Yves here. This is a very lucid article on the debt ceiling chicken game that lays out some options that I hadn’t heard of before, such as a conflict of law argument for spending beyond debt ceiling limits. the debt.
By Eric Kramer. Originally posted on angry bear
What should President Biden do if Republicans refuse to raise the debt ceiling? What should he say will he do, in advance, to avoid a catastrophe and gain influence in the negotiations?
The answer to these questions is far from clear.
Krugman and Klein on unorthodox legal strategies
Paul Krugman argue that the administration should do something – anything – to avoid default. He doesn’t care about the details – platinum coin, consul bonds, 14e amendment. He thinks there’s a real possibility that Republicans won’t want to compromise on the debt ceiling, and that could have such dire consequences that a plan B is in order. (Krugman also opposed any negotiations on the debt ceiling, a position I have previously discussed.) But Krugman worries that the administration has made it more difficult to enact unorthodox policies by ruling out the possibility of a legal workaround:
I have no idea what happens next. I think there’s a real possibility that Biden officials will ultimately be forced by sheer Republican intransigence into unconventional methods after all — a task that will be made much more difficult by the fact that those same officials have spent months talking about waste the approaches they may need to follow.
A problem with any effort to ignore the debt ceiling is that it will be subject to litigation. We don’t know how this litigation will end. Rightly like Ezra Klein pointed out, the Supreme Court can do whatever it wants. In the meantime, as disputes make their way through the courts, it is far from certain that financial markets will function properly. Also, consistent with my previous articles, Klein thinks the debt ceiling repudiation policy is bad for Biden:
If testing the question cost nothing, there would be no harm in trying. But I don’t think it would have any cost. The strength of the Biden administration’s policy stance is that it represents normalcy. The debt ceiling has always been raised before, and it must be raised now. But if the administration declares the debt ceiling unconstitutional, only for the Supreme Court to declare the maneuver unconstitutional, then Biden owns the market chaos that would ensue. Who will voters blame in this scenario? Republicans, who say they just want to negotiate the budget, as tradition dictates? Or Biden, who did something no other president had done and failed?
At this moment, finally, the positions are clear. The White House is open to budget negotiations but opposed to the debt ceiling. The Republicans are the ones threatening to default if their demands are not met. They pull the pin on that grenade, in full view of the American people. Biden should think carefully before risking snatching it out of his hands and holding it himself.
Biden should certainly try to broker a reasonable resolution to the impasse. (“Reasonable” to me means a balance between spending cuts and tax increases, cuts that don’t hit hard on the poor or Biden’s top policy priorities, a substantial increase in the debt ceiling so we don’t let’s do it more this year or next, and no receivership.) But as Krugman argues, there’s no guarantee the negotiation will work, so the administration still needs a plan B.
There are two debt limit strategies other than platinum coin, consular bonds and 14e Amendment that should be on the table in this discussion.
First, the president can attempt to avoid a financial crisis by prioritizing interest payments and reissuing maturing debt (which keeps the total outstanding debt within the debt ceiling limit). Other spending obligations would be met to the extent cash is available, consistent with the Treasury’s ability to target and prioritize. (For example, the Treasury may be able to send Social Security checks, but withhold payments to health care providers.) Here is a brief description of how it might unfold by Edelberg and Sheiner at Brookings.
If this succeeds in averting a major financial crisis – a big “if”, but certainly possible – hitting the debt ceiling could end up looking like a government shutdown to the public. There would be considerable pain in the short term, but the public would quickly grasp the stakes and the Republicans would be forced to raise the debt ceiling. As Edelberg and Sheiner note, there would likely be litigation claiming that the Treasury cannot choose who to pay, and that creditors should cut their hair. (For some additional legal, operational, and policy issues with this approach, see here.) But at least in this case, it could be the Supreme Court that triggers a financial crisis.
This could be the administration’s plan B. This would explain why the administration has dismissed some of the extraordinary legal theories that have been circulating — the Treasury doesn’t need to mint a platinum coin or issue consular bonds to execute this strategy. On the other hand, it’s far from a perfect or foolproof option. Like any failure to raise the debt ceiling, this could lead to global economic cataclysm, especially if the prioritization fails operationally or legally.
Ignore the debt ceiling
Finally, rather than quoting the 14e Amendment, the President could argue that when the debt limit is reached, he must disobey a duly enacted law of Congress – the tax law, the spending law, and the debt limit are inconsistent – and that ignoring the debt limit is the least unconstitutional option. This position has been convincingly defended by Dorf and Buchanan (see here for a brief summary and citations). The 14the An amendment would be useful here, but it is not the central issue (the conflict between duly enacted laws would exist even without the wording of 14e Amendment). This is important, because the language of the 14e The amendment is far from clear, which means the court can do whatever it wants.
If we reach the debt limit, some degree of financial disruption is inevitable due to uncertainty about the legality of the administration’s strategy. (Perhaps the strategy least prone to legal uncertainty is to pay off all creditors on a first-come, first-served basis, but first-come, first-served will make bondholders rigid and clearly disrupt financial markets .) Perhaps this uncertainty should have been cleared up by ex ante litigation, although that would give the Supreme Court the power to issue an opinion intended to benefit Republicans. In any event, although a lawsuit is pending, it is far from certain that the legal uncertainty will be resolved before the limit is reached.
So where are we?
Where does this lead us? I am not sure.
In the long term, the only solution to our debt accumulation problems is to develop a national, bipartisan consensus on fiscal policy. Obviously, this is impossible in the present moment. I will talk about it in the next articles.
Given the current situation, I tend to agree with Ezra Klein that announcing an intention to use unconventional methods is politically risky. The same goes for the refusal to negotiate, at least without a convincing explanation that most voters can understand. Biden and the Democrats are supposed to be our non-crazy political party. As I suggested earlier, I don’t think the arguments about hostage taking, etc. are compelling to voters, and voters may well blame Biden if he refuses to negotiate and a default triggers a severe recession. It may not be fair, but politics is not a poof.
As I have said before, the best way to refuse to negotiate the terms offered by House Republicans is to offer to negotiate on the future of Social Security, Medicare and Medicaid. But that train probably left the station. Given where we are today, the best thing is to agree to negotiate and compromise, but to insist that spending cuts must be accompanied by tax increases on the rich, dollar per dollar, and to fight for reductions that reflect democratic priorities. Negotiations over those terms may well fail, but Democrats would have a strong case that any breakdown was due to Republican intransigence. It could force Republicans to pass a sharp increase or allow Biden to blame Republicans for his unconventional actions (if he takes them) and for any economic harm resulting from their intransigence.
Finally, suppose Biden thinks the best response — the least unconstitutional and least economically damaging option — to a failure to raise the debt ceiling is to simply ignore the debt ceiling. This is the Dorf/Buchanan position. In this case, the president could announce that if the debt limit is reached, he will continue to issue debt to meet his obligations under the tax and spending laws of Congress, because according to him, that is the solution required by the Constitution. However, to be courteous and bipartisan about it, he could say he would consider defaulting on the debt if Republican leaders in the House and Senate asked him to do so in writing.