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Saturday, January 12, 2013

The 14th Amendment and the Debt Ceiling

Today's New York Times reports that Senate Democrats called upon President Obama to employ "any lawful means" to avoid default should the "debt ceiling" be reached.  The reporter writes that "A Democratic aide said the senators would be inclined to have the president declare unilateral authority under the 14th Amendment, which says the debt’s validity 'shall not be questioned.'”

I was appalled.  All the Senators who are so "inclined" have taken oaths to uphold the Constitution.  Neither the 14th Amendment nor any other part of the Constitution confers "unilateral authority" on the President to borrow money on the credit of the United States Government.  That power is expressly within the power of the legislative branch (see Article I, section 8, clause 2: "The Congress shall have power ... to borrow money on the credit of the United States"). As Professor Laurence Tribe wrote in a New York Times op-ed, "The Constitution grants only Congress — not the president — the power 'to borrow money on the credit of the United States.' Nothing in the 14th Amendment or in any other constitutional provision suggests that the president may usurp legislative power to prevent a violation of the Constitution." A "14th Amendment solution" is completely at odds with the law the Senators sponsoring it have promised the nation they will uphold.  

The "14th Amendment argument" rests on two prongs.  1) disregarding or misinterpreting the phrase "debts of the United States, authorized by law" in the 14th Amendment  and 2) totally misunderstanding, or twisting, what "validity" means in respect of debt incurrence.  

1.  Here is the 14th Amendment text at issue:

"The validity of the public debts of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

The phrase "authorized by law" clearly modifies the words "debts".  Thus, for the validity of a debt of the United States to be unquestionable, that debt has to be "authorized by law".  There is no law that authorizes the United States to take on "debts" for borrowed money in excess of the debt ceiling and no law that authorizes any government official to do so without Congressional authorization.  So no Treasury notes, bills, or bonds can claim the protection of this provision if giving effect to their issuance, the total amount of debt outstanding exceeds the debt ceiling. 

Proponents would argue that the word "debts" means all payment obligations that would arise under current law; thus all such payouts are "authorized by law" not just debt for borrowed money. 

First of all, that isn't accurate. A very large portion of those so-called "debts" are actually not "debts" at all on any given day but simply forecasts of payments that are expected to be made as a result of future transactions, such as forecast salary for future services by federal workers, or projected bills on account of future visits to a healthcare provider for medical treatments covered by a federal health insurance program.  But workers could be furloughed and programs repealed, without leaving a legal debt of the government to either the worker or the program beneficiaries. The only "debts" at any given moment, are those as to which all events necessary to qualify for payment by the government have occurred. The rest is just an estimate about what will arise in the future.

Second, many Federal expenditures do not have specific payment deadlines the way bond maturities do.  So it is inaccurate to speak of the government defaulting on many types of Federal payments, even if they are "debts".  It just hasn't made them yet.

Third, as a matter of logic, the argument is fallacious and misses the point.  Saying Congress has authorized debts of a certain type -- not for borrowed money -- does not prove Congress has authorized debts of a different type -- debts for borrowed money.  There is a specific statute that says how much debt for borrowed money Congress has authorized, and debt for borrowed money in excess of that is clearly not "authorized by law".  

Fourth, if you believe that all spending is public debts and all debts should be paid, you must believe that the debt ceiling has been breached perpetually, because spending in a given year has always exceeded the debt ceiling.  But legal arguments that cause other laws and centuries of practice to be considered to have been nullities are usually rejected.

Last, the argument proves way too much. If you believe that all anticipated spending is "public debt" and its validity can't be questioned - even by a law passed by Congress and signed by the President, then logically you must believe that Congress can't adopt laws to reduce that forecast spending because that would call that future spending into question.  "No budget cuts ever" must be your mantra. Maybe it's a Constitutional violation for a lawmaker, a candidate or a pundit even to state in a speech or a column that the US won't be afford its spending in the future. Or for an arm of the government, such as its actuaries, to make such a forecast, even if it is statistically unassailable.  Tribe makes this point in his op-ed referenced above.

The proponents go on to argue that, if you believe the future payouts are all debts, there is a clear conflict between the law that establishes the debt ceiling, which will get in the way of paying them when due, and thus the 14th Amendment is violated by the debt ceiling.  Again, the premise is wrong but, in any case, there are multiple obvious answers to this. 

First, there are legally other means of paying those obligations, even if they are "debts", such as collecting taxes, printing money or selling federal property.  So there is no blatant conflict per se; rather, there are actually thousands of laws and plans and decisions that don't completely harmonize.  It's their sum that is in alleged conflict with the Constitution, as so interpreted, not the debt ceiling law alone. 

Second, even assuming a conflict exists between two statutes and further assuming it violates the Constitution, both of which I think are incorrect, nothing in that argument proves that the debt ceiling is the law that gets called un-Constitutional.  The debt ceiling limits payments under other laws, but the other laws call for payments that violate the debt ceiling law. It's a chicken and egg argument logically. The conflict can be harmonized just as logically by holding every appropriations bill passed after the debt ceiling was first adopted to be un-Constitutional.

2.  "Validity" is a legal concept in regards to a payment obligation.  It is not a financial representation or warranty or anything assuring means of payment.  It is customary in loan documentation for the borrower to represent when the loan is made that it is valid; a typical phrase is "legal, valid and binding".  That says nothing about whether the borrower will be able to pay when due, which will depend on events occurring after the loan is disbursed. For a large enough loan, a supporting legal opinion may be required by the lender, but when a lawyer says "the loan is legal, valid and binding on the borrower" no one understands that to mean the lawyer is opining on the non-legal topic of whether the loan will in fact be paid when due.  For a business borrower, payback of a debt will depend on the performance of its business and the degree of solvency and liquidity when payment approaches.  For a government borrower, it will depend upon the appropriations process and its access to capital markets.  A creditor concerned about security of payment may take collateral.  None of these concerns are legal questions having anything to do with "validity". 

In the context of a debt issuance by a legal, as opposed to a natural, person, "validity" just means that all the legal steps that the entity's governing rules establish for debt issuance have been taken appropriately, and there are no legal restrictions binding on the entity being breached by the particular issuance.  It says nothing about whether the steps necessary to have funds on hand to repay the debt when due have or will take place.  Validity is a necessary but not sufficient condition to getting a judgment in the creditor's favor in a court, but that's all; invalid debts may be paid back voluntarily and valid debts may go unpaid due to financial circumstances. For example, a credit card debt may be "valid" for purposes of getting a court judgment, but the debtor may be judgment-proof, having no assets or income available to satisfy the debt, and the debt will go uncollected.  A debt may also be valid for purposes of being allowed as a claim in bankruptcy, but the debt may be discharged without payment in full.  Whether a debt is valid or not is a legal issue but not the same as a financial issue.  

In sum, there is no credible argument that the President has unilateral authority to issue debt for borrowed money, under or in excess of the debt ceiling; the debt ceiling is not un-Constitutional under the 14th Amendment; and default in payment when due of  "debts of the United States" does not question the "validity" of that debt.  The "14th Amendment solution" is even less plausible legally than the trillion dollar coin proposal which I discussed yesterday.