators have even grasped this basic logic. Of those who do understand that logic, however, a common response has been that the President, when faced with nothing but illegal choices, should choose to avoid illegality by doing nothing at all. In the car-driving analogy above, they would presumably say that slamming on the brakes is the do-nothing approach (because that would be an attempt to stop the car’s forward motion), compared to swerving into possibly oncoming traffic, or driving onto an unstable shoulder.
The unique contributions of the writings on this topic by Professor Dorf and myself are two-fold. First, we show that the do-nothing option is itself an affirmative decision to violate the law, as I will describe in a moment. Second, we provide a method based on the U.S. Constitution to determine how the President should choose among the illegal choices with which Congress will have presented him.
The mistake that many people have made, in considering the options here, is in imagining that a presidential decision not to spend money is a decision to do nothing at all. That would be true if the spending laws were not an affirmative command, or if they contained escape clauses that explicitly (or even implicitly) invoked the debt ceiling. As it happens, however, there are no explicit or implicit exceptions to the President’s constitutional duty to faithfully execute the spending laws.
We have experienced at least two constitutional clashes over this very issue: the impoundment crisis of Richard Nixon’s “imperial presidency,” and Congress’s passage of the Line-Item Veto Act under Bill Clinton. In both cases, the Constitution’s core command has been reaffirmed: Congress sets spending priorities, and the amounts that it appropriates cannot be reduced or increased by the President (even if Congress tries to give him permission to do so).
And this is where context matters. If we really find ourselves in a trilemma, the President will have, as one of his options, canceling legally required spending, which would mean that he would choose to default on the government’s legal obligations. In normal circumstances, that would obviously be a violation of the law, just as slamming on one’s brakes in the middle of a highway is normally a bad idea (and is certainly illegal). In emergency circumstances, it is still a violation of the law, but it might still be the President’s better choice.
The point of our trilemma analysis, however, is that there are two other illegal choices that are also available to the President: raising taxes without Congressional authority, and issuing more debt than Congress has authorized. We conclude that issuing enough debt to obey Congress’s other laws is the least bad option.
It is truly silly to say, in these circumstances, “But issuing debt is illegal!” It would be similarly silly to say, in the driving scenario described above, “But driving onto the road shoulder is illegal!” Under either of these unpleasant circumstances, complaining about illegality is akin to saying, “Yes, but if you had decided to drive North today, instead of South, we wouldn’t be here.” True, but unhelpful.
The Context of Defaulting Versus Issuing Debt: Which Is Worse?
The point, then, is that the President will, if the debt ceiling is not increased, find himself choosing the least bad path forward. Professor Dorf and I are the only people who have articulated a set of criteria based on constitutional principles for the President to consider in this least-bad-path scenario. Applying those criteria, our conclusion is that the President would best preserve the separation of powers by issuing debt sufficient to cover the borrowing that is implied by Congress’s spending and taxing laws.
Again, contrast this description with the rhetoric that is being used even by news reporters, much less political partisans. We are not asking the President to “blow through the debt ceiling,” or “borrow as much money as he wants,” or anything remotely like those descriptions. The President must, guided by our analysis, borrow exactly as much money as Congress’s laws require, and no more.
Even here, however, the casual responses from some commentators betray a further inability to understand the importance of context. One law professor, apparently after thinking about the issue for only a few seconds, offered this off-the-cuff comment: “I don’t think anyone in their right minds would buy those bonds.”
I have responded to that comment in a guest post on the Constitution Daily blog, by noting that Henry J. Aaron, a top public finance economist at the Brookings Institution, found no reason to doubt that issuing “those bonds” would solve the problem. Moreover, as an economist myself, I find it mysterious that anyone—much less believers in the free market—would doubt the ability of financial markets to include considerations of risk when bidding in financial auctions.
