Saturday, July 09, 2011

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.]


yes. You have got it right now. Don't think about it any more, or you may wander off again. :)

Who knows when:

"I must say that I find striking the lack of any market response, at least so far, to the prospect of default."

the response may take place. When it does, many in the market will be lemming-like. Market-timing doesn't work for that many. But if what happens in Greece can impact the market (which it has, both up and down), the potential debt limit default would grease the lemmings' skids over the cliff. If the so-called "smart money" starts to get out of the market, word will leak out and even the confidence fairy will join lemmings. So looking ahead to August 2nd, amateurs can be expected to attempt to time the market in advance as "the days dwindle down, to a precious few ...." In the meantime, some will win, others will lose.

mls admits now that it's not about the Constitution after all. At least until he "wanders off again".

"The general problem of the legal debate between American 'liberals' and 'conservatives' over economic policy is that the majority of both are in favor of the economic power that came about only as the result of the unification of social and economic life that in different situations each decry. If conservative arguments had won consistently in the Supreme Court over the past 100 years, we wouldn't have troops in 150 countries around the world."

Wickard v. Filburn and American economic power.
As American power wanes, capitalism looks less attractive to Americans.

Interesting times.

In a town that engages in over the top hyperbole as a matter of course, Geithner is arguably understating the results of a genuine US public debt default by using the term catastrophic. Think economic armageddon.

Currently, the US has issued $9.749 trillion in public debt (which does not count the various intergovernmental IOUs to SS and such).

US citizens own about half of this debt, with the rest being held by foreigners.

The primary owners are banks and investors looking for safe places to park their money like retirement funds.

Default would immediately wipe out a bit less than $5 trillion dollars of American wealth in the blink of an eye.

For our and the world's financial sector, think the Great Depression bank collapse squared.

Credit will become next to impossible to obtain for small businesses and extortionary for large businesses. Think the Great Depression business collapse squared.

The equity markets will collapse with the business sector.

Pension plans based upon bonds and stocks will be worth pennies on the dollar.

The government of course will no longer be able to borrow to finance 40% of its spending. The resulting economic collapse will reduce tax revenues to a fraction of their current levels. The US will be able to afford a government maybe 1/4 to 1/3 of its present size.

If/when the Fed tries to print money to make up for the shortfall, we go into Weimar-level hyperinflation, sucking in anyone who managed to avoid the shockwaves discussed above.

The markets are calm now because there is more than enough tax revenues to service the debt and no one can conceive of Treasury defaulting on the debt and bringing on financial armageddon to make a political point to Congress.

I agree that it's important to separate the policy and Constitutional issues. The latter, which has engaged so much attention recently, is limited to deciding whether the US can default.

The policy issue is much more flexible, of course. I'd agree that there are times when a nation's best option is default. Argentina recently, Greece now could probably be classed in that category. The US situation, though, is vastly different from those. In those cases the economic fundamentals favor(ed) default. A US default now would be purely arbitrary -- the US is perfectly capable of dealing with its debt.

As with private persons, a voluntary default when one isn't necessary is a stupid policy. That's what makes the Republican game of "chicken" here irresponsible, 14th A aside.

"If conservative arguments had won consistently in the Supreme Court over the past 100 years, we wouldn't have troops in 150 countries around the world."

Broad executive power over the military is a "conservative" argument. George Sutherland wrote the opinion in the Curtis-Wright and United States v. Belmont cases.
The "conservative" opinion in Youngstown was a dissent by Vinson that gave the President more power.

If a situation is "different," yes the rules might change. I find the quote unconvincing.

Default on outstanding US Treasury securities would destroy the world banking and financial system for those are the most basic asset of the worlds banks. Their balance sheets would thus be decimated and no amount of pretense, as in the current mark to make believe of other assets, would not work. The ledger sheets of banks and corporations are filled with advantageous fictions but Treasury paper discounted 20 or 50 or 80 percent would be a bridge to far. US Treasury securities are the worlds benchmark financial security. (Default on the obligation to spend money appropriated for gizmotrons and toilet paper is another matter)

The benign response to the possible default is based probably upon the absolute belief that it can't and won't happen, and 230 years of history, mainly. Now deep thinkers aligned with multi national corporations know that eventually the Treasury will default and underneath the conservative jihad against government is the sub conscious knowledge that default is the end game. For banking and global corporate giants anticipate that their assets and debt will then become the basis of all money. While they now control the levers of money and credit they don't own them, yet.

