14th Amendment, Debt Ceiling & Perpetual Bonds
When I read this (third article below), I thought of an earlier commentary by one of our peer-reviewed economists. This is what Robert Waldman had to say:
“Investors are glad to pay the Treasury to keep their wealth safe. Now consider the US Federal Government intertemporal budget constraint — the present value of spending must be less than or equal to the present value of revenue. What is the present value of revenue ? It is calculated by discounting revenues which grow approximately proportional to GDP by the inflation rate which hmm carry the one, round off a bit works out to roughly INFINITY.
If the Treasury can borrow at an interest rate lower than the trend rate of GDP growth (r<n), then the US Federal Government does not have a binding intertemporal budget constraint. This is the point of debt and taxes I, which turns out to be highly relevant to the Washington Post opinion page printed the day before yesterday. A totally standard calculation implies that there is not now a limit to “economic space” now. This is the normal pattern post WWII except for the period 1980-2000 — indeed the US managed the huge WWII debt with no noticeable trouble. Another way of putting this is that, if r<n then debt never has to be repaid. It can be rolled over forever and will shrink as a fraction of GDP until it is negligible. This is not a heterodox position — the link is to an AEA Presidential Address which is the epitome of orthodoxy.” Debt and Taxes IV: This Time It’s Personal, Angry Bear, Robert Waldman
In Employ America (below), The author Skanda Amarnath references an article (Biden Can Win the Debt-Ceiling Fight With Consol Bonds (nymag.com) by Eric Levitz. Unless I am mistaken, this is the same or similar to what Robert was saying above.
“In any case, a minimally dramatic or legally ambitious solution to the debt-ceiling standoff would be preferable. And the Treasury Department has one: It can keep funding the government through the sale of consol bonds.
In simple terms, a consol bond is one that never matures. A normal bond commits a borrower to paying back the principal on their loan plus interest at a set date. A consol bond, by contrast, requires the borrower to make annual interest payments forever but does not require them to pay off the loan’s full value at any particular point in time.
This is handy since the legislation establishing the U.S. debt limit defines the federal debt as the amount of principal that the government is obligated to repay. Thus, while a normal U.S. Treasury bond increases the national debt as defined by the debt ceiling, a consol bond does not. If the government borrows money via bonds that have no principal — only interest-payment obligations — then it can continue funding its operations indefinitely, even in the absence of a debt-ceiling hike.
There is a clear downside to the consol-bonds solution. In order to attract buyers for bonds that never mature, the Treasury will need to offer a high interest rate, increasing the cost of government financing. But this would still eliminate uncertainty about the government’s capacity to repay previously issued, normal bonds.” Biden Can Win the Debt-Ceiling Fight With Consol Bonds, nymag.com, Eric Levitz.
Skanda Amarnath references Eric Levitz’s solution which I have recouped part of directly above have to do with funding debt with Consol Bonds. The only issue I see is return on 30-year bonds being greater than when Robert wrote his piece. Perhaps, there is a different and lower rate for Consol bonds? In any case the idea is similar.
14th Amendment, Debt Ceiling & Perpetual Bonds: The Treasury Department is Hiding Political Failure In Technocratic Excuses, employamerica.org, Skanda Amarnath
Many thanks to Carlos Mucha for his generous assistance.
The 14th Amendment is strongly relevant to the debt ceiling, but unlike what some elected officials and journalists have claimed, it is not a ‘hidden power’ that can be invoked to carry out some obvious action. It is a Constitutional constraint that requires the Treasury Department to take any lawful action that would avoid a breach.
If there is a lawful action that simultaneously avoids both a breach of the debt ceiling and a default that violates Section 4 of the Fourteenth Amendment, the Treasury has a duty to pursue such action to the fullest extent. There are in fact multiple Constitutional constraints and considerations that the Treasury must take seriously right now, including the potential relevance of the Presentment Clause and separation of powers principles. All of these considerations make default and ‘payment prioritization‘ highly disfavored outcomes even on legal grounds, leaving aside the catastrophic economic implications. And the fact that Treasury appears to be operationally unready to undertake such lawful action—even though the debt limit was functionally reached over four months ago—is an act of constitutional malpractice of the highest order. We sincerely hope the Treasury is taking operational readiness more seriously than meets the external eye.
