President Barack Obama has taken a lot of heat for his statement that he cannot guarantee that social security checks will go out if the debt ceiling is not raised. In fact, though, the Constitution is quite clear on the point and tells him exactly who gets paid first. He has no choice whatsoever in the matter. He must use every available dollar to make sure bondholders get paid first. If there happens to be money left over after that, he can decided whether congress gets their paychecks, social security checks go out, Medicare payments are made, Raytheon gets paid for the latest delivery of ground to air missiles, or any of the U.S. government’s other obligations are met.
In practice, that means that a refusal to raise the debt ceiling by congress mandates by the terms of the constitution that the Chinese government as a holder of U.S. Treasury Bonds must be paid in full before a single American senior citizen receives a single penny of their social security check. That’s not the President’s choice, it’s in the Constitution and it’s the choice congress is making if they do not raise the debt ceiling to allow funding of all U.S. government obligations.
To better explain this, I spoke with Steve Sheppard, the William H. Enfield Professor of Law at the University of Arkansas. Sheppard is an expert on Constitutional law, an experienced lawyer, and author of several books including “I do Solemnly Swear: the Moral Obligations of Legal Officials.”
The 14th Amendment to the U.S. Constitution which, for this discussion, states: “The validity of the public debt as authorized by law shall not be questioned,” which seems pretty vague to me, but it’s your position, as an expert in Constitutional law, that this gives the President the authority to continue paying bond holders even in the absence of a debt ceiling increase?
Yes, that much is certain. You’re right it is a bit vague. There are people who believe firmly that the intent should govern in the interpretation. There are people who believe firmly that plain language should govern, and there are people who believe reasonably firmly that current circumstance should govern the interpretation. From any of those perspectives, I think it is safe to say, the fourth section of 14th Amendment authorizes the President to pay bonds when they are mature and presented and that neither Congress nor anyone else may prevent them from being paid. That seems fairly clear.
Does it allow him even to borrow to pay those debts?
Well, yes. He can do whatever is needed in order to pay those debts. So it’s a way of saying we can’t default, but we are not out of the woods. One of the problems is, of course, is that we have an enlarging set of obligations that are not ‘public debt,’ that are merely promises that are not offered as a matter of bonds or other debt. They are promises of the future to pay payrolls and such things.
The question then becomes, do those get considered part of the public debt covered in the 14th Amendment. That’s shakier ground. It’s conceivable that the President could announce “I consider all of our obligations to be public debt whether they are issued as bonds or whether they are authorized by statute and contract. Therefore, I am going to pay them all because Congress has, whether Congress now likes it or not, made all these commitments.” That’s one of the difficulties of listening to this debate; the President didn’t make any of these commitments. Congress made every single one of these commitments.
So then, the question is what would the Congress do, and it’s funny, the Congress doesn’t seem to be able to do a great deal right now, but I do think the House would make a great show of trying to create articles of impeachment for exceeding his lawful authority. All these things would simply lead more and more foreign investors to look askance at the United States, of course, but they are all options that he has.
You said that President Obama couldn’t be immediately prevented from simply declaring federal salaries and other checks to be part of the public debt, but if he doesn’t make that claim, for which there is no real legal precedent, is he then compelled by the Constitution to prioritize those bonds before other obligations like paying social security benefits?
Yes. I think that he would have to because he is absolutely required to pay the bonds. The whole point of the 14th Amendment’s section four was to make sure that the public debt would be above politics, that there could never be a question of the full faith and credit of the United States. The United States would pay its bonds. That’s the one thing that everybody agrees that it does mean: the bonds get paid when they are mature and presented.
Now, no one is entirely sure what else it means, so the threat of default, although much disputed and much bandied about, that probably is an empty threat, and I don’t hear it being made by the President so much as I hear it being made by observers. So, the President is, constitutionally, not allowed to let the country default on its bonds. The Congress can’t stop him; there is nothing they can do. The fact that they failed to raise the debt ceiling just means that he’ll have to rob Peter to pay Paul. If Paul is a bondholder, then Paul is going to get paid.
