Commentary

Defaults, Debt Ceilings and the 14th Amendment

Treasury Secretary Timothy Geithner warns us that the federal government will no longer be able to meet its obligations if the debt ceiling is not raised by August 2. The result: default, with financial chaos to follow. Despite that stark warning, the debate over spending cuts versus revenue enhancements persists. Political compromise remains elusive.

Enter a handful of imaginative lawyers who promise to save us from economic ruination — not by spending less or taxing more, but by applying the Public Debt Clause in Section 4 of the 14th Amendment. Essentially, they claim the Constitution forbids default and, consequently, a debt ceiling that triggers default is itself unconstitutional.

The Public Debt Clause says “The validity of the public debt of the United States, authorized by law … shall not be questioned.” That 1868 provision was intended primarily to prevent repudiation of Civil War debts. But the Supreme Court in Perry v. United States (1935) held that all federal debt is covered: The constitutional text “indicates a broader connotation. … [It] applies as well to the government bonds in question, and to others duly authorized by the Congress.” Still, that leaves several unanswered questions: First, what constitutes “public debt … authorized by law”? Second, is default comparable to repudiation in its effect on the debt’s “validity”? Third, even if default is unconstitutional, does that mean a debt ceiling is also unconstitutional?

Perry plainly states that authorized and existing public debt must be paid. But proponents of the debt ceiling argue that Perry is irrelevant because the ceiling refers to new obligations that haven’t yet been authorized or issued. The counter-argument, to which I subscribe, is that Congress’s appropriation of funds for subsequent expenditure is equivalent to authorizing debt that would finance the expenditure. Note that the Impoundment Control Act of 1974 bars the president from rescinding spending. In other words, Congress has implicitly authorized the executive branch to borrow; and a statutory ceiling on that borrowing — even though signed by the executive — cannot be harmonized with the spending directive.

Debt ceiling advocates also assert that Perry involves repudiation, which is more draconian than merely defaulting. Repudiation is a declaration that the money is not owed. A default, by contrast, declares inability to pay, which may even be accompanied by an acknowledgment that the debt remains valid. As long as the debt is not formally repudiated, so the argument goes, default does not automatically render one’s debt invalid.

Once again, I subscribe to the counter-argument: If a friend refused to repay my loan when due, while assuring me that he would get around to it at an indefinite future date, I would be hard-pressed to intuit that his default — although not a repudiation — left me with a debt of unquestioned validity. A default undeniably affects the integrity of public obligations. And that, said the Supreme Court in Perry, is not permissible under the 14th Amendment: “[T]he expression ‘the validity of the public debt’ [embraces] whatever concerns the integrity of the public obligations.”

If that logic were extended, however, Section 4 of the 14th Amendment might also mandate higher taxes, sales of public property and budget cuts. Without those funding sources, the validity of the public debt might also be called into question. Yet, clearly, enactment of those policies is not constitutionally decreed. Instead, consider this more plausible interpretation: Congress is precluded from capping all sources of funds that could be used to pay the debt, but not from capping some sources. Accordingly, a debt ceiling is constitutional as long as other funding is not statutorily barred. That means, of course, Congress and the president would be compelled either to reduce spending, raise taxes, sell the Treasury’s mortgage-backed securities ($100 billion) or gold ($389 billion), delay principal and interest on debt held by the Federal Reserve (16% of total debt) or simply revalue the Treasury’s gold certificates at the current market price (a gain of $378 billion) by amending the Par Value Modification Act. The choices to avoid default are numerous, notwithstanding a debt ceiling.

So, to recap, here are my conclusions, tempered by awareness that legal authorities across the ideological spectrum have wide-ranging views: First, duly enacted appropriations are legally the counterpart of “public debt … authorized by law.” Second, default on public debt, like repudiation, casts doubt on the debt’s “validity,” and therefore is unconstitutional under the Public Debt Clause. Third, a congressional ban on all funding sources to pay principal and interest would lead ineluctably to default, and is thus unconstitutional as well. But fourth, a debt ceiling that forecloses only one source of funding, leaving open several alternative sources, passes constitutional muster.

As a practical matter, I suspect no one has legal standing to challenge an executive decision to borrow in excess of the ceiling. Standing to sue entails a showing of imminent, concrete and particularized injury to the plaintiff — distinct from injury to the broader public. Perhaps Congress as a whole could claim such injury, but that would require a joint resolution, which would never pass the Democratic-controlled Senate. Moreover, even if someone had standing, the Supreme Court would likely treat the debt ceiling dispute as non-justiciable — that is, as a political question lacking legal criteria by which a court can resolve the impasse.

Finally, there is one subject on which legal scholars seem to agree: Nothing good can come from an attempt to invoke the Public Debt Clause. The constitutional implications for separation-of-powers, the effect on capital markets, the not-so-farfetched prospect of another divisive and ultimately futile bid to impeach a president — those considerations should convince the Obama administration and Congress that they, not the courts, must restore fiscal sanity.

Robert A. Levy is chairman of the Cato Institute and a constitutional lawyer.