Default and consequences

By David Cay Johnston
July 29, 2011

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

If the U.S. government voluntarily defaults, how are you going to get that tax refund? Or get paid for the work your company did for Uncle Sam?

While a last-minute agreement to raise the debt ceiling could still be reached, the risk of default as early as Tuesday is causing jitters in global financial markets and anxiety among people who depend on Social Security to eat.

Without an increase in the debt ceiling, the president is faced with an irresolvable conflict between faithfully executing those laws passed by Congress requiring payments for services and benefits and his inability to borrow more.

As William A. Galston of the Brookings Institution neatly put it: “We would be in uncharted legal territory and uncharted constitutional territory.”

Anyone whose bill was not paid when due would be able to sue. The federal government issues about 100 million checks a month. Default would spawn an explosion of litigation, overwhelming the courts, especially if the Supreme Court sticks by its animus to class action litigation.

The Constitution’s framers gave Congress the power to pay the government’s debts, but the only debts Congress was obligated to pay were those incurred during the first American Republic, the Articles of Confederation government that failed because it could not tax.

VALIDITY OF PUBLIC DEBT
The only other guidance comes from the 14th Amendment, ratified in 1868, to make sure freed slaves received due process of law. “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 relevant language states.

One problem with the president invoking that clause to ignore the debt ceiling is that the current Supreme Court might interpret the provision as applying only to Civil War debts, perhaps citing the confederation’s unpaid debts clause to buttress such a narrow interpretation.

The White House has publicly rejected the 14th Amendment argument, but that may be a negotiating tactic to keep Obama’s options open. A senior Treasury official declined to say anything about what had turned up in legal research, promising only that as the actual day of default approached, its counsel to the president would become known in stages.

Much of what the government pays out anyway is not a “public debt,” so the 14th Amendment argument seems of little help for benefits payments. The Supreme Court decided in 1960 that Social Security benefits, routinely called entitlements on Capitol Hill, are not a property right. The high court held that imbuing Social Security with a property right “would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands and which Congress probably had in mind when it expressly reserved the right to alter, amend or repeal any provision of the act.”

What must be paid are the full salaries of federal judges and the president because the framers decided that their compensation may not be diminished. The framers did not treat soldiers with the same regard, nor senators and representatives, until ratification of the 27th Amendment in 1992, which says their compensation may not vary until the next House election.

OBAMA’S CHOICE
So how would the president deal with the conflict between his obligation to faithfully execute those laws requiring payments and the law placing a limit on the federal government’s debt?

Jerome Powell, who was Treasury undersecretary for finance in the George H. W. Bush administration, suggests a purely mechanical approach. On the first day the government hits the ceiling, it pays as many bills as it has cash to cover, deferring the remainder to the following day and so on. “You just rack them up in chronological order,” said Powell, now a visiting scholar at the Bipartisan Policy Center in Washington.

Powell created a handy cash flow analysis on how he sees such a pay-and-delay approach operating. He estimates that between Aug. 3 and the end of the month the government will owe $307.6 billion, but have only $172.4 billion to pay bills. On Sept. 1 the government would have $135.2 billion of deferred bills.

One thing the president cannot do, says Laurence H. Tribe, the Harvard Law School constitutional scholar, is pick and choose who gets paid for political reasons.

In a way that is unfortunate.

Since the Tea Partiers like to remind us that actions have consequences, what would be a more fitting consequence of default than for the president not to pay the bills that come due in the districts of those very members of Congress who voted against raising the debt ceiling?  (Editing by Howard Goller)

11 comments

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“The current fiscal policy of the United States is unsustainable”, Geither to the IMF in Switzerland, January, 2011.

Either now, or later, the current continued strategy of deficit financing is unsustainable, and will cause the collapse of the economy. Worse, who is in charge? An inner city lawyer with no real world experience in anything. Every member of his “economic team”, after bankrupting the country, has quit. Geither is half out the door, and Obama is now like the Captain of Titanic, an incompetent going down with the ship.

Its time all politicians crafted a serious reduction in government expenditure now, and not in some theoretical manner on some esoteric budget not yet imagined. We need a real leader, from either party.

