One Interpretation of the Debt Limit

An opinion column from Friday’s Wall Street Journal painted a sanguine picture of the potential collision of the United States Treasury with its statutory debt ceiling.  The column, entitled, “The Myth of Government Default,” by David B. Rivkin, Jr., and Lee A. Casey, can be found here if you have an Internet account with the Journal, but just in case I will offer the following brief excerpt:

 Contrary to White House claims, Congress’s refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America’s outstanding public debt, with calamitous consequences for our credit rating and the world’s financial system. Section 4 of the 14th Amendment provides that “the validity of the public debt of the United States, authorized by law . . . shall not be questioned”; this prevents Congress from repudiating the federal government’s lawfully incurred debts… Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.

Allow me to provide a slightly more elaborate and general summary of this argument as it circulates in the Washington ether.  Admittedly, this argument is somewhat less measured and nuanced than that presented by Rivkin and Casey.

Some believe that failure to increase the statutory debt ceiling would cause the federal government to default, which those persons contend would entail serious ill effects, this argument goes.  However, in fact, even if the debt limit is not increased, the federal government need not default, which is defined accurately as the failure to service or redeem in a timely fashion its outstanding debt instruments.  The courts have held that servicing the debt, which is mandated by the Constitution, has rightful precedence over paying other obligations, which are sanctioned by mere laws.  So the correct policy choice today is to refuse to increase the debt ceiling, and thereby to win political leverage in the debate over the budget – which can be achieved at no risk of a financial market event.

I see three major problems with this argument.

First, acknowledging that the authors are attorneys and I am not, all current claimants against the Treasury have legal standing.  (Any who do not are guilty of fraud.)  The reason why those people figuratively are queued up outside of the Treasury waiting for payment is because a law gives them that right.  And the Constitution does say in its elegantly spare language that one of the obligations of the President is to “take Care that the Laws be faithfully executed” (emphasis added).  In the absence of a license to practice, I will stipulate that the conclusions stated by Rivkin and Casey are sound inferences reached on the basis of existing case law.  However, I would add that an instance of an insolvent United States Treasury surely would raise new legal issues for which there are no exact precedents.

In my limited career in government – noting again that I am not an attorney – I have observed a practical standard of legal prudence that is always observed by responsible officials in the executive and in the legislature:  Whenever possible, avoid actions that are likely to take the federal government to court, even if you believe that you are highly likely to prevail.  In theory, the executive branch can walk and chew gum at the same time.  In practice, it can’t.  When an existential issue is being adjudicated, everything else stops.  The interests of the United States in this world cannot be managed by an executive so encumbered.  To be clear, if this Congress takes this President to the brink of default, I am quite sure that this President will do what he perceives to be necessary to protect what he believes to be the interests of the nation, and the rightful authority of his successors.  However, this is not the best place for this country to go at this time – no matter which side of the budget issue you happen to take.

Second, even if you dismiss that first legal objection, you quickly find yourself in a practical morass.  In partial support of the argument in the Journal, the Treasury does have what amount to two separate payments systems: one for the servicing of Treasury securities, and one for everything else.  But suppose that you do decide to pay all of the obligations of debt service and debt refinancing, and subordinate all others.  You therefore cannot pay all of the “other” obligations in a timely manner.  But the current payment system is not physically capable of either (a) deferring payments or (b) choosing from among those “other” claims which payments are of the highest priority and must be made first, and which can be deferred with less adverse consequence.  Creating such reliable capability would take far longer than the nation has in this current dispute.  And if the Treasury were to attempt to prioritize payment among those “other” claims, it would be back in court on the ground that those who were prioritized down would not have been given equal protection under law; there is no authoritative research on this issue, which of course has not yet been tested in court.  We have a Prompt Payment Act, which establishes standards on the federal government, and imposes penalties on it if it falls short of those standards.  And clearly, entities that were not paid promptly would be economically harmed, with cascading knock-on effects on the economy as a whole.

(Another recent opinion column in the New York Times by Edward D. Kleinbard, also an attorney, suggested that the federal government could distribute “registered warrants” – another term is “scrip” – to circumvent a failure to increase the debt limit. (It might be fair to characterize Kleinbard’s political orientation as somewhat different from Rivkin’s and Casey’s.)) Personally, I am skeptical about that idea as well.  The cost to recipients (third parties would be likely to accept such “funny money” only at a discount), the cost to create and distribute such large volumes of this sort-of currency on short notice, and the potential for counterfeiting and other fraud would be just the first items on a list of potential show-stoppers.)

Finally, the argument that the term “default” applies only to debt service and redemption, to the exclusion of all other legal obligations, could prove too legalistic.  Markets might react as a matter of principle to a failure of the federal government to make good on its “other” obligations.  But markets also could conclude that prioritizing debt service in a cash-short nation entails risk even to debt service.  The Treasury’s cash flow is subject to considerable uncertainty.  For a sovereign whose paper is the ultimate safe asset, that uncertainty is not a major concern.  If cash is a little short of expectations at some particular time, you simply hold a slightly bigger auction to make up the shortfall, or you tap cash reserves.  If the Treasury is up against the debt limit, however, then by definition it has, for all practical purposes, no cash reserves.  And if it should find unexpectedly and suddenly that it cannot both make a Social Security payment (or any other non-debt-service payment that is defined as a “priority”) and redeem or service its debt, then even in a Wall-Street-Journal world, Treasury debt holders may discover that their liquidity is at risk.

Implicitly, Rivkin and Casey in the Journal, and other more-strident voices in the political echo chamber, appear to believe that the inchoate mass of “other” government spending is infinitely postponable.  I wonder how many in their number would agree on precisely which parts of federal government spending are so time-insensitive.  Anti-government small businesspersons who sell to the government probably would have a mild preference for being paid.  The anti-government elderly likely would prefer that their physicians be reimbursed by Medicare in a timely fashion, lest those physicians choose to cease participating in the program.  Anti-government persons who happen to drive might want the construction projects on their sections of the interstate highway system to proceed toward completion.  Anti-government persons who eat might be concerned if food inspections begin to run behind schedule.  And so on, through enforcement of the law and the operation of the national parks.

In sum, and in my opinion (don’t take that to either the bank, the Treasury window, or the Supreme Court), one might be comfortable with the strategy that is at least offered, if not espoused, by the Journal columnists in a world of instantaneous and definitive judicial decisions, perfect information, and infallible and instantaneously fast computer systems and software.  But that may not be the world in which we live.  Additionally, it would help their case if one believes that government is pure waste and is irrelevant, or even inimical, to the progress of commerce or the quality of life – in which case interrupting government’s function via a constraining statutory debt limit would only reduce that waste, and would be purely beneficial.  That condition too may not hold.  Therefore, one might conclude that the use of the debt limit as a political bargaining chip entails excessive cost, or at least the risk thereof – even apart from the danger of a global financial panic, or a long-term increase in the interest rates at which the public debt must be serviced.

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