Debt by Any Other Name: Even If the President Were to Default on Our Obligations, He Would Still Violate the Debt Ceiling

Posted in: Constitutional Law

In one of the most unwelcome resurrections imaginable, the debt ceiling will come back to life tomorrow, February 7, 2014. Justia’s Verdict’s readers, and people in general, can be forgiven if they find themselves rolling their eyes and asking: “Haven’t they already dealt with this—more than once?” The answer is, of course, yes. The debt-ceiling melodrama has indeed been performed four times in less than three years. This month will see the fifth act in what could become an endlessly recurring drama.

The problem is that each time the debt ceiling has come close to causing a catastrophic default on U.S. obligations, the solutions agreed upon by Congress and the President have merely bought us a few months of peace. It is maddening that the same people who loudly claim that our supposed failure to deal with the long-term debt situation merely “kicks the can down the road, to be dealt with by our children and grandchildren,” themselves continue merely to push the threat posed by the debt ceiling into the (near) future, time and time again.

This irresponsibility is especially unforgivable, because the debt ceiling is flatly unconstitutional. The Republicans are wrong to continue to try to extract a ransom by holding the nation’s finances hostage to the debt ceiling, and the Democrats (especially the White House) have in turn been wrong to try to “win the politics” rather than dealing with the underlying problem once and for all.

After President Obama’s now-acknowledged error in trying to negotiate with Republicans over the debt ceiling in the summer of 2011 (an error that resulted in, among other painful results, the arbitrary “sequester” cuts in domestic and military spending), the President decided to take a much more principled approach in the subsequent debt-ceiling standoffs. He now correctly argues that failing to raise the debt ceiling is not at all about limiting the debt, but instead threatens to make it impossible to pay the country’s bills.

As far as it goes, that is a good argument. Unfortunately, as I have argued as recently as my January 2, 2014 column here on Verdict, this stare-down strategy courts disaster, and it would require last-minute action that threatens serious political and economic fallout.

Instead, the President should long ago have said that the debt ceiling cannot supersede the spending and taxing laws that Congress has passed. He should not “just ignore” (or “blow past”) the debt ceiling, as some have disingenuously mischaracterized it. He must, however, recognize that the debt ceiling must give way, when honoring it would force him to fail to pay the federal government’s obligations, in full and on time.

The President has, apparently for purely political reasons, chosen instead to say that his only choice (if the debt ceiling were not to be increased before disaster struck) would be to default on the government’s legally owed payments. His argument is that doing so would be necessary in order to obey the debt ceiling, even if it meant that the United States would, for the first time in its history, become a deadbeat nation that did not meet its legal (and moral) obligations.

Until now, the President’s choice has been generally thought to boil down to choosing one poison over another. However, in a new law review article that I recently co-authored with fellow Verdict columnist Michael Dorf, we demonstrate that the President’s proclaimed strategy would fail, even on its own terms.

The surprising fact, and the bottom line in our article, is that the President would not even succeed in keeping the government under the debt ceiling, if he defaulted on the nation’s obligations. That is, even if he were correct to imagine that the debt-ceiling statute is the most important statute that he must obey, it turns out that defaulting on our obligations would not only violate the spending laws (and thus the Constitution) but it would also violate the debt ceiling (and thus the Constitution), anyway.

The Debate Thus Far: The Fourteenth Amendment and the Trilemma

In the midst of the first Republican-initiated debt ceiling crisis in 2011, a number of arguments emerged, offering the possibility that the President could (and should) legally declare the debt ceiling a nullity. One argument was based on Section 4 of the Fourteenth Amendment, which prohibits the government from taking actions that bring the “validity” of the public debt into “question.”

Professor Dorf and I have acknowledged that those key constitutional terms are not models of clarity. Even so, we argued in our first article published in Columbia Law Review, in October 2012, that the best reading of Section 4 would require the President to pay all of the nation’s bills when due, because the failure to do so would cause any reasonable observer to question the validity of the national debt.

Although no one has ever engaged in serious legal analysis to contest our arguments (regarding Section 4, or any of our other arguments, for that matter), a casual claim offered by a few scholars was that only outright repudiation of a governmental obligation would be enough to cause people to question the validity of the debt, in the sense intended by the Framers of that constitutional provision.

Even though we found such arguments to be fatuous, at best, Professor Dorf and I subsequently found ourselves setting aside the Fourteenth Amendment, because our analysis led us to a separate and independent basis on which to conclude that the debt ceiling was unconstitutional.

Our analysis responded to the (correct) argument that the President would unconstitutionally usurp Congress’s Article I borrowing power, if he were to borrow more money than the debt ceiling purported to allow. Coining the term “trilemma,” we noted that the President would be forced to violate Article I in one of three ways: (1) by taxing more than Congress had authorized, (2) by failing to pay the obligations that Congress had created in the exercise of its spending power, or (3) by borrowing in excess of the debt ceiling.

We offered a short version of our analysis here on Verdict in January 2013. Weighing each of the three choices, we concluded that it would be better for the President to find willing lenders to allow us to pay our obligations, rather than collecting unauthorized tax revenues or failing to pay the people, businesses, and governments who hold legally-valid claims for payment from the U.S. government.