He starts having to stop social security payments. He has to stop payments to contractors. He has to stop doing all the things that are the basis of government. I’m very confident that Treasury has a very long prioritized list of what goes first and what goes last, because we’ve had partial shutdowns before. We would get a shutdown, we wouldn’t get a default.
There’s a group among the Tea Party activists in Congress who would be perfectly happy if the U.S. prioritized bond holder payments, but was unable to make what they call entitlement payments. You’re saying that the President may be able to over-ride that eventuality by executive decree even though it would likely lead to impeachment hearings?
Yes, well, it would be uncharted territory because we’ve never had a situation in which a president has said “I’m going to go forward and pay these authorized bills without having the authority to do so. You know, he could issue bonds in order to pay them even though Congress has not authorized the payment of the bonds. I don’t think that the Tea Party understands, finally, the powers of the United States very well. I don’t think that the Congressmen who are very content to say that bondholders are going to get paid and other people are going to have to suffer fully understand that the Congress that they are members of has authorized these payments.
Even though they want to withdraw funding from all sorts of things, the commitments to fund those things have some very serious consequences to the United States. One of the fundamental problems that they’ve got is, besides issuing bonds, there are a lot of other commitments the United States makes. The bonds problem is not the only problem that we have, but it will affect the bonds and it will affect the ability of the United States to give other commitments
So, I think that it carries the risk of the United States becoming a spectacle in which people look at us as they now look at Greece. The debt in Greece has risen not just because they are slow in paying their bonds or that there was a threat to be slow in paying their bonds, but because of the instability of the government not meeting its contracts.
You said that the President or the Treasury would be within their power to issue new bonds to cover these obligations —
If he calls these obligations part of the public debt, yes.
Sure. If Treasury did issue new bonds, these new bonds then, issued on the authority of the President, without congressional authority don’t seem to fall within the scope of the 14th Amendment or would those specific bonds have less security than conventional federal bonds?
That’s a brilliant question and an important question, and no one will know the answer to it unless someone tries it. The government bases most of its conduct on customs, you know, we do what we’ve done before. For the Treasury to authorize bonds based on executive powers rather than on a specific act by the Congress, even though the President says this is within the scope of my executive powers has never been done. There are some Civil War issues and, of course, some Revolutionary War issues, but those all had more specific congressional authorization behind them. This would lack that specific congressional authorization.
In other words, we’d likely end up paying these new bondholders a large premium to accept that extra political risk, making it a financially unappealing idea for the country. So it may not be a viable tool for the President to raise funds.
It would be based upon spending authority instead of funding authority and that’s not so clear. Whether or not an investor would buy them, whether or not an investor would buy them without demanding a high premium, whether or not a court would be willing to enforce it, whether it’s something a future administration would agree to honor, all of those would be open questions and I think that the Treasury would argue strongly to avoid them. Therefore, I think that this is a very, very last ditch effort to make sure that we continue to pay our debts, but it’s within the realm of the believable. It’s quite possible, looking at the scenario in which the congress does not get past its current difficulties.
I’m trying not to point fingers at either side, but clearly they are at an impasse. If they can’t get past that impasse, what will the President do? Does he really want to begin laying off employees? Does he want to stop sending out disability checks? Does he want to stop funding schools just before they open up? All of these things become very serious issues with great rapidity.
The funny thing is that he can, having bought back bonds, he can certainly reissue bonds that he’s cashed in. So he can buy himself a window there. It’s not that we have run out of the ability to issue new bonds, because the way the debt limit works is that it is an authorization to issue a certain dollar value of bonds and let’s say he cashes out the $100 billion coming due, he could issue another $100 billion so it slows the process, but it doesn’t end the process.
There will come a point where he runs up against a wall and at that point he may decide that if Congress hasn’t given him any relief, I think it’s reasonable to that say that these amount to public debt and I’m going to issue bonds in order to meet them, because they have all been created by Congress through legislation.
