Redburn Reads, May 13, 2023
Redburn Reads, May 13, 2023
Friends,
It’s going to be up to Joe Biden to protect the full faith and credit of the United States.
By that, I mean the Biden administration, including the cautious Treasury Secretary Janet Yellen, will almost certainly have to take a leap into the unknown and continue paying the government’s bills and issuing new debt when Congress fails to raise the debt ceiling sometime within the next couple of months. The “negotiations” between the White House and Kevin McCarthy, the hanging-by-a-thread Speaker of the House, are essentially a sham. There’s no conceivable compromise between what House Republicans are demanding as a price to raise the debt ceiling for another few months – gutting domestic government spending, reversing legislation to start confronting global climate change, killing off the effort to improve IRS oversight of wealthy tax scofflaws, preventing Medicare from negotiating drug prices, and much more – and what Democrats will accept.
Yes, Biden will keep talking to the end in hopes that House Republicans abandon their position and that some sort of face-saving deal will be reached. But it’s also inconceivable to me that Biden will simply throw up his hands if – as seem likely – the talks fail. To allow the federal government to default would first send interest rates soaring, then plunge the economy into a recession, and ultimately allow Donald Trump – who says he would welcome a default – to win the 2024 presidential election.
So what are Biden’s choices? The main one is the now familiar 14th amendment option, declaring that the Constitution requires that “the validity of the public debt of the United States. . .shall not be questioned.”
Here’s how Ian Milhauser, writing in Vox, summed up the basic dilemma.
All of this matters because House Republicans are currently trying to use the debt ceiling to extract policy concessions from President Joe Biden, and their pitch to Biden more or less boils down to “that’s a pretty nice economy you’ve got there, would be a shame if someone broke it.” The idea is that, by threatening a debt default that would trigger an economic calamity, Republicans can force Biden to agree to spending cuts — such as cuts to Medicaid or rolling back much of Biden’s signature Inflation Reduction Act — that they could not obtain in a budget negotiation without this leverage.
But is this point of leverage — a law that will cause the nation to default on its debts unless Congress affirmatively stops that from happening — even legal? The answer to this question is surprisingly unclear. The 14th Amendment provides that “the validity of the public debt of the United States ... shall not be questioned,” and officials within the Biden administration are reportedly debating whether to challenge the constitutionality of the debt ceiling under this provision. Biden said on Tuesday that he is “considering” this option.
There are very strong legal arguments that the debt ceiling does, indeed, violate the 14th Amendment. But these arguments have never been tested. No court has ever ruled on whether the debt ceiling is unconstitutional. And only one Supreme Court case has ever even applied the 14th Amendment’s Public Debt Clause — and that case, Perry v. United States (1935), did so only briefly.
Meanwhile, an even more ominous question looms over any legal fight over the debt ceiling. Even if we assume that the Supreme Court, with its 6-3 Republican supermajority, would declare the debt ceiling unconstitutional if it is breached, would such a breach cause irreparable damage to the United States’ credit, even if it were later fixed by a Supreme Court order?
Now, it’s possible that Biden has publicly raised the idea of invoking the 14th amendment as a way of regaining his own leverage with McCarthy and that the Speaker, worried about giving up Congress’ control of the debt ceiling, will work out a modest deal with Biden. I’m skeptical, but here’s that argument laid out by Bill Scher, the very smart political analyst, in his newsletter for The Washington Monthly.
WILL BIDEN TAKE THE 14TH?
It's debt limit week here at the Washington Monthly! Our esteemed Legal Affairs Editor Garrett Epps and I, your humble Politics Editor, come at the issue from different angles. I hope you read both:
Garrett writes: "I’ve Argued for Years That the President Must Pay the National Debt Even If Congress Won’t Raise the Debt Ceiling"
The argument from Garrett—that the 14th Amendment gives the president the power to raise the debt limit without Congress—has come a long, long way...
Garrett made the constitutional and historical case in the pages of The Atlantic during the 2011 debt limit showdown. But at the time this was largely considered a fringe view. For example, Laurence Tribe, the constitutional law professor from Harvard, spurned the argument that summer in The New York Times.
