Fallback Bonds: A Debt Ceiling Workaround that Actually Works

Posted in: Tax and Economics

Desperate times demand desperate measures. Thus, with the U.S. rapidly approaching the arbitrary debt ceiling that House Republicans are threatening not to increase unless Senate Democrats and President Joe Biden capitulate to their extreme ideological demands, commentators and the President himself have begun to take seriously various proposals for fully funding the government should those Republicans fail to act in time.

We have long argued that should the clock strike midnight with no increase or suspension of the debt ceiling, the President will have no lawful options—indeed, no constitutional ones, because any action he might take would violate the separation of powers. Under such circumstances, we contend, the President must choose the “least unconstitutional” option: minimize the executive usurpation of legislative authority by issuing just enough new debt to cover the gap between revenues and congressional appropriations, rather than exercise completely unguided discretion to deny payments to veterans, Social Security recipients, hospitals, contractors, and others to whom those payments are legally owed.

To be clear, we share the ultimate goal of the proponents of the various schemes on offer to circumvent the debt ceiling. We would be delighted if the debt ceiling truly were a mere paper tiger that could be easily shredded by stamping “$3 trillion” on a piece of platinum or issuing bonds with a face value of one dollar but sold for a hundred dollars each because they offer 40,100 percent in interest (which is the rate Treasury would need to offer to reproduce the payback on a conventional 3-month hundred-dollar T-bill that pays the roughly 5 percent current interest rate). However, as we explained in recent Verdict columns on platinum coins (here and here) and exotic bonds, we reluctantly concluded that these gimmicks do not work as a matter of statutory construction. Reluctantly but definitively, because it is not a close call.

Our Main Response to the Pushback from the Gimmicks’ Proponents

Over the last month, we have received two kinds of pushback against our reading of the statutes said to authorize trillion-dollar platinum coins and exotic bonds as means of evading the debt ceiling. First, some readers claim that we made technical errors in parsing the precise language of the relevant statutes. We think these readers are mistaken with respect to platinum coins but might—might—have a point with respect to at least some kinds of exotic bonds. Accordingly, in an accompanying essay on the Dorf on Law blog, we work through some further details about how the debt ceiling statute would treat premium bonds. (That essay also explains the math that we used to derive the 40,100 percent interest rate stated above.)

Our overall bottom line does not change, however, because the fundamental objection to all of the gimmicks has less to do with the exact interaction of the words of the key statutes than it does with a fundamental principle of statutory interpretation. Congress has raised or suspended the debt ceiling over a dozen times just since the 1996 passage of the law authorizing the minting of platinum coins. Yet proponents of the multi-trillion-dollar coins and exotic bonds would have us believe that not only were those debt ceiling increases unnecessary; during that whole time the collection of taxes was also completely superfluous, as the executive branch could have unilaterally chosen to fund all government operations by depositing arbitrarily high value coins or arbitrarily high interest bonds with the Federal Reserve. As we previously explained, that necessary implication of the arguments in favor of the workarounds violates the basic principle that Congress does not “hide elephants in mouseholes.”

So much for the claims that the various gimmicks to evade the debt ceiling are “perfectly legal”—a familiar phrase that, in this context, would mean that there is some hidden loophole that will solve all our problems without technically violating the most expansive reading of a statute’s text.

We have also received a second, more intriguing kind of pushback from some readers. They acknowledge that the highly formalistic approaches to the various laws offered by the gimmicks’ proponents are unpersuasive if the goal is ordinary statutory interpretation aimed at discerning the best reading of those laws. Nonetheless, they say, the goal in our current, highly fraught situation is more limited. The point of the gimmicks is to give executive branch officials and, in the event of litigation, judges, a fig leaf of legal authority to avert economic disaster. In short, they suggest that sometimes a “perfectly legal” ruse is not being invoked to evade the intent of a law—which is what, for example, people mean when they say that certain abusive tax shelters might be wrong but are technically within the meaning of a poorly written provision. Instead, the much more persuasive idea here is that sometimes we fight fire with fire: if the debt ceiling law is being used to create a constitutional trap and thus take the global economy hostage, implausible but minimally defensible interpretations of other laws can save the day.

We say this line of pushback is more intriguing because we recognize that both President Biden and any courts that may be called upon to evaluate his actions could be reluctant to follow our framing of the issue and say that a course of action is unconstitutional but permissible by virtue of being less unconstitutional than all of the other options. Indeed, in our 2012 Columbia Law Review article introducing the concept of the least unconstitutional option, we acknowledged (at pages 1233-39) the temptation to conclude that the least unconstitutional option is, ipso facto, constitutional. Although we resisted that temptation as scholars, lawyers appearing before a skeptical bench might understandably reach for it.

Constitutional Avoidance

How might the Biden administration avoid simply admitting that it is violating the debt ceiling because it has no better options? It could begin by countering the no-elephants-in-mouseholes principle with a different canon of statutory interpretation. Constitutional avoidance says that, when faced with competing interpretations of a statute, courts should choose the one that does not render it unconstitutional.

