The debt-ceiling standoff remains at a standstill, even as the clock ticks on the Treasury’s ability to stave off default, by engaging in “extraordinary measures” to pay the nation’s obligations. Over the weekend, the White House wisely ruled out the “Big Coin” gambit, which would have had the government mint two one-trillion dollar platinum coins, and which was inexplicably being promoted by some prominent liberals. In December, the White House also—unwisely, in my view—ruled out the so-called Fourteenth Amendment option, which I will discuss later in this column.
Other than the President’s simply saying that he refuses to negotiate, however, we know very little about what he will do, should his strategy result in a stalemate with Republicans next month.
Last week, Professor Michael Dorf and I co-wrote a column here on Verdict, in which we described an additional constitutional argument that would provide the President with a path forward. Our “trilemma” argument suggests that, even when Congress leaves the President with no way to fulfill his constitutional duties without violating other constitutional duties, he is still obligated to follow the least unconstitutional path.
Perhaps because the bottom line of the Buchanan/Dorf analysis is the same as that of the Fourteenth Amendment option—that is, both conclude that the President must treat the debt-ceiling statute as constitutionally invalid, and thus he must issue debt sufficient to fund spending in the amounts that Congress has appropriated—there has been some confusion about whether our option is different from the Fourteenth Amendment option. It most definitely is.
Because of the potential for confusion (especially in light of the White House’s repudiation of the Fourteenth Amendment option), however, we have been not been focusing on our conclusion that the Fourteenth Amendment option is also convincing. Even so, that argument is valid. We said so in our Columbia Law Review article in October 2012, but we have been less clear about that view in our more recent writings.
In this column, therefore, I will explain why the Fourteenth Amendment—independently of the Buchanan/Dorf argument—provides the President with sufficient grounds to set aside the debt-ceiling statute. I will then explain what the President’s two options would be, as a practical matter, should he decide to issue debt in excess of the (unconstitutional) debt ceiling.
The conclusion of my analysis is that the President can rely on either or both of two convincing justifications to deem the debt ceiling unconstitutional, and he would then have at least two ways to proceed to issue debt after he does so. Neither method is without risk, of course, but those risks exist only because the Republicans in the House have insisted on creating this crisis in the first place.
The Fourteenth Amendment Option: Understanding Why the Debt Ceiling Undermines the Financial System
As I noted above, the White House has announced (in emphatic terms) that it does not think that the debt-ceiling statute is an unconstitutional violation of the Fourteenth Amendment. That view might change, however, if the Republicans really refuse to increase the debt ceiling without extracting unjustified concessions. It is certainly worth revisiting the question here, because the Fourteenth Amendment does provide an independent justification for concluding that the debt ceiling is an unconstitutional law.
Section 4 of the Fourteenth Amendment states that “[t]he validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Because the debt ceiling could actually force the government to default on its obligations, its existence raises serious questions—questions that would not be raised if the debt ceiling were not on the books—about whether the government will pay its debts—in full, and on time—as required by law.
Neither the White House nor any of the legal scholars who have dismissed the Fourteenth Amendment option have offered full-length explanations of how they reached their conclusions. At best, we have seen a few comments and blog posts pooh-poohing the idea, based on three separate arguments, which go as follows:
The first claim is that the words in Section 4 of the Amendment are vague. That is true, but that is hardly a reason not to try to discern their meaning. Other provisions in the Constitution—prohibitions against “cruel and unusual punishment,” requiring “due process of law,” and prohibiting the “taking” of property with “just compensation,” to cite only a few examples—have been, despite their obvious vagueness, the basis for invalidating laws throughout the country’s existence. It is difficult to see what is so different about the words in Section 4 that make them supposedly so impossible to interpret and generalize.
The second claim is based on original understanding. In a recent debate with Professor Dorf on NPR, one law professor pointed out that the original purpose of Section 4 was to prevent Southern senators from repudiating the debt incurred during the Civil War. It is hardly unprecedented, however, for a constitutional provision later to be applied in ways that extend beyond the circumstances that existed when the provision was approved.
