Wednesday, October 06, 2021

Debt Limit End Game

David Super

            With the impasse over raising the debt limit continuing and the day of reckoning – October 18, according to Treasury Secretary Yellen – less than two weeks away, the media are full of speculation about what the final resolution might be.  Anyone who claims to know is bluffing.  Nonetheless, some accounts of the parties’ options are significantly incomplete.  Accordingly, it seems worthwhile to lay out some possible paths.  And I cannot resist ranking them in descending likelihood of occurring. 

            The single most likely outcome is a bipartisan deal that will allow both sides to claim they got something.  Sen. McConnell will claim he achieved policy concessions and Sen. Schumer will claim that he did not surrender anything of substance.  Since I have been working in Washington, one of the most common requests I have received from Hill offices is to “please draft an amendment for me but make sure it does not change current law.”  (That experience always makes it challenging to teach a certain canon of statutory construction with a straight face.)  Any number of impressive-sounding amendments are possible that would not change current law in any meaningful way.  For example, if the Democrats have agreed internally to a new, lower top-line number for their Building Back Better reconciliation bill by then, Sen. Schumer could agree to lower the ceiling in the budget resolution to that level.  Sen. McConnell is a remarkably gifted politician and likely would come up with something more elaborate than that.  Still, noisy but largely substance-free deals have been common means of resolving these sorts of problems since polarization has sharpened.

            The next most-likely scenario is an explicit Republican fold.  Democrats are increasingly angry that Sen. McConnell claims Republicans are leaving Democrats to pass a debt limit increase with their own votes while filibustering to prevent them from doing just that.  To deter similar maneuvers in the future, they may be unwilling to help him save face.  Although this brewing crisis has yet to register much with the average voter, business groups reportedly have expressed strong irritation to Senate Republicans privately.   

            The third-most-likely scenario would be for the Democrats to do as Sen. McConnell apparently desires and pass a debt limit increase through reconciliation procedures.  This option appeals to him because the reconciliation instruction would have to “specify the amounts by which the statutory limit on the public debt is to be changed”, seemingly ruling out the common recent practice of suspending the debt limit for some period of time (and hence avoiding the specification of a new number on which Democratic candidates could be attacked).  Some media accounts have overstated the difference between raising and suspending the debt limit:  the debt limit can be raised by inserting a formula, rather than a number, into the statute; this is done routinely when enacting continuing resolutions and other fiscal legislation. 

            As I discussed in more detail in a previous post, to raise the debt limit through reconciliation, Democrats would have to revise the budget resolution they adopted for Fiscal Year 2022 to include reconciliation instructions to raise the debt limit.  This could be done quite expeditiously in the House but would consume fifteen hours of Senate floor time, which would significantly limit the Senate’s ability to perform other functions (such as confirmations).  This also would allow Republicans to offer, and require votes on, a range of politically embarrassing amendments.  (To be sure, this ability would be significantly constrained by the strict germaneness rules that would apply to such a resolution).  Once the budget resolution was revised, Democrats still would have to report out and pass on the floor a reconciliation bill to actually raise the debt limit.  This, too, would be immune from filibuster but would require another twenty hours of Senate floor time. 

            A huge advantage Democrats have in this high-stakes game of Chicken, and a reason that a Republican fold seems more likely than a Democratic one, is that the Democrats will lose the ability to fold several days before the Republicans do.  For Democrats to raise the debt ceiling on reconciliation, they likely would need roughly a week even if they moved at break-neck speed.  By contrast, Republicans can drop their filibuster and allow Democrats to pass a debt limit increase with their own votes at the drop of a hat.  Chicken looks quite different if both drivers know that one of them has lost the ability to swerve.  Sen. Schumer’s conduct suggests that he has figured this out.  It is also true that, as resolute as he sounds, Sen. McConnell has staked out a position – no Republican votes for a debt limit bill – that has always been achievable if Republicans drop their filibuster and let Democrats vote.  He does not need to move the goalposts:  he has already put his caucus in a position where they can fold at any time and declare victory.  Thus, even if the Republicans "fold", they will still get what Sen. McConnell said they wanted:  the Democrats having to pass the bill entirely with their own votes. 

