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Bumping Up Against the Debt Ceiling
The two bedrock structural principles of the Constitution are the separation of powers and a system of checks and balances. These are always in tension. The principle of separation of powers places with Congress the power to issue the public debt in the name of the United States: Article I, Section 8, cl. 1, states baldly: “The Congress shall have Power To . . . borrow Money on the credit of the United States.”
The power comes after the parallel grant to Congress to impose taxes. Together these two clauses are the main revenue drivers for the United States. Yet the current constitutional structure subjects any such debt issuance to a presidential veto that can be overridden only by a two-thirds majority in both houses of Congress. That number cannot be obtained at present, given the rough parity of power between the two parties.
The good side of this arrangement is that it divides power to avoid the risk of tyranny, as James Madison or Alexander Hamilton said in Federalist No. 51, by setting ambition against ambition. But there is also this downside: the constitutional structure creates what is commonly called a “bilateral monopoly,” where each side has a blocking power to any solution that purports to deviate from the status quo ante, which in this case is the unappetizing prospect of a US default on its debt obligations, fraught with uncertain consequences, if the two sides cannot agree on an acceptable compromise. The situation therefore resembles one which arises under the National Labor Relations Act (NLRA), which creates just this structure in the context of collective bargaining negotiations between a monopolist union and a recalcitrant employer. Each side is subject to a statutory obligation to bargain in good faith with the other, even though neither side is required to make any specific substantive concession. Needless to say, the absence of any device—e.g., compulsory arbitration—to force a deal leads to breakdowns in negotiations that can, and often do, lead to lockouts or strikes.
It is just to avoid these discontinuous breaks that I have long argued for a repeal of the NLRA, in an effort to move closer to a competitive situation where incremental moves in wages and other terms and conditions of employment displace the discontinuous jolts from strikes and lockouts. Alas, there is no competitive market for the pollical process to embrace, so either we must find—or concoct—a constitutional way to duck the problem or slug through these endless negotiations, where impasse now leads, not to strikes or lockouts, but to a paralysis of the entire economy.
Predictably, the Democrats want to bypass Kevin McCarthy, the Republican speaker of the House, who was able to get his proposed legislation through the House. To do so, the Democrats may insist that the president has under the Fourteenth Amendment sufficient authority to ignore the cap unilaterally. That text read reads in relevant part:
Section 4. 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. . . .
This provision clearly indicates that some of the debt incurred by the Union remains valid, even though in the remainder of the text it says in no uncertain terms that any of the debts incurred by the states in the late Confederacy are not to be charged back to the Union. But the huge question is how this provision avoids Congress’s power under Article I. The text itself contains the key words “authorized by law,” which can only mean that the matter is thrown back to the Congress, for at no point does the president have any power to authorize the debt under our system of separation of powers. And Congress is not constrained in Article I to issue a blank check to the Treasury but can impose a cap on borrowing in an effort to keep the country in balance.
It is unlikely that the Democrats will choose to make this structural challenge, knowing that is both risky and untested. But, if things turn desperate, some Democrats may take modest comfort in Professor Laurence Tribe’s ingenious speculation that once Congress has authorized particular expenditures, it is then under an implied duty to fund these obligations. Professor Tribe’s theory would mean that the debt ceiling, which has been a consistent part of our constitutional structure since 1939, has to yield so that the deviation from this one law is justified by “ignoring one law in order to uphold every other.” But note that none of these laws were passed by the current Congress, but by the last one when small Democratic majorities in both Houses pushed forward huge spending bills, the oxymoronically named Inflation Reduction Act, which, if anything, the current Congress is duty-bound to undo so that all the laws can be enforced simultaneously.
That option is now off the table, because President Biden has insisted on a “clean” cap increase, which sweeps all these difficulties under the rug in exchange for a promise to negotiate budget cuts thereafter. But it is foolish to say that only the Republicans are at fault for their proposal of tying a debt ceiling increase to some $4.8 trillion in budget cuts in order to reduce expenditures to last year’s levels, subject thereafter to a 1 percent increase annually for the next ten years. Democratic endorsers of this idea, such as William Galston, urged the Republicans to yield on the debt ceiling, only to be castigated for their naivete.
