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.

Sunday, July 24, 2011

Time To Give Republican Voters A Dose Of Reality

The only thing that will cause the Republicans in the House to pull back from the cliff is for their voters to start screaming at them. That will only happen when those voters understand how default will affect them personally, in the pocketbook. The President has talked in vague terms about those affects. But he has been trying to avoid panic in the markets as well as in the public. At this point, panic is the only weapon he has left.

People need to be told what payments will be delayed or not made. We are talking about checks for Social Security and veterans, to government contractors, to states for Medicaid and other things, just to name a few. They also need to know what federal services will be halted because of a lack of funding.

Starting week after next, if we cannot borrow, the Treasury will receive tax receipts that will only allow it to pay to 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.

Most people don't understand or care about "the markets," interest on bonds and all that other stuff. They do care about their own checkbooks. Well, starting in the first week of August those checkbooks will all take a hit. There is hardly a person who will not be directly or indirectly affected when those checks are delayed or stop coming entirely.

There may be a few item, such as interest, that have a statutory preference for payment. For everything else the President has essentially three choices in distributing limited funds. He can decide on winners and losers by paying some and not others. He can pay them all on a pro rata basis. Or he can simply have them paid in the order they are due. My guess is that he will choose the last course.

Nothing will get the Tea Party voters calling their Members of Congress faster than to be told in explicit terms, with amounts and dates, that their August Social Security check will be three weeks late, their September check will be seven weeks late, and that Medicare payments for their Doctors, hospitals and medicines will not be paid on time and could be delayed months.

It is time to tell these people the truth. And if that causes panic, so much the better. Because it will take their panicked calls to the legislators to bring about a change.

One other thing. There are some who think that since moneys have been appropriated they have to be spent and that sets up a conflict between the appropriations laws and the debt limit law. No such conflict exists.

Appropriations acts tell the president to spend. The debt ceiling does not tell him not to spend, it merely prohibits him from borrowing. This is a critical distinction because each appropriations act begins like this,

"The following sums are appropriated, out of any money in the Treasury not otherwise appropriated."


The key words are "out of any money in the Treasury." The appropriations acts only direct the President to spend money that is in the Treasury. They do not direct that money be put in the Treasury. The laws that do that are the laws that impose taxes which are deposited in the Treasury and the laws that authorize borrowing, the proceeds of which are put in the Treasury. The debt ceiling operates as a limit on that borrowing power. Bottom line, if there is no money in the Treasury the appropriations act doesn't appropriate anything.

When you hit the debt limit the only money "in the Treasury" is money from tax receipts. And that money is all the money the Treasury can spend. This is not a situation involving impoundment of funds, whether by rescission or deferral. They are governed by The Budget and Impoundment Control Act of 1974 They involve situations where there is ample money in the Treasury, acquired by taxes or through borrowing, and the President decides to not spend some of it. In this instance there is insufficient money in the Treasury to pay the bills because tax receipts are too low and there is no authority to borrow more.

Sunday, July 10, 2011

Treasury General Counsel Nixes Constitutional Challenge To Debt Limit

The General Counsel of the Treasury Department took the 14th Amendment off the table when he sent a letter to the NYT saying that the debt limit law is binding. Here is the text:
The New York Times
620 Eighth Avenue
New York, NY 10018

To the Editor:

Contrary to Professor Laurence Tribe’s assertion (Op-Ed, July 8), Secretary Geithner has never argued that the 14th Amendment to the U.S. Constitution allows the President to disregard the statutory debt limit. As Professor Tribe notes, the Constitution explicitly places the borrowing authority with Congress, not the President.

The Secretary has cited the 14th Amendment’s command that “[t]he validity of the public debt of the United States… shall not be questioned” in support of his strong conviction that Congress has an obligation to ensure we are able to honor the obligations of the United States. Like every previous Secretary of the Treasury who has confronted the question, Secretary Geithner has always viewed the debt limit as a binding legal constraint that can only be raised by Congress.

Sincerely,

George W. Madison
General Counsel

Posted in: Debt Limit


He doesn't clarify why it is a binding restraint. It could be that he doesn't think the debt limit is inconsistent with the 14th Amendment. Or, as was suggested in this article, it could be his opinion that the President cannot violate a law based on a non-court sanctioned determination that the law is Unconstitutional.

I happen to think that the second argument is the more likely, but certainly don't know. I reached that opinion because since 1803 the Supreme Court has made clear that the Courts alone have the power to declare laws Unconstitutional. While the President could order Treasury to issue new debt in violation of the debt limit and fight it out later in Court, I don't think he wants to risk the firestorm that would arise. He would get attacked by Democrats as well as Republicans for such an act and I suspect he feels that he has enough other issues on his plate.

