What Ceiling?

As I write this it is May of 2023. A Democrat is president of the United States and the Republican Party has recently gained a narrow majority in the House of Representatives. Unsurprisingly, the odd situation called the debt ceiling crisis has surfaced again. Deja vu, once more. Perhaps certain members of Congress can’t remember any historical events that occurred more than ten years ago, or perhaps their ideological framework, or the wishes of their financial supporters, won’t allow them the luxury of learning from the past, but we have re-arrived at an impasse very similar to one that almost brought the U.S. economy to its knees back in 2011. President Biden and the Republican leadership are reprising a scenario almost identical to the one that the Republicans led us into with President Obama (and, notably, then-Vice President Biden). But even that all started quite a bit further in the past.

Thanks to spending on the revolutionary war the United States was in debt from its inception. But there was no debt limit until the First World War. In 1916 a significant proportion of Congress opposed the size of the spending required to create a military force that was capable of fighting a modern enemy. What was required, in fact, was a compromise; the first of many. The only way to get enough support in Congress for the war legislation was to put an arbitrary limit on the total amount that could be borrowed, so the first debt ceiling law was born. This limit on indebtedness is not in the Constitution. It was a creation of Congress, the branch of government that the Constitution charged with deciding on federal spending, and the only way to push the debt higher according to that law is through another act of Congress. It is an odd arrangement, however, because Congress can continue to pass other legislation that causes federal spending to increase well beyond that debt ceiling. It does so with great regularity, but the executive branch of the government cannot actually spend the money appropriated by Congress unless Congress subsequently raises the debt limit. Congress has done exactly that on an average of more than once a year in the past five decades, and for the most part there have been minimal problems. They’ve done so because failure would cause serious consequences; the United States would be unable to pay the expenses that Congress had already incurred, including scheduled payments to contractors and Social Security recipients and Medicare clients and bondholders, foreign and domestic. Any defaults would immediately cause the credit rating of the country to decline significantly and could cause future creditors to go elsewhere. Because current creditors are worldwide, it could also lead to an international monetary crisis.

Congress was relatively reasonable with the ceiling until the 1992 election of President Bill Clinton. In the 1994 mid-term election the Republican Party gained a majority in the House of Representatives for the first time in 40 years. They decided to take advantage of that win to force significant reductions in federal spending; specifically, spending on social programs. Clinton, along with almost all Democrats in congress, disagreed. That led to a 1995 standoff on the federal budget that led to the longest government shutdown in history, a 21-day disaster. The next year the GOP leadership followed up by demanding major budget cuts before they would agree to raise the debt ceiling. They wanted $245 billion in tax cuts, restraints on Medicare and Medicaid growth, significant changes in welfare programs, and a balanced budget within seven years. Clinton compromised a bit, and before a default could occur Congress passed a bill that raised the ceiling, eased regulations on small businesses and made slight changes in taxes.

Democrat Barack Obama was elected president in 2008 with a Democratic majority in Congress. Then in the 2010 mid-term elections the GOP, assisted by a new more radical anti-deficit group called the Tea Party, gained a 49-seat majority in the House of Representatives. Not long after that the debt again approached the ceiling. As in 1995, the new House majority demanded major concessions in social spending. It was estimated that if the ceiling were not raised, the U.S. Treasury would exceed its borrowing authority by August 2nd. On July 31st, two days prior to that date, a deal was reached in which the ceiling would be raised in exchange for a complex package of future spending cuts. Despite this agreement the financial markets declined dramatically and credit-ratings agencies like Standard & Poor’s downgraded the credit rating of the United States for the first time in history. The Government Accountability Office (GAO) estimated that financial changes due to the late approval in raising the debt ceiling would raise borrowing costs by $1.3 billion in 2011 alone.