Lucy, football.

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. There are no good faith, rational arguments for repudiation, because there are no benefits from and enormous costs to the USA if it repudiates. For Greece, yes, defaulting could be rational, because they have a different, and much worse, monetary system.

What "absolutizes" the public debt is a Constitution which every federal officer swears an oath to uphold. That being the case, it IS going to be absolute, unless we either amend the Constitution to permit default, (Imagine what that would do to our credit rating: The moment the amendment was introduced, US Treasuries would be radioactive.) or a government run by oathbreakers.

I'm beginning to get the impression you'd like the latter.

Setting aside and constitutional issues it is almost certain the Treasury will not default on the payment of the interest and principal on its outstanding marketable securities any time soon. Currently the interest cost is less than 14% of the total budget or about let's say 22% of revenues. Remember every time the Treasury pays off the principal of a bill, note or bond they can immediately re borrow that amount. At any rate since bankers run the Treasury and as Geithner says default would be catastrophic you can be sure the first check written by Treasury every day will be repayment of its debt in full.

At root these things are monetary issues. The global monetary system is adrift and out of control. One does not have to be a gold bug to appreciate that. One does also not have to be a John Birch nativist to sort of get that the monetary system run by bankers whose interests are not national but global has muddied the waters of everything including sovereignty and yes, constitutionality. C is as American as Mecca and GS as American as the Greek Islands their traders are lusting for.

On matters of money the constitution always ends up being forced to fit into whatever is possible or expedient.

For instance the Treasury could issue gold and silver coins in the hundreds of billions to pay its bills but the idea never occurs to them.

I picture this:

"For instance the Treasury could issue gold and silver coins in the hundreds of billions to pay its bills but the idea never occurs to them."

in a political cartoon with Geithner responding to a pleading "public beggar" outside the Treasury Building for "Spare change, please," giving new meaning to "Coin of the Realm."

Intrade bettors have what - a few thousand dollars - at most riding on this?

The treasury just issued $28 billion worth of notes which are due to mature on August 4th (two days after the debt ceiling is supposed to be reached.) Investors demanded a shockingly high interest rate of 0.00% in order to compensate them for the risk that they wouldn't see their principle returned (i.e. that the government would default.)

The GOP is leaking the terms Obama's "grand deal" which scuttled any substantive budget reform during the current negotiations on raising the debt ceiling.

Under the proposed tax reform of Obama's deficit commission, tax deductions would be largely eliminated to reduce income and corporate tax rates down to a top rates of 23% income tax and 26% corporate tax. This plan results in a moderate revenue increase under a static model assuming no economic effects and very likely a substantial revenue increase under a dynamic supply side model. In either case, the Dems get their tax increase in exchange for the GOP demand for lower overall rates, far more of a tax increase that playing around with the deduction period of corporate jets.

This was not enough for Obama, however. The President demanded that, after wiping out all the tax deductions, the top tax rates would increase from 23% and 26% to 35% for a trillion dollar tax increase heaped on only top earners and corporations. As a point of context, the top 1% of earners already pay 28% of all federal taxes.

Obama also declined to offer any serious structural entitlement reform.

In sum, all the trial balloons Obama floated in the press about large scale budgetary reform was a lie to get the GOP to the table, force them to walk away and then blame the GOP for the failure of the talks.

Boehner should declare the Dems are not serious and have the house enact a bill with $1 trillion in budget cuts and a $1 trillion increase in the debt limit that will run out next spring as the election heats up. Then conclude by saying the House is moving onto other business.