Indeed, there would be nothing at all unusual about reading Section 4 to extend to other situations in which the validity of the debt might be brought into question, beyond the Civil War context. In the only Supreme Court case addressing this issue, four Justices wrote: “Nor can we perceive any reason for not considering the expression ‘the validity of the public debt’ as embracing whatever concerns the integrity of the public obligations.”
As Professor Dorf and I explained in our Columbia Law Review article, those words are not binding, but they are highly persuasive. And it is surely better to take these words into account than to claim that the provision in question is limited to its historical circumstances. Indeed, when the government fails to pay its bills—any of its bills—when they are due, then reasonable people would question whether the public debt will be honored.
The debt-ceiling statute thus erects a political barrier that purports to prevent the government from paying its bills (including principal and interest on the debt)—spending that Congress has appropriated under its constitutional powers—in circumstances that Republicans have now set about bringing to pass. That statute, therefore, can reasonably be said to cause the validity of the public debt to have been unconstitutionally undermined.
The final argument against the Fourteenth Amendment option is that the quoted language “does not implicitly give the president authority to do anything,” in the words of one law professor in a recent Reuters news item. This simply misrepresents the argument. No one contends that Section 4 authorizes the President to borrow money. Section 4 does say, however, that the President must exercise the authority that Congress otherwise vested in him to borrow money to pay for appropriated spending, because failing to do so would undermine the validity of the public debt.
In short, Section 4 of the Fourteenth Amendment is just like any other constitutional provision. It provides a filter by which laws can be evaluated, and when laws turn out to fail Section 4’s test, the President can treat those laws as null and void, thus proceeding to follow his duties as Congress has otherwise instructed.
One must remember, moreover, that this argument is completely independent of the “trilemma” analysis that Professor Dorf and I described in our Verdict column last week. Although we have concluded that the separation-of-powers-based argument in that column is the strongest constitutional argument available, it is important to emphasize that the objections to the Fourteenth Amendment argument are extraordinarily weak. That argument, too, can be an independent means by which the President could justify a decision to exceed the debt ceiling.
What Can the President Do? Option 1: Issue New Debt, As Usual
The President, therefore, possesses two separate and independent arguments on which to base a conclusion that the debt-ceiling statute is unconstitutional. If the nation reaches the moment of truth, the President should declare that he will not default on the obligations of the United States government—including all required payments to veterans, health- care providers, debt holders, Social Security recipients, and so on.
How might he do so, in practice? The first option is to do what one does whenever a law has been deemed unconstitutional: Proceed as one would have proceeded, if the law had never been passed in the first place. If, for example, the Supreme Court last summer had held the Affordable Care Act to be unconstitutional, we would not have created insurance exchanges for citizens who lack coverage. Instead, we would have enforced the laws that already existed regarding health insurance.
Similarly, President Obama next month could instruct the Treasury Department to do what it would have otherwise done under the law: Borrow money (under the authority that Congress vested in it in the parts of the budgetary laws that are constitutional) by selling Treasury securities to the public. That is how we typically borrow money, and there is no legal reason to do otherwise.
Would this be a “normal” auction? Definitely not. It is likely that potential buyers of the bonds would only be willing to lend money to the government at a premium, given the reasonable questions in their minds about legal challenges to the President’s decision to sell additional bonds. House Republicans’ assertions that the debt ceiling makes the new debt illegal will, therefore, increase government spending in the future, because additional spending will be required to service this debt.
Notably, however, issuing this new debt would not violate Section 4 of the Fourteenth Amendment, because—at worst—it would only cause people to question the validity of the securities that would be issued above the debt ceiling. If President Obama were ultimately to lose a court challenge, then the new securities would be deemed never to have been “public debt” in the first place. No one could claim that the public debt that otherwise existed was in any way undermined or brought into question, because it is still backed by the full faith and credit of the United States.