Thus far, Treasury seems to have gambled that political, media, and business-driven pressures on Congressional Republicans might force a change of heart towards a “clean” debt ceiling hike. But such a gamble is purely a speculative political judgment–and a poor one at that. Speaker McCarthy has political leverage and a fragile caucus to please–two facts that would have informed even the most novice of political observers away from a “clean hike” strategy that was divorced from credible unilateral solutions. Furthermore, none of the actors supposedly motivating the GOP caucus, like bankers or the business community writ large, has any interest in pushing the GOP towards a “clean hike.” Unlike everyday working Americans, such actors are unlikely to feel the worst of the political compromises that might be made to raise the debt ceiling. And they have insufficient incentive to weed out the moral hazard dynamics stoked by such concessions, all of which increase the needless prospect of future debt ceiling showdowns and default risk.
Now the most concerning piece of this: having failed both in its political strategy and in developing the operational readiness to undertake lawful alternatives, Treasury’s poor political judgments are being masked by technocratic justifications (‘the Supreme Court might block our action’ or ‘anything other than a debt ceiling increase would sow too much uncertainty and spook financial markets’). At every critical juncture, the Treasury in particular has been most eager to write off any pathway to a lawful unilateral resolution and seems poorly informed about the full suite of solutions available.
Make no mistake, multiple lawful solutions exist, and some do not involve strained interpretations of the law or even unprecedented actions.
If the Treasury is sufficiently competent, it would already be prepared to execute unilateral solutions that overcome the array of legal, technical, and political constraints. In addition to the more well-known “platinum coin” solution, the Treasury retains the authority to issue callable perpetual bonds, that too in the statutory provision that directly succeeds the debt ceiling in the U.S. Code. Unlike the statutes pertaining to the issuance of Treasury bills and Treasury notes, the statute pertaining to the issuance of bonds does not specify a time limitation in which there is to be a principal payment to be repaid. Issuance of perpetual bonds would straightforwardly not count against the debt ceiling because perpetual bonds have no face value and are issued exclusively on an interest-bearing basis. Issuing such instruments is not even novel; they have precedent and a substantive financial purpose other than avoiding the breach of the debt ceiling. The Treasury established the precedent and practice of issuing callable perpetual bonds before the debt ceiling and general bonding authorities were ever enacted.
Everything up to this moment suggests that the Treasury is not prepared to implement such solutions, and has instead chosen to travel down a dangerous path. It smacks of delusion to prematurely write off all credible alternatives in the hopes that ‘burning the ships’ might motivate a ‘clean’ debt ceiling increase on its own. We would argue that this reflects a lack of seriousness about the realities of a default, and a lack of respect for the Constitutional and statutory obligations officials are sworn to uphold. If what appears plainly obvious is in fact true, Treasury needs to be held accountable for its irresponsible approach to planning and tail risk preparation. We can only hope that the Treasury expeditiously demonstrates to the public that they are ready to take all lawful solutions to the debt ceiling showdown, including unilateral solutions, with the requisite seriousness.
No agreement yet on debt ceiling, but Biden
and McCarthy say they’re optimistic after meeting
AP – late last night
(Looks like McCarthy wearing dress sneakers again.)
President Biden and House Speaker Kevin McCarthy both said they had a productive debt ceiling discussion late Monday at the White House, but there was no agreement as negotiators strained to raise the nation’s borrowing limit in time to avert a potentially chaotic federal default. …
Each side praised the other’s seriousness, but basic differences remained. They are at odds over how to trim annual budget deficits. Republicans are determined to cut spending while Biden’s team offered to hold spending levels flat. Biden wants to increase some taxes on the wealthiest Americans and some big companies, but McCarthy said early on that that is out of the question. …
In a brief post-meeting statement, Biden called the session productive but merely added that he, McCarthy and their lead negotiators “will continue to discuss the path forward.” Upbeat, McCarthy said their teams would work “through the night.”