Posted by elusivesolution | Report as abusive

Regarding prioritizing payments, better damn well hope there’s no forest fires, hurricanes, floods or terrorist attacks this summer, because the federal government would have been gutted to the bone…..I would also add Oil spills in there, because the tea party would have successfully gutted the government regulations….

Posted by tdscreener | Report as abusive

The Titanic had enough lifeboats for the First Class passengers, and the analogy applies to today’s American economy. That’s why the Republican Tea Party is willing to crash the economy on purpose to get what they want.

Posted by GetpIaning | Report as abusive

Getplaning got it right:”The Titanic had enough lifeboats for the First Class passengers, and the analogy applies to today’s American economy. That’s why the Republican Tea Party is willing to crash the economy on purpose to get what they want”.I want to add that even if the US economy crashes the Frugalists like Boehner, Mcconnell and cohorts
will do fine because of the way GW BUSH and co left this country. No one has spoken about the wars that are draining this economy. They the rabid Republicans want social security, medicare and medicaid to pick up the slack.
Only idiots will vote for these people once again

Posted by loiters21 | Report as abusive

The Democrats have NO plan. There is Reid’s “plan” which lists all the monies to be saved from abandoning the wars. It has no real cuts because the Dems clearly want to keep on spending money we don’t have.

We are sick of the pointless spending. The Stimulus was an utter failure and Obamacare as written will be as well.

Where’s the plan Democrats?

Posted by Mauriedee | Report as abusive

It has become very, very clear to all my Republican friends that the fringe element (mostly led by the Koch brothers) are controlling the agenda here. It isn’t about a balanced budget, the agenda is control of Congress and the Whitehouse after 2012.

Republicans, including Boehner, voted 7 times under Bush2 to raise the debt ceiling even when their tax cuts were causing growing deficits. Bush2 increased Federal payrolls more than any president since FDR. It was also the first time in America history that Congress started a war with the necessary funding. (and we start 2 wars).

I do not absolve Obama here at all and the Democrat leadership. In early 2009 when they had majorities in both Houses, they should have redone the tax system immediately to pay for the stimulus and rectify the damage to the middle class. Health care is great, however taxes should have take first place over that.

The parallel to France under the Bourbon kinds and the USA today is very, very uncanny. French nobility refused to be taxed and passed bread taxes to pay for their wars. With the growing poverty and suffering, the system become more and more dysfunctional leading to the French revolution. The Tea Party Republicans and Blue Dog Democrats are leading us down that same path.

Posted by Acetracy | Report as abusive

Obama has no need to compromise and will pull admendment 14th to look like a hero. Democrats will, again, look like his seat cushion. Republicans will, again, look like duds. US rating down grade chance: 90%. Stock drop: 80%.

Posted by miscparty | Report as abusive

Come on… please stop it with the “tax the rich” battle cry. I’m in the middle and my rich friends just laugh all the way to the bank as us middle class working stiffs collecting a regular paycheck have no tax loop holes to fall back on and we wind up footing the bill. I’m so tired of the empty cries of how we have to help strengthen the middle class when the left panders to the social welfare special interests and the right panders to corporate America. It’s about time we realize that the middle are the ONLY ones who always pay and we need to simplify the tax code so that EVERYONE pays their fair share and stop the frivolous spending.

Posted by leblanc64 | Report as abusive

14th Amendment, ratified in 1868, to make sure freed slaves received due process of law. “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. There. Obama does not have the gall or right to change this. If Congress cannot get it together, here’s an easy solution. Either cut their pay in half for one year, and remove ALL bonuses that will help the US debt, or, fire them. We voted them there, we can vote them out. The seniors f this once great country need their Social Security and other Govt. annuities to live on. No jobs.

Posted by Lndnrose | Report as abusive

People should know by now that ELECTIONS have Consequences. A Default is due to the lack of Positive leadership as a result of those elections! The United States is in grave danger from the ENEMY WITH-IN!!!America has one more chance to regain their Pride and respect as a Nation. What America needs is Eight Years of Right Wing Christian Conservative government to erase Sixty years of misleading Promises!

Posted by HankPannell | Report as abusive

U.S. default would require the U.S. government to raise taxes on everyone. All sides would blame each other claiming they had no choice.

Posted by coyotle | Report as abusive