Our yodeler is indeed a man of "principle" with this:

" As a point of context, the top 1% of earners already pay 28% of all federal taxes."

as his "financial disclosures" at this Blog place him quite distant from the 1%-ers whom he seeks to protect. No sir, our yodeler does not vote his pocket book - unless he expects to strike gold with his soon to be published work of "friction." Our yodeler's "principle" since 1/20/09 has been, because of his hatred of Obama, to do and say just about anything to prevent Obama from being re-elected. Our yodeler discloses this "principle" with his advice to Speaker Bo(eh)ner in the closing paragraph of his comment. As for the House " ... moving onto other business," of course that would be to thwart the re-election of Obama, i.e., "same old, same, old" business. (From our yodeler's mouth to Bo(eh)ner's ear.)

Shut up, Bart

Gentlemen, if you have a spendthrift child who spent his allowance, maxed out the credit card that you pro vided him for emergencies and then comes back to you and demands an increase in his allowance and another credit card to support his newly acquired lifestyle, you tell your child to stop spending more than his allowance. You do not enable the spendthrift behavior by raising the child's allowance or giving him another credit card.


This has nothing at all to do with "shared pain."

The top 1% of earners earn 19% of total income, but pay 28% of all taxes under an effective total federal tax rate of 31%.

Obama wishes to raise that tax burden to have one percent of the citizenry to bear over one third of our tax burden.

Obama, Krugman and apparently you simply desire to rob Peter to maintain your profligate spending.

We've gone through this before.

Republicans don't actually care about the debt. And yet you link approvingly to Republicans.

You call yourself a libertarian yet the wars you like need to be paid for. We have an incredibly wasteful health insurance system and you oppose any attempt to make it match systems which are more economical and modern. You can't have both economic anarchism and the largest most powerful army on earth. Your economic fantasies will not allow you and army capable of fighting the "long war" that you dream of.

D. Ghirlandaio said...

Republicans don't actually care about the debt. And yet you link approvingly to Republicans.

I would agree with that statement concerning the GOP establishment. The only reason the establishment found religion now is because of Tea Party RINO hunting last year and a very large crop of Tea Party frosh in the House.

This is also why GOP approval remains low despite their wave election victory last year. The GOP is on probation.


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.

1) They know that the government will not default if the debt ceiling is not raised and

2) They do not take seriously Obama's threat to default if the GOP does not agree to his plan to raise taxes.

For heaven's sake, the President is using "pulling off the bandaid" and "eating our peas" as analogies when warning of financial Armageddon.

I would guess that McConnell's backup plan involves passing a bill that gives the President or the Treasury Secretary the authority to use existing revenues to pay debt and fund essential services, and, perhaps to issue new debt to the extent necessary to cover these obligations.

If the President were to veto such a bill, would he be acting unconstitutionally under the predominant theory of this blog?

mls is NOT asking a serious question with this:

"If the President were to veto such a bill, would he be acting unconstitutionally under the predominant theory of this blog?"

unless mls can provide a provision in the Constitution or a precedent for a Presidential veto being unconstitutional. Perhaps mls could define what he thinks is "... the predominant theory of this blog."

Shag- I am entirely serious. This is what Professor Balkin said: "Rather, the correct question is whether either the President or Congress, or both, are acting in a way to call the validity of the public debt into question. If they are, then they have a constitutional duty to stop, and take appropriate measures. In this case, I believe that Congress is behaving inappropriately, and they should stop. In order to avoid calling the validity of the public debt into question, they should raise the debt ceiling immediately."

I have some difficulty in understanding what constitutional duty Congress was violating in the situation noted; however, since those words were written, it appears that Congress and the President have switched positions, with the President insisting on conditions to raise the debt ceiling, while Congress is looking for a short term fix that would avert default. (Admittedly, all of this is based on public statements by the parties, much of which may constitute bluffing-- but that was true before as well).

So it seems to me a logical question to ask whether the President is now the one acting unconstitutionally. I am not expecting a logical answer, but I think it is a logical question.

My reference to the "predominant theory of this blog" was not well put. I am not sure whether Professors Levinson, Magliocca and others share this view or not.