Biden said all agreed that “default is not really on the table.”
Though there is no agreement on basic issues, the contours of a deal seem within reach. A budget deal would unlock a separate vote to lift the debt ceiling, now $31 trillion, to allow more borrowing. …
… The White House wants a two-year budget deal, keeping 2024 spending flat. They proposed a 1% cap on spending growth for 2025, according to a person familiar with the talks and granted anonymity to discuss them.
A compromise on those topline spending levels would enable McCarthy to deliver for conservatives, while not being so severe that it would chase off the Democratic votes that would be needed in the divided Congress to pass any bill.
“We’re going to find a baseline that we agree to that will be less than what we spent this year,” McCarthy said back at the Capitol.
Time is growing short. The House speaker promised lawmakers he will abide by the rule to post any bill for 72 hours before voting, making any action doubtful until the end of the week — just days before the potential deadline. The Senate would also have to pass the package before it could go to Biden’s desk to be signed into law.
After a weekend of start-stop talks, both Biden and McCarthy have declared a need to close out a compromise deal. U.S. financial markets turned down last week after negotiations paused amid a jittery economy. ,,,
Personally, gimmicky ideas like the perpetual bonds and the $1T coin are essentially too cute to be acceptable. Also the ‘nat’l debt is sacred’ clause of the 14th Amendment, which was passed to remind the South that they had lost the Civil War and still rankles the modern day GOP, reminding them that Abe Lincoln was their founding father, more or less.
The perpetual bond may seem gimmicky in this context, but it also sounds like a single payment annuity that could be a guaranteed income stream for a retiree like myself. Or a quick and easy way to fund a charity after I am gone. It would depend on the cost and return, but it might even be popular.
Biden and McCarthy describe ‘productive’ meeting, but no agreement is reached
NY Times via Boston Globe – late last night
President Biden and House Speaker Kevin McCarthy expressed optimism Monday that they could break the partisan stalemate that has prevented action to avert a default on the nation’s debt, but they remained far apart on a deal to raise the debt limit as Democrats resisted Republicans’ demands for spending cuts in exchange.
The two met face to face at the White House for the second time in two weeks in a show of goodwill after a weekend of behind-the-scenes clashes among negotiators, punctuated by a move by Republicans on Friday to halt the talks and accusations by both sides that the other was being unreasonable.
With Biden back from a summit meeting in Japan, the tenor appeared to have changed considerably.
“We don’t have an agreement yet,” McCarthy told reporters at the White House after the meeting. “But I did feel like the discussion was productive,” he said, adding later that he believed the tone of the talks was “better than any other time we’ve had discussions.”
“I believe we can still get there,” McCarthy said. “I believe we can get it done.”
He said he expected to speak with Biden daily until a deal could be struck.
With a default looming as soon as June 1, Biden and McCarthy began their latest meeting sounding upbeat about finding common ground in an effort to avoid economic catastrophe and left dispatching their top advisers to hammer out an agreement in the coming days.
“We still have some disagreements, but I think we may be able to get where we have to go,” Biden said as the two sat down in the Oval Office. “We both know we have a significant responsibility.”
Biden said in a brief statement after the meeting that the talks were “productive.”
“We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement,” he added, saying he and his negotiating team would continue talking with McCarthy and his.
Still, the two sides remained at loggerheads. The White House has called Republicans’ demands for spending cuts extreme, while McCarthy and his aides have accused White House officials of being unreasonable.
The number of legislative days for Congress to vote to raise the debt ceiling before the projected deadline is rapidly dwindling. Treasury Secretary Janet Yellen on Monday reiterated her warning to Congress that the United States could exceed its authority to borrow to pay its bills as soon as June 1. She said in an interview with NBC’s “Meet the Press” over the weekend that the odds of the government being able to hold out until mid-June — when a substantial amount of quarterly tax revenue is expected to roll in, giving the Treasury more breathing room to cover its obligations — were “quite low.”
