Why debt ceiling is stupid — and unconstitutional
On April 19, in introducing House Republicans’ stillborn proposal for negotiations to raise the government’s debt ceiling, House Speaker Kevin McCarthy (R-Bakersfield) said this:
“You know, if you gave your child a credit card, and they kept maxing it out to the limit, you wouldn’t blindly just raise the limit. You’d change their behavior. The exact same thing is true with our national debt.”
It’s hard to imagine a more profoundly ignorant take about our irredeemably stupid federal debt ceiling. Perhaps McCarthy knows the truth, in which case he’s a liar. Perhaps he doesn’t know, in which case he doesn’t belong anywhere near where fiscal policy is made.
McCarthy doesn’t seem to understand that the debt ceiling isn’t about limiting future spending. It’s about paying bills already incurred, just as a credit card statement reflects purchases already made.
He and his House GOP colleagues’ refusal to raise the federal debt ceiling to accommodate the spending they’ve already incurred would be tantamount to his fictional family’s refusing to pay their existing debts.
If they persisted in this refusal, they’d end up in bankruptcy, or perhaps in jail for fraud. To repeat his words, “the exact same thing is true with our national debt.”
Refusing to pay the bills that Congress has rung up would put the United States in an analogous position: The value of its debts would plummet because creditors would fear getting paid less than they were owed (as with bankruptcy).
The punishment would be severe — higher prices for goods and services, mortgage rates soaring, creditors such as Social Security recipients, Medicare providers and businesses with government contracts going unpaid.
McCarthy knows these are among the consequences if the federal government reneges on its debts, something that could happen if the debt ceiling isn’t raised. He knows this outcome would be unprecedented and unacceptable to almost all Americans; that’s why he thinks that refusing to raise the ceiling is an effective bargaining chip to force spending cutbacks throughout the federal budget.
Monday morning saw glimmers of hope that McCarthy and President Biden would reach an agreement resulting in an increase in the debt ceiling in return for some modest, relatively harmless budget cuts. But as of this writing, no deal has been sealed. Treasury Secretary Janet L. Yellen has said that the ceiling would have to be raised by June 1 to obviate any chance of a government default.
To be perfectly accurate, the government technically breached the debt ceiling back on Jan. 19; the Treasury has staved off default since then through accounting maneuvers termed “extraordinary measures,” which essentially involve moving money around. Yellen’s June 1 “X-date” is supposedly when that flexibility runs out — though the Congressional Budget Office places the date in mid-June, and says that if the government makes it that far, forthcoming corporate and personal tax payments could provide breathing room “at least through the end of July.”
So it’s timely to take a look at the latest legal commentary about the debt limit — specifically, whether it’s even constitutional, and if not, whether Biden should simply ignore it.
Before I delve into that, a quick primer on what the debt ceiling is and how it came about. As I’ve written too many times to count, the debt ceiling is a federal law that sets a limit on how much debt the Treasury can sell. At this moment, the limit is $31.381 trillion, a level set by Congress in December 2021.
The debt ceiling has been raised by congressional votes more than 91 times since 1960, generally without debate, by Democratic and Republican majorities and under Democratic and Republican presidents. When Republicans took majority control of the House of Representatives in 2011, they turned the debt ceiling into the raw material for political posturing, a fiscal nuclear bomb in the hands of willful children.
The debt ceiling was not originally meant as a limit on the Treasury’s authority to issue federal debt, but rather as a way to give it more latitude to borrow. It came into being in 1917, when Congress grew weary of having to vote on every proposed bond issuance, which it considered a pain in the neck. So it chose instead to give the Treasury blanket authority to float bonds, subject to a stopgap limitation.
In other words, the limit was never designed to keep Congress from enacting any spending bills or deficitbuilding tax breaks it wished. Obviously, it has never had that effect, since Congress routinely has approved spending that it knew, by simple math, would require more borrowing.
The Republican threats to enforce the debt ceiling have caused no end of fiscal mischief. That included the sequester, a sheaf of budget cuts enacted to settle a debt ceiling fight in 2011. The cuts were so draconian that Republicans and Democrats would have to come to the negotiating table for a budget deal.
That didn’t happen, so the cuts went into effect. They were estimated to have pared 1.2 percentage points from economic growth in 2013 and 2014, costing as many as 1.6 million jobs over that time frame.
