Sunday, May 14, 2023

What is the Optimal Strategy for the Debt Ceiling X-Date?

Joseph Fishkin

The “x-date” is the date when it’s no longer possible for the Biden Administration to keep following all the laws Congress has passed—laws requiring specific spending, laws setting tax rates, and a law from 1917 that sets a debt limit—absent some extraordinary maneuver. The president has a constitutional duty to “take Care that the Laws be faithfully executed”—and that means all the laws Congress has enacted, not just the debt ceiling law. This is a fundamental point that it seems easy for not only journalists and pundits but even some smart lawyers to forget. It follows that Biden Administration has a constitutional duty to explore, carefully consider, and potentially execute one of these extraordinary maneuvers, if there is one that will make it possible to follow all the statutes.

In an earlier post I mentioned three potential maneuvers of this kind: the trillion-dollar platinum coin, consol bonds, and so-called premium bonds. This led to several useful email exchanges. (Reports of the death of blogging are greatly exaggerated!) One was with Mike Dorf, who along with Neil Buchanan has done the best academic work on this topic—even if I don’t agree with them on absolutely everything, a considerable chunk of what you are reading from me about the debt ceiling consists of their foundational insights. As a result of these various exchanges, I am now clear on the relative merits of these three maneuvers and which one is the optimal approach. This is a complex optimization problem: the legal merits matter, but so do the political optics and the likely reactions in the financial markets. It’s an optimization problem of extreme urgency. The Biden Administration can’t just try out a few of these workarounds and see what works. They get exactly one shot to try one of them, right around the real x-date. I really hope someone inside the Treasury department is gaming this out as we speak. Otherwise we are in enormous trouble.

I don’t want to hide the ball so here’s my answer: President Biden should order the Treasury department to issue redeemable premium bonds. I hope someone at Treasury is doing the technical and legal work now that would make it possible to do this on the quick timetable required! Below the fold I’ll explain why. And at the end I’ll also explain what all this has to do with constitutional political economy.

Background Assumptions

Throughout this discussion of the available options, my assumption is that literally anything that the Biden Administration does on the “x-date” (including doing nothing) will be the subject of a large volume of immediate and frantic litigation. It’s 2023, so I also assume that a good part of that litigation will be structurally dysfunctional in nature (e.g. nationwide injunction out of Amarillo, rocketing to the Supreme Court on the shadow docket, that sort of thing). Meanwhile the markets will be looking to journalists, legal experts, the Administration, and the courts for signals about how to understand what is going on, whether bondholders and others are going to get paid, and so on.

Finally, my analysis here assumes that the Biden Administration is going to take some sort of action to avoid a chaotic default, and the question is what action.  Markets’ reaction to such executive action, I suspect, will be relief, relative to the prospect of default—tempered by a concern about the risk that a court might undo the administration’s solution.  Accordingly the single most important risk to be minimized is the risk that litigation will result in a court order causing the U.S. to default.

There are many reasons for a court to avoid issuing such an order. Apart from its destructive effect on the national economy and on America’s creditworthiness, such an order would have an equally destructive effect on the Court. There are ample jurisprudential means by which any court could avoid issuing such an order, the most obvious being that nobody really has standing to sue to force the government to default on its debts.* This could also be a political question, etc.  The off-ramps for a court exercising judicial restraint are plentiful.  However, I expect that on an issue of such importance, the Supreme Court of 2023 has at least a fair likelihood of deciding to reach the merits.  (In any case, markets would prefer a decision that reached the merits and unambiguously upheld the administration's actions to a decision to avoid the merits that left any door open to additional litigation.)