Georgetown Law Professor Brian Galle has recently suggested constitutional avoidance as a basis for his view that Treasury securities held by the Federal Reserve should not count as “outstanding” for purposes of the debt ceiling. On the merits, we agree that his reading of the debt ceiling statute is textually plausible, though we think it is neither necessary nor particularly convincing (at least, in anything but the current near-crisis context). For one thing, the Fed is by design independent of other parts of the government, so there are sound reasons to treat its portfolio separately. Moreover, Professor Galle’s approach runs into a version of the same obstacle as other workarounds: it implies that there has all along been a hitherto-invisible elephant-sized way to avoid the political and economic pain of the debt ceiling.

This approach would at least have to reckon with the longstanding practice of including the Fed’s holdings of Treasury securities in the total amount of “debt held by the public.” That measure of the public debt also includes federal securities held by state and local governments, so why not say that the debt ceiling applies only to debt held by non-government entities (especially because the federal government transfers money to sub-federal governments as a matter of course, making the distinction blurry, at best, as a matter of public finance)?

Short of that, the debt ceiling statute does not explicitly say whether the nominal limit applies to gross or net debt. Why does that matter? For various internal accounting reasons, some parts of the federal government are deemed to “owe” other parts of the federal government money, in what are known as “intragovernmental holdings.” The current debt ceiling is $31.4 trillion dollars, and gross debt is currently at that limit (with only “extraordinary measures” staving off disaster). However, net debt after subtracting intragovernmental holdings is $24.6 trillion. So even without calling state and local governments part of the government as a whole or treating the independent central bank’s balance sheet as part of the federal government, it would take only a minimum of insight to observe that the government today is in fact almost seven trillion dollars below the debt ceiling.

Longstanding and unexamined assumptions would thus give way to a more expansive (and arguably better) reading of the debt ceiling statute—a statute that, to be clear, does not limit debt and is not needed to do so. Maybe there have been many elephants out there all along, not even hidden in mouseholes.

In any event, Professor Galle may be onto something by invoking constitutional avoidance. There is a long tradition of pitting canons of statutory construction against one another. Even if constitutional avoidance does not completely displace the no-elephants-in-mouseholes principle, it might shrink the elephant down to the size of a rat that can squeeze its way through the hole.

Constitutional avoidance might suffice to persuade a court that one of the proposed workarounds is legal, but it might not. Further, which workaround should the administration choose to give it the best shot at persuading a court that its actions are lawful?

The Fallback Approach

That question rests on the faulty premise that the administration must choose only one tactic. It can instead invoke “all of the above” by creating what we will call “fallback bonds.”

In a 2007 law review article, one of us (Dorf) explored the phenomenon of fallback statutory provisions. Sometimes when a legislature enacts a statute that it has reason to fear the courts will invalidate as unconstitutional, it includes a substitute provision as a fallback. For example, in the 1986 case of Bowsher v. Synar, the Supreme Court invalidated the delegation of certain budget-cutting authority to the Comptroller General but then allowed that the result would be to “permit[] the fallback provisions to come into play” because they did not share the constitutional defect of the primary law.

Fallback provisions can be included in executive actions as well as in statutes. Accordingly, we suggest that if the administration wants to have its cake and eat it too, it could offer to sell to the Federal Reserve three trillion dollars’ worth of otherwise ordinary hundred-dollar bonds that come with something like the following caveat printed right on the face of each one:

(1) Under the principle of constitutional avoidance, this bond is lawful because intragovernmental debt and debt held by the Federal Reserve is not “outstanding” within the meaning of the debt ceiling statute, 31 U.S.C. § 3101.

(2) In the event that a court deems this bond unlawful and its judgment is not stayed or reversed within 3 business days, this bond shall be exchanged for a 3-month premium bond with a face value of one dollar and an annual interest rate of 40,100 percent.

(3) In the event that a court deems the options in (1) and (2) unlawful and its judgment is not stayed or reversed within 3 business days, this bond and others like it shall be exchanged for a platinum coin stamped with the face value of the initial aggregate price of the collection of such bonds.

(4)  In the event that a court deems the options in (1), (2), and (3) unlawful and its judgment is not stayed or reversed within 3 business days, the platinum coin described in (3) shall be exchanged for a collection of ordinary bonds that do not contain any caveats and violate the debt ceiling but are nonetheless lawful or at least not subject to judicial invalidation because: (a) the debt ceiling statute violates separation of powers; (b) the debt ceiling statute violates Section 4 of the Fourteenth Amendment; (c) violating the debt ceiling is the least unconstitutional option and thus, ipso facto constitutional; or (d) violating the debt ceiling is the least unconstitutional option and thus not subject to judicial review because any action a court might order would also be unconstitutional, indeed more so.

Needless to say, the foregoing template is simply one way that fallback bonds could be issued. The administration could re-order the options, subtract one or more, or add others—including mechanisms for selling bonds to the public. Our point for now is simply that although we are quite dubious about the proposals to circumvent the debt ceiling within existing law, we honestly hope that a court would say that we are wrong, allowing the country to avoid financial catastrophe and a constitutional crisis. Fallback bonds could play a role in a mitigation strategy.

Posted in: Tax and Economics

Tags: Debt Ceiling

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