The mandated budget cuts hit child care, Head Start and early education especially hard. The spectacle of Congress being unable to avoid the damage from a gun it placed at its own head led Standard & Poor’s to downgrade the credit rating of U.S. Treasury securities for the very first time.
The increasing obstinacy of the GOP House caucus, which is under the thumb of a right-wing extremist cadre, has prompted a reconsideration of the legality of the debt ceiling itself. As constitutional scholar Garrett Epps has written, even if Congress refuses to raise the debt ceiling, “default on the debt ... is flatly forbidden by the Constitution.”
The basis for that conclusion is the 14th Amendment, a Reconstruction-era measure that abolished slavery, provided that all persons born or naturalized in the U.S. were American citizens, including former slaves, and decreed that federal debts could not be repudiated — specifically that “the validity of the public debt of the United States ... shall not be questioned.”
Only once was that clause brought before the Supreme Court — in 1935, when the plaintiff was an investor demanding that the government redeem his Treasury bonds in gold, as had been promised when the bonds were issued.
Franklin D. Roosevelt had repudiated the socalled gold clauses in private and government bond indentures, aware that upholding payment in gold would have provoked widespread bankruptcies and devastated the federal budget. Congress had followed with a joint resolution nullifying all gold clauses.
The financial markets were “on the verge of nervous prostration” awaiting the court’s ruling, as Joseph P. Kennedy, then chairman of the Securities and Exchange Commission, recounted. Roosevelt had prepared a statement nullifying by executive order a ruling upholding the gold clauses; Kennedy stood by an open phone line, ready to order the temporary closing of all U.S. stock exchanges on FDR’s signal to guard against financial chaos.
In the event, the court upheld the sanctity of federal debt by deeming the congressional resolution unconstitutional as it applied to Treasury securities. In a plurality decision that cited the 14th Amendment, Chief Justice Charles Evan Hughes rejected the notion that “the Congress can disregard the obligations of the government at its discretion, and that, when the government borrows money, the credit of the United States is an illusory pledge. We do not so read the Constitution.”
The court, however, denied plaintiff John Perry the right to be repaid in gold; he had to accept repayment in dollars, the only legal tender at that time.
Many legal scholars have come around to the conclusion that the 14th Amendment and the gold clause ruling would allow President Biden to pay Treasury obligations even in excess of the debt ceiling.
President Clinton felt the same way. In 2011, when his successor, Barack Obama, was grappling with a recalcitrant GOP Congress over the issue, he said in an interview that if facing default, he would pay the government’s debts “without hesitation, and force the courts to stop me.”
Obama then expressed concern about the consequences of protracted litigation in such a case. Biden has raised the same doubt.
Yet it’s unclear if a lawsuit challenging a breach of the debt ceiling could be brought. Who would have standing to sue, Epps asked. Any plaintiffs would have to show a particular harm to themselves from a presidential order defying the ceiling.
Who could that be? Not Treasury bondholders — they would be guaranteed their principal and interest. Social Security recipients? Defiance of the debt ceiling would ensure they got their benefit checks. Would the GOP House minority be harmed? It’s hard to see how, other than in their amour-propre, since Chief Justice Hughes ruled nearly nine decades ago that Congress had no right to disregard the fiscal obligations it enacted.
It is possible, of course, that the current court’s conservative majority might “manufacture standing for some red state attorney general or right-wing advocacy group to challenge Biden’s upholding the full faith and credit of the United States,” Epps observed.
A ruling forcing a default might provoke Biden simply to defy the court, as FDR was prepared to do. Does this court really want to provoke such a confrontation — especially since a ruling upholding the debt ceiling would disadvantage the wealthy investor class that some of the majority’s members have reportedly relied on as patrons?
Nothing would please me more than to have Biden relieve me of the duty of writing about the incredibly stupid maneuvering the debt ceiling regularly provokes in Washington. The path is clear. It’s long since time that a U.S. president treated the debt ceiling not as an instrument of sound fiscal policy but as a pointless obstruction.
If McCarthy and his minions refuse to honor their own fiscal obligations, Biden should disregard them; that’s his most valuable bargaining chip. If past is precedent, the Constitution and the Supreme Court would have his back.