Friday, July 01, 2011

Can The President Ignore The Debt Limit If He Thinks It is Unconstitutional

The real question in the debate on the Constitutionality of the debt limit is not whether it is Constitutional but whether the President can ignore the law based on his unilateral determination regarding its Constitutionality. If he took such an action it would be a truly profound assertion of Presidential power. As much as this could be viewed as a righteous assertion of Presidential authority in the face of an irresponsible Republican cabal in Congress, once asserted, this power will continue to be available. It will be used again.

Before getting to that issue, here's a brief discussion of the debate regarding the debt limit.

There is a law that limits the amount of money the United States can borrow, the total amount it can owe at any one time. It reads

31 USC 3101(b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $14,294,000,000,000, outstanding at one time, . . . .


The Treasury reached that $14B limit in May. Here is a comprehensive Congressional Research Service Report report explaining the history and operations of the debt limit. Since May, Treasury has used some "extraordinary" powers, such as canceling Civil Service Retirement Fund obligations, to keep paying the bills.

But on August 2, 2011, Treasury will reach the limits of its authority. Beginning then and each month thereafter we will have two dollars of income for every three dollars of bills that must be paid. Choices will then be made between honoring obligations to bondholders, honoring contracts to vendors and suppliers, honoring statutory obligations to social security recipients, soldiers and other Federal employees, complying with statutory Medicare obligations to doctors and hospitals, and other obligations to states and municipalities, just to name a few.

Since the Republicans are quickly converting the possibility of defaulting on these financial, contractual and statutory obligations from an academic question into a real potential nightmare people have wondered whether that debt limit law is even Constitutional. After all,

Section four of the 14th Amendment reads,
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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.


The debate on the 14th Amendment is examined in an article by Jack Balkin in which he concludes,

What do we learn from this history? If Wade's speech offers the central rationale for Section Four, the goal was to remove threats of default on federal debts from partisan struggle. Reconstruction Republicans feared that Democrats, once admitted to Congress would use their majorities to default on obligations they did disliked politically. More generally, as Wade explained, "every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress."


It is not he purpose of this article to debate whether the debt limit violates the 14th Amendment. It is sufficient to say that reasonable legal arguments can be made to support that position. The language is broad, covering not just debt instrument but other obligations , including statutory obligations to pensioners. The language goes to all debts, not just civil war debts. And the purpose was to keep subsequent Congresses from reneging on the obligations incurred by prior Congresses. The broad reach of the language is discussed in the Supreme Court decision, Perry v United States. In any event, there is a sound basis for the President to assert that the debt limit is Unconstitutional.

In fact some in Congress have suggested he may do just that. Today Senator Schumer suggested that the President could ignore the debt limit law, but cautioned that it was premature to take such action and that it was not without risks.

Risks? You bet. And any such action 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.

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 ignoring and violating a law that clearly applied to his actions. He would be doing so even though the law has not been challenged let alone held to be Unconstitutional by a court.

Most legal scholars believe that the President has a duty to enforce the law regardless of what he thinks about it. This obligation arises from the Article II obligation of the president to faithfully execute the laws. The obligation to faithfully execute those laws is also in the Presidential oath,

I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States.


By that oath he President swore to faithfully execute the Office of President. Foremost among the duties of the office are to "take care that the laws be faithfully executed." The debt limit law, 31 UC 3101 is one of those laws.

All laws that are duly enacted a 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. If a President is presented with a law that he thinks is Unconstitutional he should not sign it. The same applies to every Member of Congress who votes on a law. But once passed and signed, it is the law.

There are some legal scholars who disagree, arguing that the President has no more obligation to enforce laws he thinks are Unconstitutional than to enforce the laws of another country. The scholars who hold that view embrace the concept of an imperial Presidency. Thankfully, that is a minority view.

The issue is simple and straightforward: "who decides if a law is Constitutional." If the President does, then there are only two branches of government and the Presidency can override the legislature at its will. If both the Court and the President decide, you have uncertainty and chaos because there is no ability to reconcile conflicting positions. It the decision rests with the Court, you have certainty, order, and a true separation of powers. Thankfully, most Presidents have respected this third view and the circumstances where laws have been ignored are rare. And I think President Obama will also respect this position. He takes the long view and opening this pandora's box would be fraught with risk for our country. He won't go there.