Tuesday, July 26, 2011

Looking Forward, Obama Faces Two Choices This Weekend

It is increasingly clear that the debt limit will not be raised before we default, which means we will run out of sufficient funds to pay our bills. Before that happens the President will have to choose between two options. He can announce that he has the authority to ignore the debt limit and order the Treasury to continue issuing debt. Or, he can announce that the Treasury will begin to delay or stop payment on bills as they come due. Each choice is fraught with risks.

Here are the basic facts. Starting week after next, if we cannot borrow, the Treasury will receive tax receipts that will only allow it to pay about 56% of its expected bills for the month. Projections for the entire month show $210B of revenue to pay $375B of bills. That means for very $100 in bills only $56 will go out. Those bills are for everything: salaries, contractors, Social Security, and thousands of other categories totaling 70 million checks per month.

The President's first option is to issue an Executive Order announcing he has directed the Secretary of Treasury to continue issing debt, nothwithstanding the debt ceiling. He will cite as authority some emergency power of the President and support it with determinations that the debt limit conflicts with one or more provisions of the Constitution and/or other Federal Statutes. It is not the purpose of this article to discuss the merits of those legal argument. The 14th Amendment argument is discussed here. Some lawyers think the arguments are strong, others think they are weak. Whatever side one comes down on it is sufficient to say there are colorable legal arguments that can be made by the President if he so choses and decides to leave it for later to fight the issue out in the courts.

The President has a second option. He can declare that once borrowing stops he will have to curtail or delay the payment of bills. He has three choices for distributing limited funds. He can decide to pay some bills and not others, essentially choosing winners and losers. He can decide that all bills will be paid on a pro rata basis. Or he can simply decide that bills will paid in the order they are due. No matter what course he choses it is probable that interest payments on debt held by the public will always be paid on time. The same is probably true for Congressional salaries given the 27th Amendment, but he may want to litigate that also.

My guess is that he will choose the last course. Choosing winners and losers introduces a whole host of other problems and has questionable legal authority. Pro-rata payment would be fine, but the complexity of administering that over time would be immense. Paying bills on a first in first out option is the easiest politically and operationally.

If he choses that option it will mean, for instance, that August Social Security checks will be late. Those paid early in the month may only be a week late, but as the month progresses, the delays will increase. And the delay will be compounded in September. The same will be true for Medicare payments to Doctors, hospitals and for medicines, payments to states for Medicaid and unemployment, checks to members of the military and all other government workers, and payments to all Federal contractors, etc.

If I had to bet, I would say the President is not going to announce he can issue debt above the debt limit because that would be a truly profound assertion of Presidential power. Let's be clear. We are talking about the President having the power to unilaterally decide whether he will comply with laws that are duly enacted by Congress and signed by the President. To the best of my knowledge no President has done that, in this way, since Lincoln suspended the Habeas Corpus provisions of the Judiciary Act of 1789. The action was challenged by a prisoner but Lincoln ignored a court decision which ruled the action Unconstitutional. Eventually, however, Congress essentially ratified his action.

This is not the same as the President's decision to not defend the Constitutionality of DOMA, the Defense of Marriage Act. In the case of DOMA, the Constitutionality of the law had been challenged in court. The President decided that the law was no longer Constitutionally defensible and argued that position in court. However, he also announced that he would continue to enforce DOMA until the courts struck it down.

This is not like the President's decision regarding Libya and the War Powers Act. While all Presidents have questioned the Constitutionality of the War Powers Act, all have generally complied with it. In the case of Libya, the President is arguing that he has consulted with Congress and in any event the Act doesn't apply because we aren't involved in hostilities. Whether one agrees or disagrees with the President's position he is clearly not taking the position that he even though the Act applies he is violating it based on his determination of its Constitutionality.

In the case of the debt limit the President would be directing the Treasury to ignore a law that clearly applied to its actions. He would be doing so even though the law has not been challenged let alone held to be Unconstitutional by a court.

Virtually all legal scholars believe that the President has a duty to enforce the law regardless of what he thinks about it because all laws that are duly enacted are presumptively Constitutional. This is a basic tenet of our legal system that was recently referred to in the 6th Circuit Decision upholding the Affordable Care Act

The minimum coverage provision, like all congressional enactments, is entitled to a “presumption of constitutionality,” and will be invalidated only upon a “plain showing that Congress has exceeded its constitutional bounds.” . . . The presumption that the minimum coverage provision is valid is “not a mere polite gesture. It is a deference due to deliberate judgment by constitutional majorities of the two Houses of Congress that an Act is within their delegated power . . .(citations omitted).

No Court has held that the President has the power to issue a binding ruling that any law, such as the debt limit, is Unconstitutional. Rather the courts have held that such power resides in the Supreme Court. Since the 1803 case of Marbury v Madison it has been accepted that only the Court can declare a law Unconstitutional. Unless that happens or until it is repealed, the debt limit is the law of the land.

Most Presidents have respected position and the circumstances where laws have been ignored are rare. President Obama may decide that this situation presents an emergency with such consequences that he needs to assert the authority to ignore the law. But I suspect he won't. He takes the long view and opening this pandora's box would be fraught with greater risks for our country than dealing with the problems associated with having insufficient funds to pay our bills on time.

Whichever course he choses he will need to announce it before the debt ceiling is hit. If he choses not to assert the authority to override the debt limit then the sooner he announces that, the better. Yes, he is concerned about spooking the market. But such an announcement may finally light a fire under the Tea Party voters when they understand that they will be impacted financially. We can only hope. One thing is for certain. The time for appeals for bi-partisanship and compromise is over. It is time for a lesson in stark reality.

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