Default and consequences
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.
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)