Twelve years later, the 14th Amendment option has gone mainstream. Tribe changed his position. The Biden administration has been seriously considering the possibility.
Garrett has held fast, resurrecting his argument for the Monthly last November, and further pressing the point this week. The New York Times has cited his work, and he sat for an extended interview on the subject with MSNBC (you can watch below).
But is Biden actually ready to break the 14th Amendment glass in case of emergency?
After meeting with Republican leaders on Tuesday, Biden said:
I have been considering the 14th Amendment. And a man I have enormous respect for, Larry Tribe, who advised me for a long time, thinks that it would be legitimate. But the problem is it would have to be litigated. And in the meantime, without an extension, it would still end up in the same place. I’ll be very blunt with you: When we get by this, I’m thinking about taking a look at — months down the road — to see whether — what the court would say about whether or not ... it does work.
Many headlines latched on to the first sentence (e.g. "Biden says he’s considering 14th Amendment as debt ceiling option"), but what he said after was more interesting to my eye.
Biden seems to be saying that he is worried about the period of legal uncertainty which would follow an assertion of 14th Amendment power, so he's reluctant to do it now.
But "months" after "we get by this" (by which I assume he means, months after a debt limit agreement is reached), he would like to see "what the court would say." That sounds like he wants to create some sort of legal case so the Supreme Court could formally resolve the constitutional debate.
How Biden could do that escapes me. Who would get sued, and for what, to create a legal case for the Court to adjudicate, after a deal is forged?
An uncharitable take would be Biden doesn't know either.
A more charitable, if Machiavellian, assessment, would be: Biden knows there's no way to get a Supreme Court ruling about 14th Amendment power in advance of a future debt limit crisis. But he wants to give some hope to progressive advocates, and dampen the potential for criticism from his left flank.
My own expectation (if not quite a prediction) is that Biden won't have to break any glass.
By meeting with Republican leaders and blessing talks among their respective staffs, Biden has moved off of his position rejecting budget talks without Republican support for a clean debt limit increase.
Speaker Kevin McCarthy has not made any non-negotiable demands beyond tying an unspecified amount of spending cuts to a debt limit increase.
Both have indicated they do not want to default and have not taken any irreconcilable positions. There is room to find common ground.
TELL YOUR FRIENDS! TELL US WHAT YOU THINK!
If you like what you see in this newsletter, please forward it to your friends and encourage them to join our newsletter email list. You can sign up to receive the newsletter at this link. And please share any feedback with me about this newsletter at bscher@washingtonmonthly.com.
Thanks,
Bill
Personally, I think Scher is too optimistic and his prediction won't come true. And, in my view, it’s time to test the Constitutional argument and end the silly gamesmanship over the debt ceiling once and for all. When Congress approves spending and tax plans, it should have no choice but to honor the result, even when that requires government borrowing to make sure Washington pays its bills. Let’s at least have an honest debate among lawmakers about the budgets they approve, rather than using a fake outrage over government debt (which is still a long ways from being a serious problem) that Republicans only invoke when a Democrat is in the White House.
And maybe an honest debate would finally put raising taxes on the table again rather than allowing the GOP to generally get away among the mainstream media with the argument that the only way to narrow the budget deficit is to cut spending.
Still, there is an alternative to the Constitutional argument that I hadn’t heard before until the always interesting Ed Levitz, writing in New York magazine, brought up another possibility. Here’s how he laid it out:
The White House has several options at its disposal. For one thing, Biden could simply declare the debt limit unconstitutional under the 14th Amendment, which stipulates that “the validity of the public debt of the United States … shall not be questioned.” Some legal scholars therefore believe that it is not constitutional for Congress to prevent the federal government from paying its debts.
Alternatively, the Treasury Department could use its statutory authority to print platinum coins in any denomination to mint a $1 trillion coin and then use it to repurchase government debt held at the Federal Reserve.
Both of these approaches enjoy the endorsement of some legal experts. But they both have the same downside: Either action would represent a dramatic assertion of controversial executive authorities. In the first case, the president would be openly nullifying a long-standing U.S. law. In the second, the Treasury would be utilizing its seigniorage powers in a counterintuitive — and highly amusing — manner that would almost certainly attract sustained public attention and ridicule. . .