Incidentally, Michael Abramowicz will be on CSPAN's Washington Journal tomorrow to discuss this issue.

I'm not a big fan of Josh Marshall but he describes the situation well, though he admits he doesn't understand the "why": Dumbfounded

"There are many things I do not understand about the progress of this so-called debt negotiation. But of many here's one that perplexes me the most. If Hill Republicans will not allow the government to continue borrowing money beyond the current statutory debt limit, I think there's probably a decent constitutional argument that the president must shut down parts of the government and many government payments before defaulting on the country's debt obligations. I'm not saying there's any force that can compel him to do that. But I can't see where the constitution doesn't provide pretty clear guidance on the question. There's enough money coming into the Treasury to service the payments on the current debt. But if you don't borrow more money you have to shut down vast amounts of federal outlays. And the most logical places to start are with Social Security payments and Medicare reimbursements. Stuff like cutting Social Security checks in half starting the following week.

There are plenty of ways you could piece it together. But I think it's fair to say that there's no way to do it without immediate and huge cuts to entitlements and the military. Discretionary spending just isn't a big enough piece of the pie. So why the adamant refusal to put this in front of the public? It seems quite clear to me that if what was coming in early August was an immediate 50% cut in Social Security payments and/or a similar cut in salaries to members of the military and a lot else that the tenor of this whole conversation would be quite different.

And if this all sounds hyperbolic, where exactly do you think the money is going to come from if there's no deal?"

MLS, as usual you miss the point on purpose. If it's unconstitutional to play politics with the debt (let's just say play "real" politics since that's what happening now) it doesn't matter who does it.

Obama's biggest strength was always his biggest weakness: he's a successful black politician in the white mans' political world. He doesn't come out of black politics. His first big political move involved having a competitor, a black woman, thrown off the ballot. I can't see him doing that to a white candidate, it would work against him.

Or it would have once, and that's the point. He's in a position now to step on the Republicans and make it work. He could step on Big Daddy's throat.
But he's afraid. Too bad.

All elected officials have certain duties with respect to the Constitution, including by means of their oaths of office. But the term "constitutional duty" is not one of art. We attorneys have a "constitutional duty" by the oaths we have taken. Many, if not all, American have a "constitutional duty." But federal elected officials do not necessarily violate a "constitutional duty" by the way they vote. I ask mls again, cite some judicial precedent that would make a presidential veto an act that violates the Constitution. What exact provision(s) of the Constitution would be violated? Keep in mind that Jack Balkin's statement related to both the President and Congress. They do have constitutional duties. But if they fail to perform them in connection with enactment of a bill, e.g. Congress failing to pass a bill, or if passed, a presidential veto of the bill, what specific constitutional provision(s) are they violating? This is political. Jack Balkin's posts, read in their entirety, make this point. The Constitution provides for elections to remedy failures of elected officials - as well as impeachment.

mls is " ... not expecting a logical answer, but I think it is a logical question." It sounds more like a rhetorical (or at the least fallacious) question with such an expectation. A proper answer to a rhetorical question may best be rhetorical.

And let's not ignore the political history of the debt ceiling statute as detailed in Anita's article referenced earlier on this or an earlier post on the topic at this Blog. This is political theatre with potentially serious results. Let's stop trying to do a constitutional dance on the tip of a needle. Congress first has to pass a bill; if it does, the President will have to decide whether or not to veto. There are no angels here. Voters, rationally and irrationally, will react to such. This is a republican form of governance provided for by the Constitution.

I'm still expecting on August 3rd a direct deposit of my Social Security check. If it doesn't, I have ample other means. But many of the other 55 million Social Security recipients may not. Consider how a failure to act may impact interest rates, which most likely would increase, perhaps resulting in larger income tax deductions and thus reduced tax revenues. And the stock market roiling surely will offend the many voters owning 401(k)s. No, the sky will not fall, but there may be some dark days. Once again, let's hear the chorus: "The days dwindle down, to a precious few ...."

Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do.
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