Debt-Limit Endgame

Unpredictable. Unprecedented. Dangerous.

The day of reckoning over the debt limit drama will soon be upon us.  No one really knows for sure how it is going to end up.  There are a number of important points to consider, however, as we move closer and closer to some resolution or catastrophe.

There is no deal to be had

Ever since the House passed a one-year debt limit increase along with its Freedom Caucus wish list of massive discretionary spending cuts and repeal of multiple Democratic legislative achievements on health care and climate change, the media narrative has been that there will be a “deal.” The deal, it is predicted, will find a “middle ground” resulting in spending cuts in exchange for a debt-limit increase.

I don’t think that is going to happen.

The dynamics of “no deal” have been baked into the cake since Kevin McCarthy made mass concessions to his right flank in order to gain the speakership. The rules McCarthy agreed to made clear that he would be removed from his position if he were to bring legislation raising the debt limit to the House floor that did not have the approval of 218 of the 223 members of his caucus. Such legislation would therefore have to meet the severe fiscal and policy demands of the approximately 50 members of the House Freedom Caucus, which, it is worth reminding readers, voted unanimously not to certify the election of Joe Biden to the presidency even after the January 6 riot. 

So, in practice, the McCarthy concessions meant that any bipartisan debt-limit increase that passed the Democratic controlled Senate could not possibly even be taken up in the House, even if it might be able to be passed with, let’s say, 120 Republicans and a 120 Democrats voting for it. And any legislation that can meet the tastes of the Freedom Caucus, cannot possibly get the approval of 60 Senators (oh yes, Democrats can filibuster legislation they hate too). 

There is no deal. 

A discharge petition will not work in the House

Others have imagined that a clean debt limit increase could be brought to the House floor through the arcane process of a discharge petition, which would require a handful of Republicans to buck their party and team with Democrats. This is even more fantastical than the idea of a clean debt limit passing the House. There are no Republicans ready to Liz Cheney their careers or invite MAGA rallies outside their homes. A debt limit increase that emerged from the House via a discharge petition might also struggle to overcome a Republican filibuster in the Senate. This is another dead end.   

McCarthy is not going to blink

Biden’s strategy has been to refuse to negotiate with McCarthy and presume that as stock and bond markets destabilized as the doomsday approaches, McCarthy would be forced to pass a debt limit that could gain Biden’s signature. 

But it has been clear since January that a couple dozen House Republicans would prefer the country to go into default than to pass a debt limit deal that does not meet their fiscal and policy requirements. And there is no way McCarthy will fall on his sword by bringing a debt limit package to the floor that would be passed with substantial Democratic votes and few GOP legislative priorities attached to it.

So, Biden’s idea of a “clean-debt limit increase,” or even a debt limit increase with palatable spending caps and minor policy changes is most probably not going to happen. 

The legal debate over the constitutionality of the debt limit

Since there is likely to be no deal and no debt limit increase emerging from the Congress, another option for President Biden is to claim that the debt limit is unconstitutional and instruct Janet Yellen to borrow more money to pay off our bonds, keep the government running, and issue Social Security checks and other entitlements to beneficiaries.

This possibility has spawned a fierce legal debate on the pages of the New York Times. Former jurist Michael McConnell has argued that this constitutional argument is “dangerous nonsense” and Harvard Law professor Laurence Tribe has asserted that “there is only one right answer” to the question of whether the debt limit is constitutional, “and that is no.”

McConnell’s argument is straightforward. The Constitution gives the Congress the exclusive power to tax, spend, and borrow money. He argues that the debt limit statute falls within these powers as a positive authorization from Congress to the Executive to borrow money up to but not over the limit. The President, he claims, has no constitutional power to borrow money that is not authorized by Congress – so any bonds issued in excess of the debt limit would have no legal authority and therefore would not be backed by the full faith and credit of the United States. Not only would Biden be acting illegally by issuing such debt, McConnell claims, but the bond market would sniff this defect out immediately and “sensible investors would not purchase such bonds or would demand such a premium as to make them uneconomical.”

Tribe disagrees. He believes that Biden may issue new bonds above the debt limit so he can exercise his constitutional authority to “take Care” that a myriad of tax and spending laws that Congress has enacted in the past “are faithfully executed.” In other words, Tribe believes that the single law – the debt limit first enacted in 1917 – may be circumvented if it frustrates the ability of the President to execute annual appropriations laws that fund government operations, massive entitlement programs like Social Security, laws that require prompt payment of interest on government bonds and obligations to reimbursement hospitals for services provided seniors under Medicare. One law may be violated, Tribe claims, “in order to uphold every other.”