The Merits of Three Possible Workarounds

So let us discuss those merits. First, suppose the Treasury mints a platinum coin worth some very large amount of money, deposits it at the Fed, and uses that to pay the bills. This is basically a form of printing money. The amount of money the Treasury can print is generally restricted by statute, but the statutes allow a platinum coin of any amount. Legally this approach is not immune from challenge. For example, some will argue that the statute really only allows commemorative coins, rather than coins that are real legal tender. In addition, this maneuver relies on Jerome Powell accepting the coin; there’s plenty of uncertainty about how that would go. Still, overall, in my view the legal case for this option is solid. The main problem with the coin approach is of a different kind: Much of the American punditocracy finds it silly. And unfortunately, the global investor class will listen to the domestic pundit class. Debt politics is about public confidence, and if people think you’re being silly, that can cause real harm to American credit. That is the chief shortcoming of this strategy.

The next two strategies rely on issuing unusual types of bonds. In both cases, the idea is that the debt limit statute regulates the “face amount of obligations,” 31 U.S. Code § 3101(b). So, what if the Treasury finds a way to raise lots of money from bond auctions but not actually increase the “face amount of obligations” outstanding? That’s the idea behind using consols or premium bonds.

Suppose the Treasury issues consols. These are “perpetual” bonds that never mature; they just pay a set rate of interest, really just a set stream of payments, in perpetuity. If they have very low or zero face value, they would seem to add very little or zero to the debt for purposes of the statute. However, there is an important wrinkle. A different provision of the debt limit statute, § 3101(c), says (bear with me) that for “any obligation issued on a discount basis that is not redeemable before maturity at the option of the holder,” it’s the “original issue price” (what the treasury raised at auction) that counts as the “face value.” Consols do have an original issue price. So if § 3101(c) applies, it would render the consol maneuver ineffective. Can consols avoid § 3101(c)? The answer is… maybe. Are consols an “obligation issued on a discount basis”? (Discounted from what? Perhaps in the sense that any time you think about the present value of a stream of future payments you’re “discounting”?) It’s hard to predict how anyone would interpret this. The bottom line is that consols might be a successful way around the debt limit, particularly if a court is looking for a way to hold that they are, but the chances of that are hard to guess.

Finally, the Treasury can issue what are called premium bonds: bonds that pay an extra-high rate of interest, and that investors are therefore willing to buy for much more than their face value. Suppose a $1,000 bond matures, and this time, instead of doing what it normally does and issuing another $1,000 bond, the Treasury instead issues a $500 bond that pays lots of extra interest—enough extra that the market will pay as much for this bond as it did for the one that just matured. The new one’s face value is much lower, which means less debt according to the express terms of the debt ceiling statute. 

There is one extremely important move the administration must make in order to make this work. (Here again, I’m indebted to Mike Dorf.)  The key is to make the premium bonds “redeemable before maturity at the option of the holder.” In other words, that high-interest $500 bond must say that if the person holding it wants to redeem it at any time—for its $500 face value—they can. (Nobody’s actually going to do this, because the whole point of these bonds is that their face value is low.)  As long as the bonds are redeemable in this way, § 3101(c) does not apply. Instead, by its clear textual terms, the debt limit statute would only count the face value of the bonds, $500 in my example, even if the Treasury raises a lot more than that at auction. It shouldn’t be too hard to sell enough of these higher-interest, lower-face-value bonds to keep the debt simmering along just below the debt ceiling for a very long time. This is the strongest approach for a Treasury that needs to raise money without increasing the debt for purposes of the debt ceiling statute.

(I will note here that it also seems possible to create a consol bond that is likewise redeemable at any time by the holder, and that therefore falls unambiguously outside § 3101(c) in the same way as the redeemable premium bonds. You would want the consol to have a (low) face value, and for the holder to be able to redeem it for that low value at any time; it would trade, at issue and subsequently in the private market, for much more than the face value. In this way, it ought to be possible to create consols that, apart from their perpetual character, look a lot like the redeemable premium bonds just discussed. Only the low face value would count against the debt limit. Historically, U.S. consol bonds have had a face value, as you see in the picture below.  But I think redeemability at the holder’s option would be an unusual feature on what is already an unusual type of bond, so I leave this wrinkle aside for our purposes here and focus on the redeemable premium bonds, which I think would be the more straightforward approach.)