In their compromise, Democrats and Republicans agreed to the Budget Control Act of 2011 in which Congress promised to cut spending by $1.2 trillion as it raised the debt ceiling by some $900 million. There was also a backup plan. If Congress failed to figure out how to cut the budget an automatic sequestration plan would begin. By 2013 Congress had failed, and the backup plan cut the budget of all federal agencies by an amount sufficient to make up the $1.2 trillion savings. The reductions didn’t apply to Social Security, Medicaid, veterans, or civil and military employee pay, but the other effects were not a good experience for the many federal employees who were laid off and for citizens who depended on their efforts. Conservative estimates noted that it cost the larger economy more than 700,000 jobs. However, it seems that Republicans didn’t learn from any of that, to the point that they are clearly willing to make the same mistakes for a third time now, in 2023.

Who is willing to do that? On April 27 almost all of the Republicans in the House voted for a debt ceiling bill tied to massive spending cuts. On May 5th 43 Republican senators signed a letter opposing raising the debt limit without such cuts, enough to sustain a filibuster to block any other debt ceiling bill. Note that whenever the Republicans complain about “excessive” federal spending, which they do only when a Democrat assumes the presidency, they conveniently ignore one form of federal spending that accounts for a significant portion of the national debt. That is the revenue foregone in tax cuts in the “tax reform” laws passed under presidents Reagan (1981 and 1983), G. W. Bush (2001) and Trump (2017). All of these bills increased the deficit and debt significantly; estimates have indicated that if the Trump tax cuts had never been passed it would not now be necessary to raise the debt ceiling. In the face of the GOP’s single-minded opposition, President Biden has only a few options:

One is to accept the GOP demands and go ahead with the massive reductions in social services and infrastructure spending that were contained in the bill passed by the House. This is unacceptable, as it would cause suffering for millions, in jobs and healthcare and many federal services, and could push us into a lengthy recession. Not only that, but the Republican Party would have learned, once again, that hostage-taking works and will be encouraged to repeat the threat in the future.

Second is to refuse to accept anything other than a single-purpose bill to raise the debt limit, with the likelihood that the GOP would refuse and would allow the nation to fall into default, another option that could severely damage the national and international economy, not to mention the status of the United States as a world financial leader.

Third, the U.S. Treasury has the power to issue platinum coins in any denomination. They could create two such coins, designate their value at one trillion dollars each, and deposit them in the Treasury account in the Federal Reserve (the Fed). The Treasury could then withdraw funds from that account to pay its obligations. A similar option would have the Fed purchase an option to buy government properties for two trillion. In the future, after Congress lifted the debt ceiling, the president could buy back those options or the coins. In the meantime the government could avoid any chance at default. Both of these options were discussed back in 2011 but not taken seriously despite the fact that they are very similar to the practice of quantitative easing that the Fed used to bail out the private sector after the 2008 recession..

Fourth, President Biden could declare that Section 4 of the 14th Amendment to the Constitution makes the debt ceiling law unconstitutional. That section states, “The validity of the public debt of the United States, authorized by law, including all debts incurred … shall not be questioned.” In the 1935 case Perry v. United States the Supreme Court held that Section 4 prohibited a current Congress from abrogating a debt contract incurred by a prior Congress. In other words, it’s neither necessary nor proper for today’s 118th Congress to reject or approve a debt limit; previous congressional sessions have already considered and voted on the current financial obligations when they passed the legislation which called for those expenditures. After that, it becomes the job of the executive branch to honor the previous laws and spend the amounts required. Under this interpretation, it is the president’s duty to ignore the debt ceiling.

If President Biden would follow this strategy he and his administration would undoubtedly be taken to court, a process that could take years to adjudicate. If, in the end, the Supreme Court rules against using the 14th Amendment in this manner, President Biden will still have significantly delayed the default and the types of destructive events or legislation that could have occurred in June of 2023. If, on the other hand, the Supreme Court rules that the congressional debt limit law is, in fact, unconstitutional, not only would the current crisis be resolved, but a recalcitrant majority in one house of Congress would never again be able to hold the “full faith and credit of the United States” as a hostage to force the United States to enact unpopular or destructive budget options. To avoid the errors of the past and to stop misuse of the debt ceiling in the future, it’s time to give the 14th Amendment a try.

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