The debt ceiling end-game

What should President Biden do if Republicans refuse to raise the debt ceiling?  What should he say he will do, in advance, to avoid a catastrophe and gain leverage in negotiations? 

The answer to these questions is far from clear.

Krugman and Klein on unorthodox legal strategies

Paul Krugman argues that the administration should do something – anything – to avoid a debt default.  He doesn’t care about the details – platinum coin, consul bonds, 14th amendment.  He thinks that there is a real possibility that the Republicans will be unwilling to accept any compromise on the debt ceiling, and that this could have such dire consequences that some plan B is essential.  (Krugman has also opposed any negotiations over the debt ceiling, a position I have previously discussed.)  But Krugman worries that the administration has made the adoption of unorthodox policies more difficult by dismissing the possibility of a legal workaround:

I have no idea what happens next. I think there’s a real possibility that Biden officials will in the end be forced by sheer Republican intransigence to adopt unconventional methods after all — a task that will be made much harder by the fact that those same officials have spent months trash-talking the approaches they may need to follow.

One problem with any effort to ignore the debt ceiling is that it will be subject to litigation.  We do not know how this litigation will end.  As Ezra Klein rightly points out, the Supreme Court can do whatever it wants.  In the meantime, while litigation works its way through the courts, it is far from clear that financial markets will function properly.  Furthermore, consistent with my previous posts, Klein believes the politics of repudiating the debt ceiling are bad for Biden: 

If testing the question wouldn’t cost anything, there would be no harm in trying. But I don’t think it would have no cost. The strength of the Biden administration’s political position is that it stands for normalcy. The debt ceiling has always been raised before, and it must be raised now. But if the administration declares the debt ceiling unconstitutional, only to have the Supreme Court declare the maneuver unconstitutional, then Biden owns the market chaos that would follow. Who will voters blame in that scenario? Republicans, who say they just wanted to negotiate over the budget, as is tradition? Or Biden, who did something no other president had done and failed?

Right now, at last, the positions are clear. The White House is open to budget negotiations but opposed to debt ceiling brinkmanship. Republicans are the ones threatening default if their demands are not met. They are pulling the pin on this grenade, in full view of the American people. Biden should think carefully before taking the risk of snatching it out of their hands and holding it himself.

Biden should certainly try to negotiate a reasonable resolution of the stand off.  (“Reasonable” to me means a balance of spending cuts and tax increases, cuts that are not harshly targeted at the poor or Biden’s key policy priorities, a substantial increase in the debt limit so that we are not doing this again this year or next, and no sequester.)  But as Krugman argues there is no guarantee negotiating will work, so the administration still needs a plan B.


There are two debt limit strategies other than the platinum coin, consul bonds, and the 14th Amendment that should be on the table in this discussion. 

First, the President can try to avert a financial crisis by prioritizing interest payments and reissuing maturing debt (which keeps the total outstanding debt within the debt ceiling limit).  Other spending obligations would be met to the extent that cash is available, consistent with the Treasury’s ability to target and prioritize.  (For example, perhaps the Treasury can send out Social Security checks, but withhold payments to health care providers.)  Here is a short description of how this might play out by Edelberg and Sheiner at Brookings.

If this succeeds in averting a major financial crisis – a big “if”, but certainly possible – hitting the debt ceiling might end up looking something like a government shutdown to the public.  There would be considerable short-term pain, but the public would quickly grasp the stakes and Republicans would be forced to raise the debt ceiling.  As Edelberg and Sheiner note, there would likely be litigation claiming that the Treasury cannot pick and choose who to pay, and that debt holders need to take a haircut.  (For some additional legal, operational, and political problems with this approach see here.)  But at least in this case it might be the Supreme Court that would trigger a financial crisis.

This may be the administration’s plan B.  It would explain why the administration has dismissed some of the extraordinary legal theories that have been bouncing around – the Treasury doesn’t need to mint a platinum coin or issue consul bonds to execute this strategy.  On the other hand, it’s far from a perfect or foolproof option.  Like any failure to raise the debt ceiling, it could lead to a worldwide economic cataclysm, especially if prioritization fails operationally or legally.

Ignoring the debt ceiling

Finally, rather than citing the 14th Amendment, the President could argue that when the debt limit is reached, he needs to disobey a duly enacted law of Congress – tax law, spending law, and the debt limit are inconsistent – and that ignoring the debt limit is the least unconstitutional option.  This position has been argued persuasively by Dorf and Buchanan (see here for a brief summary and citations).  The 14th Amendment would be helpful here, but it is not the central issue (the conflict between duly enacted laws would exist even without the language in the 14th Amendment).  This is important, because the language of the 14th Amendment is far from clear, which means that the Court can do whatever it wants.

Litigating ex ante

If we hit the debt limit, some degree of financial disruption is inevitable because of uncertainty about the legality of whatever strategy the administration pursues.  (The strategy least subject to legal uncertainty may be paying off all creditors on a first-come, first-served basis, but first-come, first-served will stiff bond holders and will clearly disrupt financial markets.)  Perhaps this uncertainty should have been cleared up through litigation ex ante, although this would empower the Supreme Court to issue an opinion designed to advantage the Republicans.  In any event, although there is a lawsuit in process, it is far from clear that the legal uncertainty will be resolved before the limit is reached.

So where are we?

Where does this leave us?  I’m not sure. 

In the long run the only solution to our debt accumulation problems is to develop a bipartisan national consensus on fiscal policy.  Obviously, this is impossible in the present moment.  I will discuss this in future posts.

Given the current situation, I tend to agree with Ezra Klein that announcing an intention to resort to unconventional methods is politically risky.  So is refusing to negotiate, at least without a compelling explanation that most voters can understand.  Biden and the Democrats are supposed to be our non-crazy political party.  As I have previously suggested, I do not think that arguments about hostage taking etc. are compelling to voters, and voters may well blame Biden if he refuses to negotiate and a debt default triggers a severe recession.  It may not be fair, but politics ain’t beanbag.

As I have previously argued, the best way to refuse to negotiate on the terms House Republicans have proposed is to offer to negotiate over the future of Social Security, Medicare, and Medicaid.  But this train has probably left the station.  Given where we are today, the best bet is to agree to negotiate and compromise, but insist that spending cuts must be matched with tax increases on the wealthy dollar-for-dollar and to fight for cuts that reflect democratic priorities.  Negotiations on these terms might well fail, but the Democrats would have a solid case that any breakdown was due to Republican intransigence.  This might force Republicans to pass a clean increase or allow Biden to blame Republicans for his unconventional measures (if he takes them) and for any economic harm that results from their intransigence.

Finally, suppose that Biden believes the best response – the least unconstitutional option, and the least economically damaging – to a failure to raise the debt ceiling is to simply ignore the debt ceiling.  This is the Dorf/Buchanan position.  In this case the President could announce that if the debt limit is reached he will keep issuing debt to fulfill his obligations under Congressional tax and spending statutes, because in his judgment this is the constitutionally required solution.  However, to be gentlemanly and bipartisan about it, he could say that he would consider defaulting on the debt if Republican leaders of the House and Senate ask him to do so in writing.