Pictured: a U.S. Consol from the 19th century (from Wikimedia)

Formalism and the Political Economy of Debt Limit Enforcement

Is the argument here for redeemable premium bonds, on some level, a bit formalistic? Sure. Although I prefer the adjective Gorsuchian. What I mean is that this is just the kind of careful, close-to-the-text argument that often appeals to a number of Justices on the Court, including Neil Gorsuch. But in fact the Justices would have very good reasons, not rooted in any specific Justice’s textualist leanings, for allowing the premium bond maneuver to proceed.

Let’s walk through the counterfactual—a Supreme Court decision that goes the other way and invalidates this good-faith effort by the administration to comply with all applicable statutes, a decision that throws the nation into default. To reach that dumpster fire of an outcome, first the Court would have to blow through the obvious hurdle that no plaintiff really has standing to demand that the United States stop paying people and entities what they’re owed.* Second—and it is at this step that the redeemable premium bonds are so important—the Court would have to ignore the plain textual meaning of the debt ceiling statute, which is absolutely clear that if an obligation is redeemable by the bearer, we count its face value, not how much it brought in at auction, for purposes of the debt limit. To force a default, the Court would have to blow past that and instead go for some sort of legal-realist substance-over-form reading of the spirit and purpose of the debt limit statute. That is all fine and good, but keep in mind, the actual purpose of the debt limit statute, when enacted in 1917 during World War II, was to expand the power to borrow, not constrict it!

The case for sticking with the text rather than some economic-substance-over-form approach is also much stronger in this case because the Fourteenth Amendment, Section 4, looms behind every action anyone takes with respect to the debt ceiling. That constitutional provision says that the validity of the public debt shall not be questioned. (Today in a deeply mistaken Times opinion piece, Michael McConnell offers in one paragraph a creative argument that perhaps defaulting on the debt is not the same as calling into question its validity. That seems... quite a stretch.  Really, we are supposed to imagine that the Reconstruction Republicans would not have seen any constitutional problem with some Andrew Johnson-like figure failing to pay the Union’s debts?  But in any event, let us simply note that the more conventional and obvious interpretation—that failing to pay our debts is exactly what this constitutional provision prohibits—is at least a possibility courts should consider when thinking about constitutional avoidance.) Constitutional avoidance here provides a strong reason for avoiding even coming close to violating Section 4 of the Fourteenth Amendment; and happily, if the Administration executed the premium bonds maneuver, there would be a straightforward way to avoid the potential constitutional problem: just hew to the literal text of the debt limit statute.  Do not put any substance-over-form purposive gloss on it.  Indeed, quite frankly, constitutional avoidance here counsels grabbing hold of any formalistic fig leaf you might find near at hand, including ones far flimsier than the strategy outlined here, in order to avoid a wholly unnecessary constitutional, political, and economic blowup.

But again let’s imagine the worst case, a Court that ill-advisedly barrels ahead, attempting to enforce the spirit of the debt limit statute rather than its letter, and along the way reimagining that spirit so that it conveniently sounds more like Kevin McCarthy wish-fulfillment than the work of a wartime 1917 Congress intent on making it easier for the nation to borrow. The Court would then be in the uncomfortable position of the dog that caught the car. Would the Court really want to order a government default?

Ordering the Biden Administration to default on the debt would mean ordering the Biden Administration to treat the debt limit statute as a kind of super-statute, powerful enough to trump other statutes. Otherwise, there is simply no reason why the debt limit statute should have greater priority than the various money-spending statutes that also constrain the administration.  Ordering a default, that is, would mean ordering the Biden Administration to pick and choose among its spending obligations, in a way that violates not only abstract separation-of-powers principles but very clear Supreme Court precedents eliminating, in other contexts such as the line-item veto, the power of the executive to pick and choose among spending obligations set by Congress. The president doesn’t get to do that! But the Court would effectively be ordering the Biden Administration to do it. The only justification for this—for elevating the debt ceiling, for blowing up the separation of powers regime on spending, and for destroying the good credit of the United States—would be an underlying commitment on the part of the Court to a particular austerity-centered vision of constitutional political economy.

