Debunking Debt Ceiling Myths


The commentary on the debt ceiling standoff has featured a bunch of mistaken conceptions from across the political spectrum. Let's address them. 

Myth #1:  The 14th Amendment Prohibits a Default

A variety of commentators claim that the 14th Amendment prohibits the United States from defaulting. It does nothing of the sort. Read the text of the Public Debt Clause: 

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.

The Public Debt Clause is a prohibition on disputing the validity of US debt obligations--that is disputing whether they are legitimately owed. There's not a word in the 14th Amendment about default. The drafters of the Public Debt Clause included some very experienced commercial lawyers. They understood the difference between defaulting on an obligation and disputing or repudiating an obligation.  For example, I might acknowledge that I owe a loan, but just not be able to pay it. That's different than saying "I don't owe the money."

The Public Debt Clause is a prohibition on Congress, the Executive, and the Courts from disavowing US debt obligations. It's not a prohibition on defaulting because such a prohibition would be meaningless. If a country is unable to pay its obligations, no constitutional commitment device can change that. A constitution cannot fill a bare cupboard. And if a country is simply unwilling to pay its obligations (but admits to them), then its creditors are left with whatever legal recourse they might have. But prohibiting default doesn't get creditors anything. Prohibiting disavowal does because it means that creditors retain their right to be paid.

What all this means is that "invoking the 14th Amendment" is meaningless, unless it is shorthand for "treating the debt limit as unconstitutional." Now it just so happens that the debt limit is unconstitutional—but not because of the 14th Amendment!


Myth #2:  The 14th Amendment Requires Prioritization of Interest Payments on Treasury Bonds

This prioritization myth is something being pushed by (no surprise) the Wall Street Journal's editorial page.  It translates to "debt ceiling is fine...screw the pensioners, as long as bondholders get paid." But even if you politically agree with bondholders über alles, it is a position utterly lacking in textual support. As noted with Myth #1, failure to pay interest on existing bonds is not questioning the validity of the bonds. It's just defaulting on them. You can't get any prioritization argument out of the text. 

Additionally, the Public Debt Clause refers to the "public debt of the United States," which the good folks at the WSJ interpret to mean publicly held US Treasury obligations (query if that would exclude the special Treasury obligations held by Social Security...). But they simply ignore the rest of the Public Debt Clause:  "including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion". That additional language shows that whatever the 14th Amendment is doing, it is not limited to Treasury bonds includes certain debts incurred for pensions and services. And once we admit that the scope is broader than just Treasury bonds, the whole prioritization idea falls apart. Instead, we are left with the question of just what falls within the scope of "public debt".

Myth #3: Breaching the Debt Limit Would Wind Up With a Loss for the Administration in the Supreme Court

A lot of commentators assume that breaching the debt ceiling ends up with a Supreme Court case being heard by a pro-GOP Supreme Court. It could, but I think that's unlikely. It's just not a very realistic view of how litigation works. For starters, it's not obvious that anyone has standing to sue. But even if someone did, litigation, even over important issues, takes time. In this instance, that's a feature, not a bug, because litigation is rarely about a definitive court decision. That's really the exception in US litigation. Instead, litigation just moves negotiations to a different forum. Deals are the story of US litigation; most litigation is about jockeying for better deal position. And that's what it would be here.  

Let's be clear—no one wants to see this issue resolved in litigation. It's not a first-best outcome. But if there isn't an acceptable deal, however, then the choice is between default and breaching the debt limit. We know that default is a terrible outcome. If there is no deal, litigation is the best alternative, recognizing that it changes negotiating dynamics. I'll also note that the dynamics change in a way that's favorable to the administration: the House GOP will lose their major threat, namely that the debt ceiling will be breached, and every additional dollar of debt issued in excess of the debt ceiling will just raise the ante and put more pressure on the House GOP not to crater the global economy.

And even if the administration were to lose, so what? At that point it's back right where it would be if it decided not to breach the debt ceiling—having to decide between taking a bad deal and shutting down the government.

Myth #4: Treasury Auctions Will Fail If the Debt Ceiling Is Breached

Some folks have fretted that Treasury won't be able to sell new debt if the debt ceiling is breached. There's no way to prove it, but I'm skeptical of this claim. Everyone knows that this standoff will end sooner or later with a deal in one form or another and that deal will unquestionably ratify any debt issued over the debt ceiling. That's why the auctions won't fail. Treasury will have to pay a higher coupon, but it's a gamble, I'd certainly be willing to take.