Plowing Ahead Why the Debt Ceiling Might Be Illegal and Why that Doesn’t Matter

In yesterday’s post, I made a passing reference to the argument that the debt ceiling might not actually be a real thing. To those of you who read that and thought I had gone off the deep end, I probably owe a bit of an explanation. But first, let’s go over what the debt ceiling actually is. The history is a little bit more interesting than you might imagine.

When the Constitution was adopted, the Founders gave the government the obvious power to acquire debt on behalf of the country – precisely the kind of thing governments have to do in order to fight wars and build railways. Specifically, Article I, Section 8, Part 2 reads:

“The Congress shall have power…to borrow Money on the credit of the United States.”

The mechanism through which this was accomplished was basic enough: the Congress would vote to authorize individual bond issues in order to fund individual projects. But when World War I came along, the scale of government and government spending grew too large and complicated for this kind of micro-management, and so the Congress authorized the Treasury to issue bonds independently.

US Treasury official counting money in 1907, in the good old days before government officials argued that debt defaults and government shutdowns were a good idea.

US Treasury official counting money in 1907, in the good old days before government officials argued that debt defaults and government shutdowns were a good idea.

That is, as long as the total amount of debt didn’t exceed a given amount. That amount is the debt ceiling.

Now, the thing to keep in mind is that the debt ceiling is not the mechanism through which the government decides how much it’s going to spend or what the size of its financial obligations will be. That’s done through appropriations. The debt ceiling is instead the process through which the Congress gives the Treasury the authority to pay for obligations already entered into.

The Government Accountability Office puts it this way: “The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.”

The reason it exists is because the Congress, all the way back in 1917, didn’t want to be seen as too-readily endorsing government indebtedness. So it crafted the debt ceiling as a fig leaf, a mere formality. And it had been treated as a formality until the 2010 Tea Party election, when the GOP credibly threatened to default on the national debt as leverage in their negotiations with the White House.

Not surprisingly, since the debt ceiling is at best an empty gesture and at worst a Sword of Damocles, many have suggested that we simply abolish it. Including me. Unfortunately, because the debt ceiling might as well be named ‘the Fiscal Responsibility Clause’, it’s a little hard to run against it. (But what do I know – I thought it would have been hard to run against something called the ‘Equal Rights Amendment’.)

Which brings us to a more arcane, but also more interesting argument about the debt ceiling: that it doesn’t actually exist. That argument takes a couple of forms:

The first has to do with a section of the Fourteenth Amendment:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

That clause was included for two very specific purposes: first, to make sure that creditors were confident that the Union would pay it’s Civil War debt; and second, to make sure that everyone was clear that the Union would not pay the Confederacy’s debt. But recently, some have argued that the clause authorizes the President – who is sworn to uphold the Constitution and therefore the integrity of the public debt – to unilaterally override the debt ceiling.

More people than you’d think argued that Obama should be willing to do exactly that the last time we were in this mess. As usual, though, focusing on personalities distracted from a meatier discussion. The point isn’t that the President could lift the debt ceiling through the authority of his office: the legal argument is that he could ignore the debt ceiling because it is unconstitutional.

Since the Constitution forbids defaults, a debt ceiling that leads to a default isn’t legal.

There’s a second argument as well – a bit softer than the first – and it has to do with the issue of how statutes are interpreted. It’s not unusual for legislatures to pass acts that contradict earlier legislation, either by design or by accident. In fact, it’s not unheard of for different parts of a bill to irreconcilably disagree with each other – because, you know, it’s not like legislating is a full-time profession or anything.

When that happens, there are well-established and court-tested legal principles in place for how to resolve the conflict. One such guide is that a newer law that is in conflict with an earlier law in effect supersedes the earlier law. The argument as it applies here is clear: when Congress passes a bill directing the Treasury to spend money in excess of the debt ceiling, then that newer law essentially supersedes the earlier act.

Either way, you get to the same place: the debt ceiling isn’t actually a valid legal construct. The fact that some people like the political leverage an act gives them doesn’t make it constitutional, and neither does the fact that a legal principle has been adhered to for a long time. Not to state the obvious, but for a long time it was ‘perfectly clear’ that separate-but-equal was constitutionally permissible. That doesn’t mean it was.

Of course, that’s all well and good for the legal arguments. From an economics perspective, it’s not clear it matters. If the Treasury issues a bond over the objections of the Congress, a Court might ultimately side with the Treasury, but it would probably be enough to seriously spook investors. After all, just because you issue a bond, doesn’t mean anyone will buy it.

Thats why, like I said yesterday, we should just eliminate the debt ceiling. If Congress wants to fight about spending, let them do it beforehand and not when the bills come due.

Follow Pedro on Twitter @IamPedroA.

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