            A more remote possibility that President Biden recently floated was that the Democrats would abolish the filibuster and pass a debt limit increase as ordinary legislation.  This option would remain open to them after moving the debt limit through reconciliation has ceased to be feasible.  Having the Republicans filibuster a debt limit increase that they admit is necessary for overtly political reasons would provide Democrats powerful cover and might make some drop their objections to the change.  This seems an unlikely result, however, because Sen. McConnell likely would prefer to drop the filibuster of this particular legislation voluntarily rather than lose the filibuster for all legislation going forward.  After all, what does it profit a senator to gain the whole world yet forfeit his filibuster?  President Biden’s raising this prospect appears part of a strategy to raise the heat on the Senate Minority Leader. 

            Another remote possibility, but one more likely than a default, is that nothing happens by October 18 and President Biden takes unilateral action to nullify the debt limit.  He could simply declare it unconstitutional under section 4 of the Fourteenth Amendment and order the Treasury to continue borrowing to pay the Government's lawful debts.  This has been subject to considerable debate, on this blog and elsewhere.  This post is already long enough without my musings on whether the Constitution really is a financial suicide pact. 

            The President also could authorize some additional category of "extraordinary measures", ways of obtaining funds or postponing expenditures beyond the ones the Treasury has been relying upon in recent debt limit crises.  Unless these measures yielded quite large returns, however, they would only delay the reckoning modestly and hence might not seem worth the political cost to the White House.  Democrats likely would prefer a showdown now to one closer to the midterm elections.

            Or the President could direct the Treasury to mint a platinum coin in a very large denomination.  The coinage statutes give the Treasury broad discretion to create new coins in whatever denominations they deem appropriate.  Coinage historically has been regarded as something quite separate from the obligations that the debt limit constrains.  The Treasury then could sell this coin to the Federal Reserve for money that could be spent on the nation’s debts.  Moses did not bring the debt limit statute down from Mount Sinai; it is rather crudely drafted and reflects an era when financial practices were structured very differently than they are now.  No one should be surprised that it features numerous loopholes.  And doing this, like declaring the debt limit unconstitutional, would end these crises and their disruption once and for all:  although a subsequent Congress could theoretically narrow the coinage authority, it is far from clear that either party would work actively to reinstate the debt limit if it became nonfunctional. 

            If no deal is reached, the Republicans do not fold, the Democrats neither relent and use reconciliation nor destroy the filibuster, and the President rejects unilateral action, the Government could have a shortage of funds beginning October 18.  This is unlikely to look like the default that many people expect.  The Government will still have a great deal of money coming in and be able to pay many of its bills; it just will not be able to pay all of them.  Defaults in developing countries typically result from the inability meet a single, massive, indivisible tranche of debt service obligations, leaving no doubt that the government is in default.  By contrast, the U.S. Government is likely to start prioritizing which bills it pays first.  The government typically pays its bills as soon as it can, but it often has considerable legal leeway.  For example, it routinely reimburses states and others that provide Medicaid and other public benefits relatively quickly; it has some modest room for slowing that down.  It could start paying money due under contracts on the last lawful date.  The problem would tend to snowball, and eventually would become an unmistakable default.  In the meantime, however, different entities with different agendas would disagree about whether the Government was in default, potentially slowing the impact on the financial markets – which surely would recognize that, former President Trump’s proposals notwithstanding, the U.S. will eventually pay its debts in full.  And even slowing down the financial consequences modestly would give large donors the opportunity to demand that Senate Republicans stop filibustering the debt limit bill.   

            The kind of explosive, dramatic default that has occurred in some developing countries therefore seems the least-likely outcome.  That, however, hardly suggests complacency.  The debt limit impasse has already reached the point that leaders around the world are surely drawing conclusions about the dysfunction of our government and political system.  And in the medium- and long-run, that may well do more harm to this country’s interests and its ability to be a positive force in the world than a true financial crisis.


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