The most straightforward option, therefore, is for the President to proceed with business as usual, giving the investing public the option to lend the government money on the terms that it is willing to accept, under the circumstances. That those terms will almost certainly be less favorable to the government is the inevitable result of Republicans’ refusal to repeal an unconstitutional law.
What Can the President Do? Option 2: Issue IOUs to the Public
It is possible, however, that such a sale of Treasury securities would fail, in a financial sense. That is, there is the possibility that too few people would step forward to lend money to the government, even at extremely high interest rates. If that were to happen—or, perhaps, to avoid the possible financial disruptions of such an embarrassing failure, if one seemed likely—another option would be to issue debt directly to those people who are owed money by the government.
Last week, Professor Edward Kleinbard argued for a variant on this possibility, in an op-ed in The New York Times. Invoking the State of California’s 2009 experiment with issuing “registered warrants” to pay its bills, Kleinbard suggested that the federal government could similarly issue scrip, that is, simply IOUs, when it runs out of room under the debt ceiling.
The headline-writers at the Times, however, described this misleadingly as an “escape hatch” to avoid the problems with hitting the debt ceiling. Kleinbard’s actual proposal, however, is not to avoid the debt ceiling at all. Instead, he would simply have the government issue the IOUs, not with any guarantee that the IOUs are worth anything, but as an acknowledgement that the government is, in essence, “sorry to announce that it cannot pay its bills right now.” (Those are my words, not Professor Kleinbard’s.)
That would certainly be a way to avoid breaching the debt ceiling, but it would achieve that result only by doing nothing more than putting a nice gloss on outright default. Such non-guaranteed scrip might as well be called “default acknowledgement coupons,” because they merely state that those who are owed money will not be paid as promised, in full and on time.
Issuing IOUs could, however, still be a good option. If it turns out that the public is willing to accept the scrip, and if they take seriously Kleinbard’s suggestion that the government should specify that the IOUs are transferable (and that banks might accept them in exchange for cash), then people might tolerate the default.
A better approach, however, would be for the government actually to guarantee the scrip, and to designate it as something that is transferable by law. Doing this would turn the scrip into actual debt, which is exactly the point. If we are trying to find an alternative way to borrow money, and the normal approach (selling Treasury securities) is deemed to be too risky, then maybe forcing the public to lend money to the government is the less bad approach.
This latter approach could, however, potentially be challenged as having created an alternative currency, beyond that which the Congress has authorized. This approach, therefore, could create its own cloud of uncertainty around the scrip program, which the President would have to weigh against the uncertainty inherent in issuing debt through the normal means.
We know, however, that the alternative favored by Republicans is a full-on default. That would, for the first time, create a situation in which the United States government failed to pay its obligations in full, on time, as established by law. That is the outcome that we are trying to avoid, because the full faith and credit of the United States government must have meaning, in order for the debt of the federal government to continue to be widely accepted—which is why it is possible for the government to pay low interest rates, thus saving money for future taxpayers.
The bottom line, therefore, is that the Republicans’ hostage-taking will have very bad consequences, no matter what happens. The only question is how to choose among the bad options that the Republicans will have forced upon the country. Presidential recognition that the debt ceiling is unconstitutional—for two independent reasons—does not end the inquiry. The damage from nullifying that unconstitutional law must still be contained. None of the choices are good, and the President will have to decide which one is least bad—just as he should decide, as a threshold issue, that exceeding the debt ceiling is the least unconstitutional option. Although I continue to believe that issuing Treasury securities is the best option, reasonable minds can differ.
Finally, it is important to emphasize that these constitutional justifications are not “end-runs” around the debt ceiling, any more than Brown v. Board of Education was an end-run around laws that segregated schools by race. The Constitution is not a mere technicality, but rather the framework within which laws must fit. If, as is the case with the debt-ceiling statute, a law is unconstitutional, setting it aside is anything but an extraordinary action. It is required by the rule of law.