It’s probably the subject for another post, but one of the times when you can really see constitutional political economy arguments at work in our legal and political system is in the choices courts and politicians make about which statutes should count as the super-statutes. This is a signal example. The Kevin McCarthy caucus in the House may not be able to agree on much, but they all seem to agree that the debt limit statute, a statute originally enacted for the opposite purpose from the one to which it is now being put (it was enacted to make borrowing easier!), is some kind of super-statute that trumps the president’s obligation to take care to faithfully execute all the other laws. The underlying reason the House Republicans believe this is because they want to build a constitutional political economy with a weakened federal government, hamstrung by restrictions that make it operate more like a business with a balance sheet and less like a true democratic sovereign through which the people and their representatives can steer the nation’s economic development.  That is their constitutional vision, and it is the key to making sense of why they assume the debt ceiling statute trumps Congress’ other (and more recent) enactments that require the money to be spent.

If the Court orders a default in the face of a credible attempt by the administration to comply with the letter of the law, it’s not because some statute from 1917 made them do it. Let’s take seriously for a moment the idea that perhaps for purely jurisprudential, non-result-oriented reasons, a Justice might favor reading the debt limit statute in an economic substance-over-form way, blowing past its plain text. In that case, the Biden Administration still has, by far, the better of the argument. The administration should argue (in the alternative) that default itself—or more specifically, the unilateral spending cuts that default would involve—would actually only add to our “obligations” under under 31 U.S. Code § 3101.  The IOUs that all those defense contractors, Social Security recipients, school districts, and so on are effectively accumulating as we fail to spend the money Congress appropriated are “obligations” that will later need to be paid—and that courts will enforce. They increase our overall obligations. (This is another terrific point first made by Dorf and Buchanan.) Finally, also in the alternative, the administration should certainly argue as well that if the Court really wants to hold that there is no way out of the conflict between the different statutes that Congress has passed, then the Biden Administration is obligated to choose the least unconstitutional option, and that is to obey the appropriations statutes rather than the debt limit statute.

The argument of the previous paragraph applies even if the Biden Administration simply decides that in a conflict between its spending obligations and its debt ceiling statute obligations, it’s the debt ceiling that will give way. That’s one way the Administration might go. It would be amply justified as a matter of statutory interpretation, not to mention statutory interpretation in the shadow of the Fourteenth Amendment Section 4.

But it would be so much better for the Administration to take the further step of issuing redeemable premium bonds. This allows the administration to say in good faith that it is complying with the letter of all the relevant laws. 

The Biden team should not even seriously consider the terrible option of “prioritizing payments,” which is really a form of less-disorderly default, creating more IOUs to pay later which are themselves obligations that add to the debt under the debt limit statute.  This approach puts all the political liabilities on the Administration while also destroying the nation's credit, since since bondholders will rightly wonder: If some obligees are not getting paid, am I next?

The bottom line is this: If it turns out that we really are being ruled by a right-wing faction in robes that is determined to impose on us all an austerity-centered vision of constitutional political economy in which the debt limit statute is transfigured into the pro-austerity super-statute of Kevin McCarthy’s dreams... well then at least make them do their own dirty work. Do not do their work for them.  Strategies like “prioritizing payments” are doing their work for them. Instead, the administration should execute the renewable premium bond strategy.  This is a straightforward way to comply unambiguously with the letter of the debt ceiling law, while continuing to spend the funds Congress has ordered spent.  With any luck, this maneuver might be just the formalistic solution that helps even this Court find its way back from the brink.

*On standing: Perhaps Xi Jinping would have standing?  I am trying to think of someone who would actually benefit from a U.S. default, and despite China’s holding lots of U.S. Treasuries, it seems plausible that the long-term geopolitical beneficiary of undercutting the credit of the United States would be Xi.  Whether he is within the zone of interests Congress intended to protect in enacting a broad debt authorization statute in 1917 I leave as an exercise for the reader.

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