Shit Gets Real—Fiscal Cliff Edition

US President Joe Biden speaks during the White House Correspondents' Association dinner at the Washington Hilton in Washington, DC, April 29, 2023. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)
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Yesterday, the Times published an article reporting that Biden administration officials have an active discussion about whether the debt-ceiling law is unconstitutional and thus whether President Biden has the right and the duty to disregard it rather than default on the government’s debt and spending obligations. That along with Secretary Yellen’s June 1 announcement hit like a thunderclap against D.C.’s conventional wisdom about how this drama plays out. On a dime the insider newsletters decided that this probably isn’t going to be settled by a simple negotiation, or maybe any negotiation. The extraordinary measures a lot of us have been talking about for some time suddenly started to seem real to them too. The addition of the June 1 quasi-deadline signaled to still others that there probably isn’t time for a negotiated settlement even if the administration decided to negotiate.

Put that together and we seem to be in a new place on this just in the last day or so.

For what it’s worth, I don’t think that last point is really true. If both sides wanted to cut a deal the principals could get together and come to one over dinner. Then, if the leadership was on board, there’s always a way to hold quick votes. The issue remains that the House is controlled by the Freedom Caucus and other Freedom Caucus-adjacent Republicans in the House and the Senate. They want to hold the Treasury and the full faith and credit hostage. Meanwhile the White House and virtually all Democrats refuse any replay of the 2011 hostage-crisis debacle. These aren’t technical or procedural issues. It’s that political impasse and the Democrats’ refusal — at least to this point — to negotiate with parliamentary terrorists.

D.C. conventional wisdom shapes and constrains action in the capital. That conventional wisdom has changed significantly over the last 36 hours or so, and not entirely or mainly because of Yellen’s announcement.

Quickly, what are the extraordinary measures? There are a ton that people talk about. But I’m just going to focus on four key ones, which I think frame the parameters of the question.

One: Mint the coin. (I include this one less because it’s plausible than because it’s discussed so much.) Because of a quirk in the empowering legislation, the Treasury does seem to have the ability to mint a trillion dollar (or any amount) platinum coin to come up with plenty of money to meet government obligations. In theory, this solves the problem. The law seems clear. But I’m pretty sure this will never happen for two reasons. First, it just seems weird and absurd. Second — and barely discussed for reasons I don’t fully understand — creating a trillion dollars out of nowhere must have some inflationary effect on the dollar, especially since inflation is only now coming down off four-decade highs.

Two: The Fourteenth Amendment. There is a strong (and I believe correct) argument that the Fourteenth Amendment not only makes it unconstitutional to default on the national debt but even to put the “full faith and credit” into question. That puts even the kind of “pay this and don’t pay that” triage we discussed yesterday under the shadow of constitutional prohibition. There are countless permutations of how this could work. But the gist is always the same: The President announces that the Constitution requires servicing the government constitutional debt obligations and statutory spending obligations.

One additional wrinkle to this. Were the President to go this path I imagine he would add one additional point to the analysis. The debt-limit cliff forces the President to violate the budget law or the debt-limit legislation. Placed in this impossible situation I suspect he would resolve the dilemma in favor of the budget law since the Constitution provides the guidance of the Fourteenth Amendment. It allows him to make a somewhat less definitive constitutional claim.

Three: Consol bonds. This is something that came up in our conversation with Paul Krugman back in February. The whole topic got surprisingly little attention until quite recently. But I think it’s the most likely option. In short, the Treasury can issue bonds that have no “face value” but pay interest forever. That piece of paper has a lot of actual value since it’s a guarantee of payment forever. Thus people will pay a lot for it. But it has no “face value.” Thus it doesn’t add to the national debt. The debt limit doesn’t cover it. It increases the the government’s obligations but it’s not debt.

If this sounds silly, you’re right. It is silly. But debt-limit hostage taking is also silly. And it’s not a wild or unprecedented idea. The Bank of England used to issue them. If you want more details look up “consol bond.” The point is that it’s not a new idea. It’s been done before. And it does seem to satisfy the language of the debt ceiling law.

The complication is that you can’t just spring these on the debt markets with no warning. You need at least some period of time to explain how they work, gauge demand, etc. The government would also have to pay some premium because of the novelty and political uncertainty.

Of course I have no inside knowledge but politically, financially and constitutionally this path seems to have the fewest sharp edges. But my hunch is that Number Three or some comparable bit of financial financiers’ mumbojumbo is the most plausible path even though the constitutional issue is entirely valid.

Four: Simply service the debt and let some government spending go unpaid. Think of this as thunderdome government shutdown. You’ll know it applies to you when your check doesn’t arrive. As I noted yesterday, it’s not even clear the Treasury has the technical ability to pull that off. So who knows how plausible this is? It’s a very messy and destructive approach. But the White House would likely be confident that public pressure would build against Republicans to relent.

The key thing to focus on is that if Biden is serious about not negotiating (and I think he is) he’s got to have some play, some plan B, in mind for what he’ll do when the Republicans call his bluff. If he doesn’t, or if he’s not willing to come up with one super quick, he’s wasting everyone’s time. These are the four most plausible approaches.

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