To Prevent Future Debt Ceiling Crises, President Obama Needs a Plan C

Posted in: Tax and Economics

President Obama is very good at making speeches.  Here is the opening sentence of a speech that he should deliver immediately: “I vow to you today that I will always do what is necessary to make good on the promises that the United States has made to our citizens, to our businesses, and to other nations.”

Although that vow sounds simple enough, and not even especially controversial, we know from the experience of the last several years that many Republicans in Congress have said that they can force the President to turn us into a deadbeat nation if they so choose.  They claim that the debt-ceiling law trumps the government’s legal obligations.  What is most surprising is that President Obama agrees with them.

What the President can and should do now is forestall any future hostage-taking by making it clear that, rather than failing to pay our bills in full when due, he would be willing to order that we borrow enough money to prevent our defaulting on our obligations.  He can, moreover, make the case that doing so honors the notion of individual choice, in a way that I will explain below.

The President’s First Two Debt Ceiling Strategies: One Was a Disaster, and the Other Remains a Ticking Time Bomb

In the time since Republicans won control of the House of Representatives in the 2010 elections, we have faced three major debt-ceiling crises.  During the first confrontation, in mid-summer 2011, the President negotiated with Republicans, agreeing to a terrible bargain that still haunts us, through the sequestration-related cuts and the other direct cuts that continue to harm the nation, and especially its most vulnerable citizens.

Plan A, therefore, was for the President to reach out to the people across the aisle, who would supposedly have been willing to reach a reasonable compromise.  Realizing that this was a disastrous miscalculation, the President shifted to Plan B, by which he would refuse to negotiate with hostage-takers, and would stare down the Republicans until they blinked.

In both February of this year, and again last week, this strategy worked—in a very limited way.  The President at least started to make some of the arguments that I (along with some others) have made since the beginning of this madness.  For example, a few weeks ago, the President said, “There are a whole bunch of things that I’d like to see passed through Congress that the House Republicans haven’t passed yet, and I’m not out there saying . . . I’m going to let America default unless Congress does something that they don’t want to do.  That’s not how adults operate.”

The important point that President Obama was making is that authorizing sufficient borrowing to cover the country’s legal obligations is not something that he wants as a partisan matter.  It is simply required as part of running a government that is not a laughingstock.

As I say, the President’s strategy succeeded in the limited (but obviously crucial) sense that the other side backed down (for now).  As the humorist Andy Borowitz imagined a presidential pronouncement after the Republicans’ surrender: “Obama declares national day of gloating.”  It would be a mistake, however, for the President to try to repeat this strategy.

In both cases, after all, his strategy all but invited a crisis, because he could not credibly say that Congress had no choice but to increase the debt ceiling, while also saying that he would have a fallback plan if Congress did not do so.

The President’s approach, therefore, guaranteed that we would all be forced to endure the narrowest of escapes, as we waited to see if Republicans would call the President’s bluff.  And it really was a bluff, because the President surely knows that he would have alternatives at his disposal, if the other side had held firm.

And we must not forget that the Republicans did not agree never to use the debt ceiling again.  They agreed only to suspend the debt ceiling until February 7th, at which point the debt-ceiling issue will arise again, surely to include yet another round of “extraordinary measures” by the Treasury to forestall default, and more brinksmanship.

Moreover, the limited success of this strategy came at a great cost.  Waiting until the last possible moment roiled the financial markets, increasing borrowing costs to the government (on the order of tens of billions of dollars, according to early estimates), and disrupting the housing market and other key sectors of the economy.

When hostages are recaptured alive, in other words, we can all be happy that they were not killed.  We cannot, however, forget that they endured a horrible, scarring experience.  Our citizens and the nation’s economy are better off now that President Obama has won his stare-down, but we were all harmed by the experience.

Is Another Showdown Over the Debt Ceiling Even Likely?  Why We Should Prepare for the Next Political Crisis

One possibility, of course, is that the President’s successful “I won’t negotiate with hostage-takers” stance has broken the back of the opposition.  The Republicans were blamed by a majority of Americans for the government shutdown as well as for the debt-ceiling crisis, and senior voices in the party are now calling for a return to reasonable, adult behavior.

We have, however, seen this movie before.  When the 2012 election results came in, we were treated to a few weeks of Republican elders’ announcing that they would look deeply into the problems that had led to such disastrous electoral results.  Yet less than a year later, that “autopsy” had done nothing to temper the extremists who took the country to the brink of catastrophe.

Those extremists, moreover, are not at all chastened by recent events.  The lesson that they seem to be taking from this debacle is that their weak-kneed leaders blinked too soon.  That is hardly the reaction of people who believe that their fundamental strategy was flawed.  They are, instead, more like the terrorists who unsuccessfully tried to assassinate British Prime Minister Margaret Thatcher in 1984, and who issued the following statement afterward: “Today we were unlucky, but remember we only have to be lucky once. You will have to be lucky always.”

And we must also note that the Republican leaders who opposed the shutdown were absolutely not opposed to using the debt ceiling as leverage in budget negotiations.  House Speaker Boehner, early in September, tried to get his caucus not to shut down the government, but instead to put all of their focus on the debt-ceiling standoff.

That strategy fits both with the Republicans’ evident belief that they can continue to exploit the public’s confusion about what the debt ceiling is, and with the views of extreme anti-government ideologues who affirmatively want the government to default on its debt.

Republicans continually try to tie the idea of increasing the debt ceiling with “irresponsibly digging us deeper in the hole,” and similar claims.  They know that the public does not (yet?) understand that Republicans have already guaranteed that the debt must go up, by voting for a long series of tax cuts and refusing to cut even the very spending that they claim they want to cut.  Boehner and others believe that the public hears “increase the debt ceiling” but thinks “increase debt,” and they also believe that such a misunderstanding is the Republicans’ political salvation.