It is unnecessary to recapitulate here our arguments for concluding that exceeding the debt ceiling was the “least unconstitutional” of the three options available to the President. Suffice it to say that, even though the President explicitly ruled out the Fourteenth Amendment argument (as well as the obviously terrible idea of minting trillion-dollar platinum coins, which Professor Dorf and I have both argued would be illegal and unconstitutional), the White House never even came close to acknowledging our trilemma analysis. And it certainly never explained why defaulting on the nation’s bills was a less-bad option than borrowing enough money to pay those bills.

As I noted above, no legal scholars or commentators ever came forward to engage with the substance of our analysis. A handful of scholars offered a few stray comments to reporters, saying that our arguments were not realistic or “sensible.” And that is essentially where the debate has stood, with some further important enhancements on our part (especially here and here), since late 2012.

The New Buchanan-Dorf Analysis: Congress Has Already Guaranteed That the President Will Violate the Debt Ceiling, Even if He Tries Not to Do So

Despite our frustration in not seeing the President or his allies even acknowledge the trilemma, or our analysis of the President’s proper response to it, Professor Dorf and I have assumed until now that the President really would be making a choice among three different ways to violate the Constitution. He could violate the borrowing power, or the spending power, or the taxing power. But whichever choice he made, he would at least avoid violating the other two of Congress’s powers.

In our short new article, also to be published by Columbia Law Review (and currently available for download here), we demonstrate that the President would actually violate both the spending power and the borrowing power, if he were to default on any of the nation’s obligations.

How is that possible? Our central point is that a default by the United States would merely delay the payments that are legally due. Although that delay would violate the spending laws (and thus also violate the Constitution), the President would certainly assure the public that he would pay those bills as soon as possible. Although he could not legally promise to pay interest (or consequential damages) due to the delay, the President would, without question, try to limit the economic damage to the nation’s global standing by trying to characterize the default as merely a temporary problem.

For both statutory and constitutional purposes, however, this would amount to borrowing from the people who are owed money. That is, the President would say, “We can’t pay you now, but we’ll pay you soon.” That would put the government on the hook to pay money in the future, which means that the President would be borrowing on the credit of the United States.

Therefore, because the President would refuse to borrow money from willing lenders on the open financial markets, he would force the government’s obligees to become the government’s temporary (and quite unwilling) creditors. For example, if the President could have avoided violating Congress’s spending power by borrowing $100 million to pay a government contractor in full and on time, but instead chose to tell that contractor to wait, then the government would still owe an additional $100 million, as of the date that the bill came due.

That forced loan, in turn, would increase the total amount of debt owed by the federal government, to a total amount of debt that would be $100 million above the debt ceiling. This is because the debt ceiling covers all obligations of the federal government, not only the official debt instruments that the Treasury usually issues on the financial markets.

There would, however, be one way out for the President. If he did not wish to violate the debt ceiling by forcing obligees to lend the government money, he could simply announce that those bills would never be paid at all. In other words, he could repudiate those debts as soon as they came into existence.

Although the word “irony” is often overused in common conversation, this would truly be ironic. After all, the scholars who rejected the Fourteenth Amendment argument did so by claiming (incorrectly) that only outright repudiation was covered by Section 4 of that Amendment. Here, however, even their extremely limited reading would be implicated. (And as an aside, we also note that the President could claim that the obligee’s legal claims are simply null and void, but that doing so would amount to an unconstitutional “taking.” This, in turn, would merely change the number of the amendment being violated, from the Fourteenth to the Fifth.)

In short, in violating the Constitution by usurping Congress’s spending power, the President would either violate the borrowing power as well, or he would repudiate the debt and thus violate the Fourteenth Amendment. By contrast, he could limit himself only to violating the borrowing power, by issuing enough debt to avoid the need to default on any of the government’s obligations in the first place.

A New Trilemma? Three Bad Choices, Two of Which Are Even Worse Than We Imagined

There really should be no debt-ceiling statute. It serves no purpose, because Congress’s spending and taxing decisions determine the amount of debt that will come into existence. The debt ceiling perversely makes it possible that some federal debt will take the form of forced loans, or will require an out-and-out repudiation by the President.

This means that the President would face, quite independently of our constitutional “trilemma,” a grim choice among three options. Under his best option, he could, as I described in a Verdict column last October, follow the Buchanan-Dorf logic and borrow money on the financial markets from savvy financial players, who could choose how much interest they would need to be promised in order to risk the possibility that they might ultimately not be paid at all.

The President’s second choice would be to force people to lend money to the federal government, even though failing to pay them on time would potentially create financial havoc (and worse) in their lives. That havoc would flow from the inevitable domino effect that would ensue when the initial unpaid obligations caused the existence of still more unpaid obligations, owed by people who have not received the funds that they had every legal reason to expect to receive.

The third choice would be to tell some of the government’s obligees that they are simply out of luck, because their obligations happened to come due on a day when the debt ceiling had been reached—and because the President has decided that it is more important to stay under the debt ceiling than to honor our obligations.

Even if the debt ceiling is increased this month without much fuss, as seems possible, the threat will return all too soon. Only by taking a stand now can the President make this end once and for all. He can take solace in the fact that he never really had the choice to honor the debt ceiling at all, without simply repudiating the nation’s obligations. His only choice is in how to do so with the least additional constitutional and economic damage.