Let's not absolutize the public debt

Sandy Levinson

Many of the arguments, including perhaps my own, seem to be suggesting that there's something almost sacred about the public debt. But can that be the case? We allow repudiation of private debts all the time; that's what bankruptcy is about. And, for better or worse, Blaisdell (1934) significantly weakened the forced of the Contract Clause, which was supposed to give creditors a big axe to wield against states passing debtor relief laws that took the form of impairing "the obligations of contract." So maybe there's a difference between private and public debt. Surely there is, but one message of Perry is that the United States could in fact renege on its obligations to pay gold by virtue of basically presidential fiat based on the altogether accurate belief that sticking to the promise set out on the face of the currency itself was in fact not enforceable. (A majority did seem to suggest that repudiation was unconstitutional, but, as with Marbury, the majority also came to the conclusion that they didn't have the power to do anything about it. And it is well known that FDR was prepared simply to ignore the Court on the grounds basically of emergency power. I don't know if the Court was actually aware of that, but they may well have surmised it.) And there are many conservatives these days who are in effect calling for states to repudiate their solemn debts regarding public pensions, by declaring bankruptcy. (Conservatives are discovering the merits of Blaisdell after attacking that decision for some 75 years.)

So it does seem basically a political/economic decision as to when one honors debts and when, on the other hand, one simply says, "I'm not goin to pay. Sue me (if you can get standing and if the state itself hasn't provided a perfectly legal means of debt repudiation"). Imagine if the current debate were about the wisdom of the US honoring all of its public debt, with good faith arguments being made on both sides about the costs and benefits of repudiation. Would we (i.e., political liberals) necessaarily be arguing that the Constitution simply disallows that, even if it might appear, on balance, to be the wise thing to do? Wouldn't such an argument require repudiation of Blaisdell and adoption of Sutherland's extremely powerful dissent, based on text and history (whereas Hughes's majority opinion was based far more on doctrine and prudence)?

Isn't the key to understanding the current argument the fact that no one (at least in "mainstream politics" or economcs) is arguing that refusing to honor the US debt would be desirable? Indeed, what makes the negotiations so dramatic is that everyone professes to believe that it is essential not to default. That being said, there is obviously a difference of opinion about the consequences of default. I must say that I find striking the lack of any market response, at least so far, to the prospect of default. Maybe everyone believes this is indeed pure political theater, and that a rabbit will be pulled out of the hat at the last minute, so that only chumps (like yours truly, perhaps) take seriously the possibility that our government is so dysfunctional that a default will in fact occur. Or, perhaps, sophisticates believes that the consequences of default are overrated. We will still be the 800-pound gorilla (maybe now only the 775-pound gorilla) and our debt will still be safer, all things considered, than any other country or area (including, say, Europe).

But if one does believe, as Timothy Geithner appears to, that a default would be "catastrophic," then one shouldn't be so blase. Imagine an asteroid coming toward the earth, which will hit us in a month unless we buildl and use a gizmotron, which would cost a trillion dollars of unappropriated funds. (And Republicans would argue that we can't raise taxes in order to build the gizmotron.) Would we simply accept this and get ready for the big hit, or would we demand that the President "act"--or that the military take over and do whatever is necessary? In any event, don't our arguments (including my own) about the Constitution depend, ultimately, on empirical judgments about the consequences of default, unless one absolutizes one particular form of property, i.e., public debt?

Musings on a Saturday afternoon....

[UPDATE: It's now Saturday night, the "grand deal" has utterly collapsed, not least because the Republican presidential candidates seem to be condemning any deal at all that would raise the debt ceiling unless it's accompanied, at the very least, by a balanced budget amendment. Intrade currently says its 80% likely that the US won't default. So query: what will the Intrade odds be on Monday, and what will the stock market do? Is this moving from political kabuki to a genuine probability of the US defaulting because of our utterly dysfunctional political system, caused by all sorts of things, including, of course, the Constitution itself?]

[FURTHER UPDATE: The current Intrade site indicates that the market now assigns only a 19% probability to a default, and the price of a "no default share" has gone up by ten cents. I am curious why this is the case, given Obama's statement that he will veto any short term authorization of a higher debt and the continued proclamations by congressional Republicans that any increase of taxes is unthinkable. Mitch McConnell has assured us that he has a secret plan that will make sure there is no default, but, as with Nixon's 1968 secret plan, I have no idea what what it could possibly be, given McConnell's insistence on new taxes and Obama's promise to veto any short-run extension. But it is clear that the Intrade market, at least, views what is going on in DC as mere Kabuki (or perhaps the better analogy is to Javanese puppets), full of sound and fury but signifying nothing about the genuine potential for default. I hope the investors are correct.]
Posted 12:58 PM by Sandy Levinson [link]