In the face of the game of deficit ceiling chicken that is going on in Washington right now, there has been much discussion, mostly from the Blue Team, about simply disregarding the statutory debt limit in reliance on the Fourteenth Amendment’s clause preventing the public debt of the United States from ever being challenged or called into question. Even Professor Larry Tribe, the great constitutional scholar, has signed on to this approach. The position is reckless and frightening.
The problem with what I’ll call the Tribe approach is that it utterly ignores market realities. Congress first adopted a debt ceiling in World War I; previously each individual federal debt issuance was individually authorized. Now many of our federal debt limit increases are occasions for political theater, with the Red Team typically trying to extract spending cuts to show how fiscally responsible they are. In this case they are trying to conceal the fact that $7 trillion, or roughly 25% of our total federal debt, was accumulated during the four years of the Trump Administration. While Covid was unquestionably a big part of that, the Trump tax cuts played a role too.
Now the Red Team proposes to trigger a default on soon-to-be-maturing federal debt, by refusing to raise the debt limit. Everyone knows that would trigger a major financial panic given the role that U.S. Treasury securities play in global financial markets. The dollar still remains the world’s reserve currency, having replaced the British pound after World War II. This is a privileged position that we are in, enabling us to fund budget and trade deficits that are extraordinary in size, and giving us influence around the globe that is also outsized in relation to our share of world population and even total economic output. The Red Team can’t possibly wish to jeopardize that position, and yet the game of chicken they are playing requires them to threaten it.
The response from certain quarters of the Blue Team is the Tribe approach. Just ignore the debt limit, borrow more to pay off maturing Treasury securities and to fund the current deficit, rely on the Fourteenth Amendment and claim that under that provision the debt limit is unconstitutional and has been for more than 100 years. That is, in my mind, crazy talk. It has never been argued before.
Ignoring the debt limit in this fashion would be immediately challenged in the courts. Judge Michael W. McConnell, formerly of the Tenth Circuit and now the Director of the Constitutional Law Center at Stanford Law School and a senior fellow at the Hoover Institution, argues cogently in this week’s New York Times that the President’s abrogating of the debt limit unconstitutionally defeats Congress’s overall power over the purse. Professor Tribe argues equally cogently that if the public debt of the United States cannot be questioned then the debt limit, if not increased, directly contradicts the Fourteenth Amendment by not just calling the debt into question, but by refusing to pay it and defaulting, as if we were Argentina or Venezuela. If there are respectable arguments on both sides, and there are, there will be litigation, and resulting litigation uncertainty.
The crazy part that then comes into play is, how will markets function in the face of the resulting uncertainty? Who will buy a newly issued Treasury security when there is uncertainty as to the validity of its issuance? Due authorization, validity and enforceability are all key elements of the legal opinions that support many non-Treasury debt offerings. At a minimum new purchasers will demand a hefty interest premium to compensate them for the risk. That itself will present broad market valuation and macroeconomic policy risks. The result will be a financial panic, potentially as bad as the outright default that the Red Team’s game of chicken threatens. Remember that U.S. Treasury securities are the world’s major cash asset, the risk-free gold standard medium of global exchange. There is no realistic way in which the Tribe approach can possibly be implemented without disrupting that, given the inherent legal uncertainty engendered by that approach. There is no way that a global financial panic can be absorbed while the litigation plays itself out. As much as I respect Professor Tribe’s long and illustrious career, the approach he and other Blue Team members are advocating is impossible to achieve given the realities of financial markets. There is no substitute for raising the debt ceiling, which simply must be done.
I get why President Biden is reluctant to negotiate with the Red Team over the debt limit. The House bill would require massive cuts in federal spending, and since the Red Team has conceded they won’t touch Social Security or Medicare that would have the effect of eviscerating everything else, including defense. And, since the Red Team also can’t want a financial panic, they will predictably turn the steering wheel first, to avoid a crash. The last time we played chicken with the debt limit was during the Obama years, which President Biden saw close up as VP, and the lesson he learned was don’t use the debt limit to negotiate with the Red Team. But the logic of the game of chicken has to include the threat of irrational behavior, so there is clearly risk that a default could happen. But we can’t use the stratagem of the Fourteenth Amendment’s public debt clause to try to counteract that.
So far markets are relatively stable, predicting that a resolution will be reached. But short term interest rates have risen, reflecting the market’s evaluation of the risk of default, and accentuating the yield curve’s inversion which is a key predictor of a recession. To some extent, therefore, the very macroeconomic risks reflected in this post are already occurring. Some market wags are saying, however, that equity markets need to take a dive before the Red Team will see the real risks that their game of chicken represents.
Let me say that while I clearly favor an unconditional increase in the debt limit, it is also clear we are on a long-term unsustainable path. Our current federal deficit is roughly 10% of GDP. Not 10% of the total federal budget. 10% of GDP, or roughly 30% of the federal budget. Total federal debt is now well in excess of annual GDP. While deficits have been and are projected to be lower in the Biden Administration than in Trump’s, from 2016 to 2024 our total federal debt will have exploded by roughly a third. Our sclerotic political system has proven itself to be unable to deal with that, but if we’re not careful financial markets in the long term will do it for us. If the dollar ceases to be the world’s major reserve currency we will be up an excretory function’s creek with no paddle. China is trying to persuade some countries to use the renminbi/yuan, but there are obvious problems with that given their political system, and many of the countries that they have been willing to be persuaded, such as Iran and Argentina, are themselves hardly models. Before 2008 some thought the Euro could be at least an alternate reserve currency, but the Euro crisis that followed made that far more difficult. The EU also suffers from political design problems, including the veto power given to smaller members over budget matters, that prevent investors from having complete confidence that Germany and France will always be willing to backstop that currency. It turns out that our Supremacy Clause matters. The dollar wouldn’t have been able to become the world’s reserve currency if Utah or Wyoming or Rhode Island could unilaterally veto the federal budget. We therefore have some time to solve our budget problems, which we really must address over the next decade as the Boomers retire and pressure on Social Security and Medicare grows. A good resolution of the game of chicken might be for a bipartisan commission of government leaders to be appointed to present an array of possible solutions. That may seem hopelessly naïve, I know, but at heart I’m an optimist.
The views expressed here are those of the author, and do not necessarily represent or reflect the views of NYCLA, its affiliates, members, officers or Board.