Saturday, July 23, 2011

Interesting Blog on the Constitutional Option

I was sitting on the patio of my local country market this morning with my son and our puppy. We got chatting with a nice guy on a bike and he turned out to be Michael C. Dorf, a Constitutional Law Professor at Cornell. It transpired that he has a blog Dorf On Law and that he's been hosting a fascinating debate amongst eminent constitutional lawyers on the options that the President has should Congress fail to raise the debt limit.

I highly recommend reading it since it currently appears to me that there's a fair chance Congress will fail to agree.  House Republicans seem to be completely intransigent and unwilling to compromise.  Democrats are much more willing to compromise, but if they capitulate completely on this issue, they are going to find themselves having to capitulate on lots of other things too - Republicans will draw the lesson that they can get everything they want by threatening to blow up the government altogether.  So Democrats probably should not accede to Republican demands entirely, and the tenor of the news coverage at the moment suggests that they won't.

It's possible that the parties could agree to small increases while they negotiate further when the limit approaches close enough, but it's very unclear that there's any basis for an ultimate agreement regardless of more time.  Possibly it may require major damage in the markets before enough minds are changed to make an agreement feasible.

Thus it's very interesting to know what the President's options are in the situation in which Congress has essentially left him with a set of laws that violate the rules of arithmetic.  What I took away from the discussion at Dorf on Law is that there is very little relevant case law, thus the relevant passage in 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.
stands almost unadorned with subsequent precedent. It's meaning is not something that eminent law professors can then easily agree on - questions as basic as whether social security payments required by law, military wages, payments to contractors, etc are a "debt" that the government is constitutionally required to honor, or whether only explicit treasury bonds/bills etc are "debt" for constitutional purposes.

For what it's worth, from the perspective of ordinary business accounting, payments to subcontractors, employees, etc become liabilities of the business when due, appear on the balance sheet as such, and if they aren't paid the resulting creditors can enforce their claim against the business in court, up to and including forcing bankruptcy.  In short they function exactly like any other kind of debt.  It's not obvious to me why the government should be different.

For another analogy consider what would happen to you as a consumer if you continue to pay your mortgage and credit card bills but stop paying your utility bills, phone bills, medical bills etc.  I think you would find that after a short pause your credit score would start to decline rapidly (as well as finding yourself with no electricity or phone service).

But then other questions arise.  Is "failing to pay it on time" the same as "questioning the validity"?  One might imagine the government readily agreeing - ie not "questioning" - that the debt is "valid", but nonetheless taking the position that it could not actually pay up at present.

The legal situation being unclear would operationally mean that the President would have to make a decision in a vacuum, and then some time later it would wind up in the Supreme Court where Anthony Kennedy would ultimately decide whether his approach had been correct or not.

At any rate, it does appear that the Republican party has been quite innovative here: this is an entirely novel risk to civilization, but nonetheless it does seem to be at least distantly possible that it might now rise to that level, since I don't think anyone really understands the modern global financial system well enough to say what will happen to it if the US government is considered to have defaulted on its debt.  But we do certainly know enough to say that modern economies won't function without a working financial system.

Hopefully Congress will step back before they take us over the cliff.  Hopefully they understand exactly where the edge of the cliff is - I'm not sure I do.

7 comments:

King of the Road said...

Thanks for a very interesting take on this. Thanks for your blog in general, it's in my blog roll and is almost always interesting and though provoking.

It's amazing to me that this kind of brinksmanship can take place. Why it's happing is, in part anyway, lucidly explained in a post by Conor Friedersdorf at The Atlantic here.

Derwein said...

King of the road!

I read the text you linked to. As a Swede my knowledge of US-debate obviously is somewhat limited. That said I cannot help to get some thoughts about it.

It seems reasonable that media, e.g the likes of (the mentioned) Limbaugh and Levin has had a great influence here. But to me it also would seem that they and their likes are acting as (willing) tools for the wealthy and big capital which has such a large influence on which issues receive attention in your country. Anyone that argues that any redistribution of wealth through taxes (the government) is evil will have an immensely greater chance of getting a platform in media, thinktanks and what not; than those arguing the opposite. (And by the way they by promoting the interests of the wealthy they have a good chance of being able to join their ranks)

Now it would seem that also leaders of large corporations (big capital) consider that this has gone (a bit) too far. But, even if they do they have limited power to stop it now.

As a Swede I would designate this as the (proverbial) dragon-seed which they (big capital) now maybe do not want to reap. Unluckily it is not only those sowing the seeds that will have to do the reaping. To a much larger extent the reaping will fall on others.

Pinku-Sensei said...

Today's Republican­s already hate the Fourteenth Amendment, which yesterday'­s Republican­s wrote and ratified, for the "birthrigh­t citizenshi­p" clause of the Fourteenth Amendment. Now today's Republican­s have another reason to hate the Fourteenth Amendment because of the public debt clause. This is one more example of how 21st Century Republican­s reject their past. They are now the party of Jefferson Davis, not Abraham Lincoln.

Stephen said...

Would one way to honor both the debt ceiling and payment obligations be to simply "print" money?

Stuart Staniford said...

Stephen: It appears so. There are a bunch of technicalities that make it more complex than it might appear but there is a loophole that would allow this. See http://balkin.blogspot.com/2011/07/obamas-top-secret-plan-to-solve-debt.html

dimposter said...

Good post, and interesting days for sure.

re "this is an entirely novel risk to civilization";
Stuart, in your post Singularity > Climate Change > Peak Oil > Financial Crisis, you explain the risks to civilization that you are concerned with. You've already got the Financial Crisis, but the irrationality of the debate is perhaps another issue again.

The 2003 documentary "The Corporation" argues that if corporations were regarded as human, many would be diagnosed as psychopaths due to acts that are harmful to the rest of society or even themselves. Similarly, it seems to me that Societies often harbor attitudes and commit acts that are self-destructive or harmful to humanity in general.

This debt ceiling fiasco is such an act of course. It is pretty easy to argue that the US political system (amongst others) is irrational, and I think that many would go further and argue that the US as a society is not rational. (Mercymercyme's comment on your US survival post comes to mind.. http://earlywarn.blogspot.com/2011/07/us-survival-statistics.html)

The Irrationality of Society could be regarded as a condition that leads to the risks you are concerned with, but I wonder if it would be useful to categorize it as a risk in itself. It could be an interesting lens to view seemingly unrelated events, in the same way that under the lens of the Singularity, issues such as unemployment trends and Moore's law are related in ways that may not be obvious to (say) the average economist.

JS123 said...

Just pick when you want to default, now, or after the debt limit is increased ad infinitum and the country is drowning in interest payments.