Now this is an intermediate step and it’s a little harder to describe, the way Eric Posner has argued it, he would say simply that the President just has this power. That is very dangerous and it runs completely contrary to the idea of a Constitutional government of laws. On the other hand, where we already have a Constitutional statement that says someone has got to make sure that nobody can question that the United States will make good on those commitments in the light of its public debt, there is a middle ground which is to look at those debts and commitments and make sure that they are honored so that politics does not hold the credit of the United States hostage.
As I say, it’s not just the bond ratings that are there, the whole currency can collapse. If nobody believes the United States can pay its debts, because of a political impasse, we are in trouble.
Is that really, though, the state that we’re in? Do people think it will be more than a couple of months until we get it all straightened out?
I don’t think it’s the state that we’re in, but I think it’s a state that we can now foresee. I don’t think that we’re going to get there. I think in fact, the Congress will reach a compromise. I think you’re right, within a couple of weeks we’ll see something fixed. Not completely fixed, but fixed enough.
Part of what I do as a Constitutional lawyer and basically as a lawyer, is to figure out what do you do when things go wrong? What’s your fallback position? Well, that didn’t work, what’s the next one, and so on.
For the short term, it’s easy. The government cannot default. What about the mid-term? What if it’s not a problem of default, but it’s a problem of not meeting our other contracts? Well, there are other tools that can be brought to bear, but they are less well understood because we’ve never needed them before.
From a business perspective, if I were placed in a position where I did not have access to funds to meet my obligations, the first thing I would try to do is to renegotiate those obligations with bondholders.
That’s right. Unfortunately, those are fixed. The problem is in the United States, we’ve got this Constitutional obligation to favor bond holders over other obligations. If we were a private company, we could do things like renegotiate with our bond holders, you know, they’ve got our notes, but we’ve got their value. We’re not in the situation of a private commercial entity that could renegotiate the long-term note holders because you’ve got to keep your suppliers and vendors all lined up first. That’s not how government works.
Currently, we’ve been viewed as probably the most secure investment in the world. Even if we are down-graded because of this bump in the road, I don’t think there’s any question of it being a permanent state of affairs, do we really risk our status as the most secure investment in the world?
I think it really depends on how big of a hiccup and how long people are thinking of this as a hiccup. Not just people generally, but how long the finance minister of China and the director of Sovereign Wealth Funds and the head of Warburg and all the other big investment houses think it. Frankly, I think it’s probably something we can ride out for a brief period of time. The good news is that Europe is in trouble and China’s got its problems and everybody else who is in the business of running a national economy, on a big scale anyway, has got their problems right now too. So, we can have a few problems before this becomes an immense problem.
The United States could find its currency being a less-favored reserve currency very quickly. It’s not like we would lose our whole status, but the Chinese have been very eager to get the world to move from a single reserve currency to a basket of reserve currencies.
The Europeans are keen to see that too. They’d like to see people buying Euros in the same way they buy dollars in order to give themselves a global hedge like we have. The fact is that there are people who have been waiting for a moment like this for years. The question is do we provide it for them because we can’t get our act together.
If any of them gain significant advantage because of this, then I think the United States Congress should hang its head in shame.
I spoke with an economist yesterday, and, without your basis in Constitutional law, his assumption was that any lack of ability to pay would first, and substantially, be borne by bond holders rather than other U.S. government obligations.
It’s a natural assumption because, in the private world, you can normally hold on to your bond holders and push other claimants to the fore. We’ve got this Constitutional prioritization for debt, so we’re going to have to go with that. All the congressional statements to the contrary, we’re stuck with the Constitutional system that we’ve got and sometimes I think they don’t realize that. They are so keen to go with the Constitutional system that they prefer, they forget we have the one we’ve got. The President runs the Treasury and it’s the congress that’s created all these obligations and we’ve got these obligations whether we like it or not. If we stop honoring them, we’re in big trouble.
The economist agreed that whatever the outcome, none of it was good.