In addition, the most extreme wing of the Republican Party, as noted above, believes that defaulting on the debt would be a good thing.  Some of the Republican extremists’ most admired anti-government writers have said that repudiating the debt would be a good thing, because making the United States government a deadbeat would prevent it from ever borrowing money again.  Among the Republicans’ base, that kind of thinking is not considered crazy.

Finally, we must not forget just how much the supposed “moderates” in the Republican Party tried to appease their more extreme counterparts.  (When the definition of moderation is that one wants to allow the majority of Congress that wants to reopen the government to do so, we know that we are in an alternate universe.)

Senator Susan Collins complained bitterly that the President kept “moving the goal posts” in negotiations, even though the whole point was that there would be no negotiations until the shutdown was over and the debt ceiling had been increased or eliminated.  Senator John McCain bizarrely warned that the President should not “humiliate” the Republicans who had started the hostage crisis, because “what goes around comes around.”  The putative voices of reason were hardly stalwarts for thinking clearly in the recent crisis.

In short, we should not blithely assume even that this President will never face another debt-ceiling crisis, much less that any future President would not have to deal with one.  President Obama must, therefore, figure out a Plan C, a method by which the debt ceiling is permanently taken off the table as a negotiating tactic.

Implementing the Buchanan-Dorf Strategy Before the Next Crisis Begins: Declaring the Debt Ceiling a Dead Letter Without Brinksmanship

Many readers might have seen recent discussions of an argument that Professor Michael Dorf and I have developed over the last two years.  (For example, a recent op-ed in The New York Times laid out most of the elements of our argument.)  In what we call the “trilemma” analysis, we conclude that the President is constitutionally required to issue enough debt to prevent default on the government’s legal obligations, notwithstanding the debt ceiling.

Although the White House never directly responded to our analysis, the President continued to call any constitutional objection to the debt ceiling a “magic bullet” that would never work.  Rejecting a different constitutional argument, based on the 14th Amendment, the President reportedly argued “that the legal controversy alone about the Treasury’s authority to issue debt would do immense ‘damage’ to the faith and credit of the United States. ‘It’d be tied up in litigation for a long time. That’s going to make people nervous,’ he said. ‘What people ignore is that ultimately what matters is, what do the people who are buying Treasury bills think?’ ”

President Obama is certainly correct that such a controversy would do damage to our country’s credibility, but that will not be the result of issuing more debt, but of Congress having put the President into an impossible position in the first place.

The President will not, moreover, avoid being “tied up in litigation” by defaulting on our legal obligations.  Everyone whose valid legal claim for payment from the federal government was defaulted upon would be a potential litigant.  The only question is who will be suing the President: people who have been stiffed on valid legal claims, or Republican members of Congress (and their backers) who want to claim that the President has exceeded his authority by issuing additional debt.

More to the point, as I noted above, the President can correctly describe his strategy as maximizing freedom of choice.  That is, the people who are possibly facing default hold valid legal claims that require the United States government to pay them, in full and on time, under the duly-enacted laws of this country.  They would not be offered a way to avoid being the victims of default, because they have already fulfilled their part of the bargain.  Default would leave them with no choice but to live with the harmful consequences of the President’s decision not to pay them the money that is due.

If, in order to pay those valid legal claims, the President were to issue debt in excess of the debt ceiling, who would be hurt?

The President’s comments suggest that we need to ask what “the people who are buying Treasury bills [would] think.”  Good question.  They would certainly not think that the newly-issued Treasury securities are of unquestioned legal validity.  They would know, therefore, that they would be taking a risk of not being repaid, which is not usually the case with Treasury securities.

But that simply means that the people who would choose to buy those securities would be able, in advance, to assess the risks and make the free choice to go ahead and lend the government money, even in the face of the legal uncertainty that the Republicans’ tactics will have created.

Will those investors require a higher interest rate than they would on legally-ironclad Treasury debt?  Absolutely.  It would be crazy not to demand a “risk premium.”  But savvy investors do this all the time, and they understand that some high-yield investments will ultimately not be repaid.  That risk premium would also serve an additional useful purpose: allowing us to measure the cost to the government of the Republicans’ hostage-taking.

A business that has been promised payment for services rendered to the federal government should not be forced to become the government’s involuntary creditor.  People who buy and sell risky assets for a living can decide of their own free will to do so, by making bids in a public auction in a free market.

The central point, therefore, is that the President would be setting up a system in which some people could voluntarily choose to take on the risk of default, rather than seeing other people have default forced upon them.

Yes, there will be litigation.  At least, however, the country’s legal commitments will have been honored.  The President could then honestly speak the words that I wrote at the beginning of this column: “I vow to you today that I will always do what is necessary to make good on the promises that the United States has made to our citizens, to our businesses, and to other nations.”

Posted in: Tax and Economics

One response to “To Prevent Future Debt Ceiling Crises, President Obama Needs a Plan C”

  1. Ted Harvatin says:

    A political polemic loaded with ad hominem attacks on “hostage takers” and other hysteria, masquerading as legal and economic analysis. I would give it an F-. First of all, Obama has NEVER negotiated with the DULY ELECTED House of Representatives unless there was a gun to his head. Second, your proposed strategy will not work as is requires Obama to do something beyond voting “present”. Finally, we now have several DEMOCRATS calling for Obama to do what he refused to do at the behest of Republicans-extend the individual mandate and repeal the medical device tax. Obama partner in cirme Harry Reid would not even bring it for a vote.