The problem, however, goes deeper. When someone says that the President might have difficulty borrowing money by issuing bonds under a legal cloud, the implied comparison is not to the alternatives that must be faced during a crisis, but to the ordinary scenario of bonds issued under normal circumstances. By comparison, I would not want to drive at high speed onto a gravel shoulder under normal conditions, but when I face only bad choices, that might be the best available option.
Similarly, we should not be asking whether a financial trader would, or would not, as an abstract matter be willing to buy legally-questionable debt that has been issued to avoid default. We should ask, instead, whether it is better to issue that legally-questionable debt, or to live in a world where the U.S. government has defaulted on its legal obligations.
In a post-default world, after all, all government-issued debt would be under a cloud, not just the debt that Professor Dorf and I believe that the President must issue to prevent a default. And this would be true even if the President were somehow able to “prioritize” payments to Treasury bondholders (Wall Street financiers, foreign governments, and so on) in the way that some Republicans say that he can. Every analysis that I have seen from the gimlet-eyed analysts on Wall Street tells us that defaulting on any federal obligation, not just on formal Treasury debt, would have a significant negative effect on all financial markets.
Saying that issuing debt without Congressional authorization would raise questions in financial markets, therefore, is hardly news. The question is whether doing so is better or worse than defaulting. (I should note that the third option, under which the President attempts to collect tax revenue beyond what Congress has required, is logically available, but for obvious political reasons has been repudiated by everyone.)
The Best Path Forward: Let the President and the Fed Work Together to Save Us Again
Within the context of choosing between default, on one hand, and issuing unauthorized debt on the other, there is a further nuance. The usual method by which the Treasury borrows money is to issue bonds in the public financial markets, allowing it to borrow money from savers of all kinds. Because of its technical legal independence, however, the Federal Reserve (the Fed) is considered to be a part of “the public” when it comes to loaning money to the rest of the federal government.
Under existing law, the Fed is not permitted to directly finance the Treasury’s borrowing, except as a side-effect of the Fed’s operations that affect interest rates and the financial markets. The Fed buys and sells Treasury bonds as a matter of course, but it is generally illegal for the Treasury to turn to the Fed for additional borrowing beyond what Congress has permitted. The Treasury bonds held by the Fed, after all, count toward the debt that is purportedly limited by the debt ceiling.
Under normal circumstances, therefore, one would never want to call upon the Fed to funnel money to the Treasury in defiance of Congress. Again, however, we are looking at a context in which every choice would involve some illegal action, because Congress failed to act.
Therefore, if we were truly worried that no one would buy debt that was not authorized by Congress, and that a “failed bond sale” (which happens every now and then in corporate bond issuances) would further destabilize the financial system, the best route forward would be for the President to coordinate his bond sale with the Fed.
Again, this would violate the debt ceiling, but that is the whole idea. The reason to follow this route would be to allow the Fed to fulfill its fundamental role, which is to guarantee the smooth working of our financial system. If the Fed decided that a federal default (that is, a violation of the spending laws) would carry higher costs than having the Fed coordinate a bond sale with the President, it should do so. Proceeding down this path would have the further advantage of being reversible, once the crisis ended, with the Fed then unwinding its bond holdings.
There is, in fact, precedent for the Fed’s taking such an active role in a crisis. Five years ago, the collapse of Lehman Brothers brought the global financial system to the brink of outright collapse. The Fed stepped in, setting aside whatever legal ambiguities that might otherwise have dissuaded it, and it successfully prevented catastrophe.
Next week, or later this Fall, or at any point in the future, radical ideologues in Congress might leave this President, or one of his successors, with no legal options. If so, the President must follow the Constitution and obey Congress’s spending and taxing laws by issuing enough debt to finance the difference.
Even if the Fed will not cooperate, that is the best path, from both a constitutional and an economic perspective. It would be best, however, if the Fed were to see its duty as including the prevention of a completely unnecessary expansion of this crisis. The Fed does not have the power to make this painless, but it can turn a potential 100-car pileup into some expensive, but manageable, body damage.