McConnell’s analysis, in my view, suffers from ignoring the actual circumstances the country is facing.  It is not the “ordinary stuff of politics” for one chamber of Congress to threaten catastrophe for the country if its agenda is not fully implemented. Surely, McConnell cannot believe that the President is powerless, for example, to maintain the safety of our nuclear arsenal, if Congress refuses to appropriate funds for this purpose unless the President signs a piece of legislation that he would otherwise veto. Of course, the Constitution anticipates compromise during times of divided government, but there is a compelling reason that blackmail is outlawed under federal law. Coercion is not the same as negotiation. To allow the threat of default to be weaponized against a president would permanently distort the balance of powers between the branches that the Constitution so carefully establishes.

McConnell points to the agreement Biden helped to negotiate under similar circumstances in 2011 as the model for how the current crisis should be resolved, but doesn’t acknowledge what a farce this “solution” turned out to be.  The 2011 agreement set up a special “super committee” in Congress to reach a budget accord by a date certain and provided that there would be an automatic across the board sequester of federal discretionary spending if the committee could not reach a deal. The super committee failed, the sequester went into effect, and then Congress spent much of the next decade modifying and circumventing the spending caps that the sequester put into place. The mindless cuts the sequester caused were bemoaned by both sides of the aisle.

McConnell also fails to acknowledge that Congress has enacted laws that directly conflict with each other. Why, under McConnell’s analysis, should the debt limit law be enforced, but the law which requires that the “Secretary of the Treasury shall pay interest on the public debt” may rightfully be ignored? McConnell does not say. Last December 23, Congress passed legislation appropriating $1.7 trillion to fund government operations. On that very day, the public debt was $31.34 trillion and the debt limit was $31.40 trillion, yet Congress refused to raise the debt limit. At what point is a president charged with “faithfully executing the Law” allowed to say, “Give me a break!”

In the late 1990s, the House created the Gephardt rule to avoid the incongruity of enacting tax and spending legislation that created debt, but not authorizing the issuance of that debt. It worked for many years to align the budget with the debt limit, but was repealed most times the GOP controlled the House this century, including just this past January. The Gephardt rule provided that the debt limit could be raised when the House passed a budget resolution that set the levels of spending, taxation, and debt. The current House GOP, however, had no use for this rule since it wanted to use the debt limit for legislative leverage and, in any event, had no interest in passing a budget resolution that would have made clear the details of the spending cuts for which it wants Biden and the Democrats to share responsibility. And thus the Gephardt rule was cast aside – leading to the incoherence of having tax and spending laws that mandate debt far in excess of the statutory debt limit.  

For all these reasons, I find the Tribe analysis compelling.  Congress’ failure to coherently exercise its fiscal responsibilities has put the President in an impossible situation. The path of least constitutional injury is to temporarily disregard the debt limit law, while enforcing all the other laws that Congress has enacted. It was once observed by Justice Robert Jackson that the “Constitution is not a suicide pact” – Tribe has put forward an imperfect but tenable constitutional solution that avoids putting the country on an economic suicide mission. McConnell has not.

What happens if Biden ignores the debt limit?

First, McConnell argues that interest on any bonds issued above the debt limit will be exorbitant because such debt would not be “authorized by law” and thus would not qualify for protection under the Fourteenth Amendment that bars Congress from questioning “the validity of the public debt.”  

I am no bond expert, but neither is McConnell.

The United States issued debt prior to the Fourteenth Amendment that was always repaid, so it is not a certainty that this protection is necessary to make the bonds economically viable.

Also, by issuing this debt in order to pay off old debts and other obligations, the United States would be backing its full faith and credit. Interest on new bonds might be higher than ordinary because of the debt-limit standoff, but that will be a small price to pay to avoid default, which might make global interest rates permanently higher and stifle economic growth for decades.

Second, the matter may go to the courts.  Yet, I do wonder, what party would have standing to sue Biden for issuing the debt in order to avoid default? No one is harmed and everyone gains by the government paying its debts and complying with every law but the debt limit.  I’d be interested to know if anyone has seen compelling legal analysis on this issue.  What I read here does not convince me that House Republicans could bring a successful lawsuit based on the idea that its legislative leverage is compromised by Biden’s failure to comply with the debt limit. This also seems to be a classic “political question” between the two elected branches of government that the courts might be wise to stay out of. And one also has to wonder if a) the House would actually seek a court injunction that would force an unprecedented government default and b) a court would have the guts to issue that injunction. Even this Supreme Court might have qualms about a judicially ordered government default.

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The only thing we know for sure is that the debt-limit endgame is going to be messy, uncertain, and damaging.