And Republicans hinted that no deal was likely to materialize until a default was truly imminent. Asked on Monday evening what it would take to break the deadlock, McCarthy replied simply: “June 1.”
Chief among the outstanding issues is how much to spend overall next fiscal year on discretionary programs and how long any spending caps should be in place. Republicans want to allow military spending to increase while cutting other programs. But they have shown some flexibility around how long they would seek to cap spending overall, coming down from their initial demand of a decade to six years.
That is longer than Biden wants. White House officials have proposed holding both military and other spending — which includes education, scientific research and environmental protection — constant over the next two years.
“These are tough issues,” said Rep. Patrick McHenry, R-N.C., and a key ally of McCarthy’s who has been involved in the talks and attended the White House meeting. “A directive to cut spending year over year is the toughest thing to do in Washington, D.C. But that is the speaker’s directive to his negotiating team. It is our expectation to be able to get that.”
Hard-right members of McCarthy’s conference have continued to pressure the speaker not to accept anything less than the spending cuts that House Republicans passed in their debt limit bill last month, which would have amounted to a reduction of an average of 18% over a decade. ,,,
… And Republicans hinted that no deal was likely to materialize until a default was truly imminent. Asked on Monday evening what it would take to break the deadlock, McCarthy replied simply: “June 1.” …
(The biggest gimmick of all?)
(Biden and MCarthy are after all both centrists, but approach the center from opposite sides, the fringes of which are very far apart. As centrists, they have to find ways to stay functional, in office, so as to govern.)
NY Times: …
“I firmly believe what we’re negotiating right now, a majority of Republicans will see that it is a right place to put us on a right path,” (McCarthy) said.
But he also hinted that members of his conference should prepare to accept a final product that falls short of what some lawmakers have demanded.
“I don’t want you to think at the end of the day, the bill that we come up with is going to solve all this problem,” he said. “But it’s going to be a step to finally acknowledge our problem and put one step in the right direction. And we’re going to come back the next day and get the next step.”
Once negotiators agree to a deal, it will take time to translate it into legislative text. McCarthy has promised that he will give lawmakers 72 hours to review the bill, and said Monday that he believed negotiators would need to agree to a compromise this week in order to pass legislation raising the debt ceiling before the projected June 1 deadline. …
(Biden and MCarthy are after all both centrists, but approach the center from opposite sides,
B.S. sanitizing Repubs as centrists is a fantasy of the worst kind. These are true subversives. They have little desire to be a part of the nation and promote the welfare of all.
To call McCarthy a “centrist” is to attribute to him a political philosophy not in evidence. McCarthy is a flaccid member to be flexed in any direction his right wing pulls it. McCarthy controls nothing and no one.
“These are true subversives. They have little desire to be a part of the nation and promote the welfare of all.”
True. But stating this truth will hurt GOP fee-fees, and it is more important to get along than it is to face reality, donchano.
It takes a centrist to recognize another centrist, evidently.
He may be a pseudo-centrist though, if there are such critters.
Not all GOP folks are centrists, obviously. Nor are all Dems (sufficiently) liberal, it would seem. I’ve taken a personal pledge to never again vote for anyone from the GOP. Does that make me sufficiently liberal?
Both left & right would seem to prefer that no agreement be reached that requires budget cuts, OR that an agreement is reached that DOES require budget cuts.
Can’t have it both ways. So, we can expect Hell and/or High Water, so to speak.
We will have Default, and resolution will be next year in November.
Your prophecy is noted.
Centrist in this country has always meant “corporate”, that is “against the poor” but out of your bedroom. or maybe just “opportunist.”
Pretty much the only people who like or respect centrists seem to be those who call themselves centrists. That’s a lot of people, however.
“65% of Republicans identified themselves as being on the right, with only 27% of them claiming to be in the center. Among Democrats, 42% of respondents claimed to be on the left. Another 42% of Democrats identified as centrists. The study suggests that the elected members of the two major parties are more polarized than the people they represent.”
Many Americans are actually centrists—in theory, anyway
(At least back in 2019 anyway.)