The thing that I find really untenable about it, is that congress members are within a legal system. We don’t often think of the law as dealing with money and debts and things like that, we think of them as special, that the economy is separate from the law. The law creates all of these opportunities and they are all defined by these laws. The power to regulate is, in fact, a legal power and these people have legal responsibilities as officeholders. The system demands that they exercise their discretion in certain ways to protect it.
You don’t get the right to show up with a brand new philosophy and say “I’m just going to rebuild the system to meet my philosophical needs.” When you enter into the system, you’ve got to make the system work according to its own terms or you’re not really acting in a way that is morally defensible. I know that there a lot of guys out there that ran for public office, claiming that public office is a bad thing. Well, this is not helping us now. A lot of people wanted to become officials in the government claiming that government is bad. This is not helping us. Instead of learning about the government and knowing how the economy works, these people are, frankly, acting with very little knowledge about what the economy is or how the economy relates to a giant state like the United States of America. They are just, well, making mistakes. We are going to pay for those mistakes if they don’t stop it.
The White House has in the past couple of weeks, has indicated that it is not planning on invoking the 14th Amendment to work outside of Congressional authority. Your view is that the White House is, in fact, compelled to use 14th Amendment authority.
I think if it got to the point where we did not have the cash on hand to pay a round of bonds that matured the Constitution would require the President to use the 14th Amendment to pay. He’d have to find dollars to pay, in one way or another and if it meant a simultaneous issuance of new debt, then that’s what it means. It’s an obligation the President has, whether the President wants it, whether the Congress wants it. The Congress has no power not to secure that debt.
The best that he could do for social security checks and other obligations would be to invoke executive authority to declare them a part of the public debt protected by the Constitution and count them all equal?
I think that’s right. The language of the 14th Amendment is so broad not to allow the debt to be questioned, that he can’t vary the terms. He can’t make it worse. He’s going to have to treat all the bond holders according to the terms they have. We can’t go back and renegotiate our bonds.
By that definition, there is no risk at all to current bondholders and no risk at all of debt default.
That’s exactly right! That’s the fundamental Constitutional principle of the fourth section of the 14th Amendment. It has powerful implications for all these office holders, but it’s there to do exactly what you said. There cannot be risk to bond holders according to the Constitution.
I don’t have a solution to the crisis. That’s not something anyone other than the members of congress and the President can have, but I do understand the boundaries around which they can work. There is a gate through which he must go, whether the congress believes it or the President even wants to believe it. I understand why he’s reluctant to do that. When it gets later, he will probably discover that he has no choice.
Right. From a congressional viewpoint, especially a GOP controlled congressional viewpoint, they would love the President to appear to overstep his authority, or be seen as making a free choice to cut social security checks and military paychecks leading into an election year while still paying Chinese bond holders. So they would be happy to have him invoke the 14th Amendment and he is likely posturing so as not to make that look like an option.
I think that’s right. It violates the Chutzpah rule: you shouldn’t have refuge from a crisis that you’ve provoked. I don’t think they are doing it deliberately, I think it is an unintended consequence. The fact of the matter is that he has attempted to get the Congress to do its job and the Congress has failed to do its job. So, he will have to do what the Constitution mandates him doing, and they will blame him for actually doing his job. That’s unfortunate, but that’s the situation. He became the President to carry out the Constitution and the good news is that he now has to do it. That doesn’t make it easy for him.
Unlike Steve Sheppard, I do think they are doing it deliberately. I believe the Tea Party wing of the GOP wants a government shutdown. They are willing to sacrifice the interests of the American people who rely on social security checks, willing to sacrifice the families of military service members who rely on their government paychecks, willing to sacrifice absolutely anyone and anything to hurt President Obama politically and get closer to their goal of deconstructing the entire federal government. What they are doing is weakening America politically, financially, and even militarily if we cannot adequately fund military actions, technology, and supplies because the American dollar loses its status as the world’s reserve currency of choice. The ignorant, undisciplined freshmen Republican members of the House of Representatives are playing with fire and the American people are the ones about to be burned. Heaven help us all if one of them makes it to the White House in 2012.