The deadline for a debt ceiling hike is only weeks away, with Treasury Secretary Janet Yellen saying the U.S. could run out of money to pay its debts by June 1. Some Republicans, whether serious or bluffing, seem ready to go to the brink of default — if not actually default on the U.S. national debt. Debate has intensified over whether President Biden might sidestep the debt ceiling so the nation can keep paying what it owes.
There are powerful legal reasons and arguments for him to do so. These include the 14th Amendment, which prohibits questioning what we already owe, and the so-called later-in-time rule of statutory construction, which basically means that Congress’s most recent budget legislation trumps any earlier legislated ceiling.
Given the stakes, it’s important to explore the likely consequences if Mr. Biden ignores the debt ceiling — how doing so would affect our economy and the markets, our retirement savings and even our constitutional system. There is encouraging news for the president and those who follow our first Treasury secretary, Alexander Hamilton, in believing we must pay our legally incurred debts. We are far better off doing so, even if it means short-term chaos should Mr. Biden allow the June 1 deadline to come and go.
First, consider the consequences if the United States stopped paying its debts and defaulted on June 1. This would undo what Hamilton and his successors sought to ensure: a national credit rating beyond cavil or reproach. We would see a great tottering — if not worse — of U.S. banking, U.S. financial markets and the world’s capital markets.
For one thing, U.S. Treasury securities, valued at over $24 trillion (by far, the largest asset market in the world), are the primary safe asset held in banking, pension fund, mutual fund and other business portfolios. Our present regional bank crisis involving Silicon Valley Bank and others is occurring in response to a relatively slight, temporary drop in the value of low-yield Treasuries largely because of the Fed’s interest rate hikes. An outright default would leave us nostalgic for the comparable placidity of this troubled moment.
We would also probably see a rapid plunge in the value of the dollar worldwide as a global reserve asset. Our currency’s value in relation to others’ is rooted primarily in global demand for dollar-denominated financial assets, since we have relinquished our primacy as a goods exporter to China. Since Treasury securities are by far the most voluminous asset, their slide would be the dollar’s slide. This would quickly render imports, on which we continue to rely, far more expensive. Inflation could look more like that of Argentina or Russia 20 years ago than that of the present or even the 1970s.
This is to say nothing of our subsequent incapacity to maintain our military bases and other assets abroad and to pay thousands of U.S. military personnel. Only China would be a world-bestriding global superpower, abetting the moves it is already making with Russia, Brazil and other nations to displace the dollar as what Valéry Giscard d’Estaing once called the United States’ global “exorbitant privilege.”
Finally, even the serious prospect of U.S. default would quickly raise debt-servicing costs, rendering our deficit larger than it currently is — a consequence dramatically at odds with Republicans’ professed concerns about tying the debt ceiling hike to massive budget cuts.
It almost makes you think that fiscal responsibility isn’t what House Speaker Kevin McCarthy’s caucus really wants.
Now suppose the president decides to challenge or ignore the debt ceiling and instructs Ms. Yellen, on June 1 or before, to continue paying our nation’s obligations, as established by Congress in the most recent budget legislation, no matter what. Assume also that he and his administration carefully explain to the nation the legal and financial bases — not to mention the moral ones — for continuing to pay our debts.
The best-case scenario in this situation is that Mr. McCarthy’s caucus recognizes it has no legal case and its bluff has been called and that it gives up the tactic and passes budget legislation to which the Senate and the president can ultimately agree. This is unlikely but not impossible. After all, the only real alternative for Mr. McCarthy would be to go to court and seek to enjoin the president’s decision to continue to pay obligations — legal obligations already legislatively incurred. The impact of going to court to argue for defaulting on the nation’s debt, let alone the political optics for Mr. McCarthy, would be very risky.
It’s also possible that Mr. McCarthy’s Republicans howl in protest and stage more hearings and votes on the budget in the House, taking us to the brink of June 1 before legislatively addressing the debt ceiling. But it’s hard to see this getting them anything other than impotent spectacle, further cementing their public image as unserious, especially if the president formally repudiates the debt ceiling now or this month, rather than waiting until June.
But suppose the Republicans take the president to court nonetheless. What then? Assuming the courts didn’t refuse to hear the case on justiciability grounds, the challenge would certainly receive expedited review, given the magnitude of the matter. During the brief time the issue was being litigated, we’d see the beginnings of some of the nightmare economic scenarios sketched above.
But only the beginnings. The president’s multiple arguments would be compelling, and the markets, in any case, are already pricing in worries of this sort. The prospect of an end to the too-often threatened fiscal terrorism that is debt ceiling gamesmanship, moreover, would surely be more welcome to the markets than would be continued hostage taking and associated uncertainty of the kind that Republicans now regularly impose on the nation and its creditors.
However radical some of the Supreme Court’s right-wing justices might be, even they understand the legal precept that the Constitution isn’t a suicide pact. Even less so is the 1917 Liberty Bond Act, in which the debt ceiling is rooted. As a legal matter, this ceiling has long since been superseded by a new congressional budget process that has determined its own ceiling through budgeting since 1974 and was of doubtful 14th Amendment conformity, at least as now interpreted, in 1917.
Several of the court’s justices are pragmatic people on economic questions. It is exceedingly difficult to imagine Chief Justice John Roberts (who famously upheld Obamacare in 2012 and after) or Justices Neil Gorsuch and Brett Kavanaugh, let alone the court’s Democratic appointees, demanding default — especially if the aforementioned financial tremors have already begun.
Justices Samuel Alito and Amy Coney Barrett are a bit harder to call, but it seems likely that at least Justice Alito would refrain from demanding default, given his record of moderate decisions on issues of financial law. All but Justice Clarence Thomas and perhaps Justice Barrett, accordingly, look fairly likely to strike the debt ceiling, at least as applied by Republicans, should they try to sue the president out of paying our already legislated obligations come June.
Will invoking the 14th Amendment amount to a constitutional crisis, as Ms. Yellen suggested this week? Not really. For one thing, as noted above, there are multiple grounds upon which Republican hostage taking on the debt ceiling is contrary to law, and not all of them implicate the Constitution. For another thing — and, in my view, yet more important — the present issue is not really a legal issue pitting the president against Congress.
The current debt ceiling nonsense is a case of one faction of Congress being pitted against Congress itself. Our legally contracted debt is congressionally legislated debt; refusal to pay on this debt boils down to the House Republican faction refusing to pay what Congress itself has mandated we pay.
Let us now end the absurdity. Let us bury the Liberty Bond-era debt ceiling.
Robert Hockett is a professor of law at Cornell University, an adjunct professor of finance at Georgetown University’s McDonough School of Business and a senior counsel at Westwood Capital. He worked at the Federal Reserve Bank of New York and the International Monetary Fund.