In any case, a minimally dramatic or legally ambitious solution to the debt-ceiling standoff would be preferable. And the Treasury Department has one: It can keep funding the government through the sale of consol bonds.
In simple terms, a consol bond is one that never matures. A normal bond commits a borrower to paying back the principal on their loan plus interest at a set date. A consol bond, by contrast, requires the borrower to make annual interest payments forever but does not require them to pay off the loan’s full value at any particular point in time.
This is handy since the legislation establishing the U.S. debt limit defines the federal debt as the amount of principal that the government is obligated to repay. Thus, while a normal U.S. Treasury bond increases the national debt as defined by the debt ceiling, a consol bond does not. If the government borrows money via bonds that have no principal — only interest-payment obligations — then it can continue funding its operations indefinitely, even in the absence of a debt-ceiling hike.
There is a clear downside to the consol-bonds solution. In order to attract buyers for bonds that never mature, the Treasury will need to offer a high interest rate, increasing the cost of government financing. But this would still eliminate uncertainty about the government’s capacity to repay previously issued, normal bonds. So the impact on the cost of credit in the broader economy should not be very significant.
But it has the advantage of being extremely boring and incredibly legal. The Treasury Department has the authority to issue whatever kind of bonds it sees fit. Avoiding default through the sale of consol bonds would not require any epic constitutional confrontation between the executive and legislative branches nor would it involve the creation of an object tailor-made for the ultimate heist. It would merely require the Treasury Department to do something weird — but dully technical — in order to prevent a financial crisis. The Treasury and the Fed have pursued variations on that basic task repeatedly since the 2008 financial crisis and have generally faced little political blowback for doing so.
Of course, in a context where the Treasury’s sale of consol bonds robs the House GOP of leverage, it is likely to spur some controversy. But “it’s not fair for the Treasury Department to prevent a financial crisis by using its well-established authority to sell bonds” does not seem like a winning political argument.
To be sure, the consol-bonds strategy works better as a means of buying time than as a permanent solution to the debt-ceiling problem. After all, it would be more expensive to fund the government through consol bonds than regular ones. Were it 100 percent certain that the Supreme Court would reject a legal challenge to Biden’s invocation of the 14th Amendment or minting of “the coin,” those options would be preferable.
But if the administration wants a lower-risk option for avoiding default indefinitely, it should sell bonds that pay interest in perpetuity.
In any event, I do not think the Biden administration will be so self-destructive as to allow a debt default. Still, the situation is fraught with peril, as these articles make clear, and we could be in for a very hairy situation in the weeks ahead.
As for me, I expect to be out of the country when all of this unfolds. Lisa and I were married 50 years ago, on June 30, 1973, and to celebrate, we are planning a six week trip to Italy, Croatia, Slovenia, and Switzerland, retracing some of the places we visited on a 10 month honeymoon we took to Europe after we were married. Back then, the whole trip, which also included stays in Greece (we were on Mykonos for a month in the middle of winter, spending about $5 a day for room and meals), France, Germany and Austria as well, cost us about $6,000 (the equivalent of about $36,000 today). Our main transportation was a 1963 VW bug we bought in Munich for the equivalent of $300. We loved just about everything even though we were on a tight budget. This time, though, we’re aiming a little higher and it looks like we’ll spend about $75,000 treating ourselves to some amazing experiences, great meals and excellent hotels over a much shorter time. On our anniversary date, we plan to be at a small inn, Pension Crasta, in the car-free Fex Valley in the Swiss Engadine, where we stayed for a couple of days in 1973 as a splurge. Now it’s one of our more modest accommodations. I feel very fortunate that our life together has worked out in such a way that we enjoy such indulgences in our retirement.
This will be my last RR for a while. We’re also taking a 3-week road trip in late July/early August to travel to Colorado and back for a family wedding. There are lots of things I’ll be missing but I probably won’t return to writing this newsletter until after Labor Day. Somehow, I figure y’all will survive without it.
Take care,
Tom