So it is back to the bargaining table. It is clear why Biden supports a program that raises the cap now and waits to address budget cuts for a second round of negotiations in which he can again ignore all Republican demands for budget-cutting, or even worse, use executive orders—think the release of student debt—to attempt to circumvent Congress’s power altogether. Armed with these prospects, it will come as no surprise how the second round of negotiations is likely to founder on the same issues that roiled the debt negotiation. The Republicans will propose their earlier package that is designed to reduce the deficit by shrinking the rate of growth in government expenditures. The Democrats will claim that any such heartless cuts by “radical MAGA Republicans” will imperil the most marginalized groups in the United States, so these must be rejected out of hand.
The Democrats will then govern with their preferred form of deficit reduction, which is to start with an increase of expenditures on everything from health care to education to family support to affordable housing, and then to cover those new expenditures by increasing taxes on corporations and high-income taxpayers, while somehow miraculously saving Americans several trillion dollars in the process. Their rosy prognostications hope to grow the economy while raising the total public debt to record levels, now about $31.5 trillion, up from about $6 trillion during President Clinton’s last year in office, which translates into a growth of debt from under 60 percent to well over 100 percent today.
Growth, however, slowed in the first quarter of 2023 to about 1.1 percent, down from about 2.6 percent in the fourth quarter of 2022. Similarly, real wages between April 2022 and April 2023 declined by 1.1 percent. And there are widespread predictions that heavy pandemic expenditures will lead to a widespread recession starting with tech and finance.
None of these arguments will persuade Biden and his Democratic supporters to mend their ways. Hence, any round two of the budget negotiations will rehash the same arguments raised in round one. Any failure of the two sides to timely agree will require more stopgap measures. It seems likely this breakdown will not have the same instantaneous, disruptive consequences as a default on the federal debt, but it is likely to be very severe nonetheless.
There are no reliable game-theoretical solutions to bilateral-monopoly games that ask who will blink first. Before putting too many chips on a Biden win, recognize that there are complications. The Republicans can say it was the president who failed to budge on the cap. And Biden surely has to know that with his approval rating dipping below 40 percent and the 2024 election quickly approaching, he does not have much room for error. If Biden pushes too hard on the debt cap, he may rue the day that he sought to boost the fortunes of the Trump campaign in order to get his preferred opponent.
My Hoover Institution colleague Niall Ferguson recently wrote that the full-court press against Trump may make a second term for Trump “inevitable.” Inevitable is a tough word to use in presidential politics, but here it should remind us that every tempting political strategy has a real downside. It is entirely possible that Biden’s weak political position might just lead him to abandon his hard-line political stance for some compromise to end the current impasse, so that these unhappy warring factions can each live to fight another day.
© 2023 by the Board of Trustees of Leland Stanford Junior University.Published in Economics, Law
Biden and the Democrats are convinced that because they control the Media they will win this exchange; however, the media landscape is fragmented and It is much more likely that the president will be blamed for a failing economy than congress. I think we have reached a point where we are going to sleep walk into at least a technical default.
The Republicans must hang tough. Due to the problems with the Petro Dollar, our lack of actual production of real products here in the USA, our gigantic debt, our rampant inflation and the looming issues with more huge money printing the Pubs cannot give in.
All that said, I deeply feel that the Pubs have bungled the marketing of their position. I would guess that less than 10% of Republicans, no less the nation, even understand that to pass the Biden Budget as is would require a multi-Trillion money print which could lead to a dollar collapse or a permanent debt spiral situation leaving us a deadbeat debtor nation. In fact probably less than 10% of Republicans even understand that we have been printing Trillions of dollars to stay afloat. so…….
THE FIRST THING OUT OF THEIR MOUTHS SHOULD BE ” ABSOLUTELY NO MORE MONEY PRINTING” WE HAVE TO SERIOUSLY CUT SPENDING OR WE ARE TOAST”!
In a post in the Member Feed I discuss the brewing Banking Crisis, which is not being discussed at all really in anywhere near honest terms by either the FED or the Biden Adminstration, with neither proposing any no real life solutions to that gigantic problem which is intricately tied to our deficit and which could if left unresolved destroy much of our economy. Literally hundreds of banks could fail. Soon.
It will be a GOP loss
Always has been, always will be.
The Republicans might pull this off. McCarthy stole the initiative from the Democrats. His passage of a debt extension was unexpected by the smart guys in DC. Now it’s up to the Democrats to respond. And while they may have air supremacy, their field leadership is old and less than inspiring.
Going up against a silver tongued telegenic star is one thing. This time it’s the Democrats fronted by a not very likable mush mouthed old man.