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Tuesday, December 4, 2012

The Fiscal Cliff and the Debt Limit -- What Would Lincoln Do?

LincolnNew York Times:  The Debt Limit Is the Real Fiscal Cliff, by Bruce Bartlett:

In a new book, Is U.S. Government Debt Different?, Howell Jackson, a law professor at Harvard, walks through options for prioritizing government spending in the event that Republicans insist on committing financial suicide. They are all illegal or unconstitutional to one degree or another. They would require the Treasury to either abrogate Congress’s taxing power, spending power or borrowing power.

In the October issue of the Columbia Law Review, Professors Neil H. Buchanan of the George Washington University Law School and Michael C. Dorf of Cornell Law School examine the question of what a president should do when he must act and all his options are unconstitutional. They cite Abraham Lincoln’s July 4, 1861, message to Congress in support of the idea that some laws are more unconstitutional than others and the president is empowered to violate the one that is least unconstitutional when he has no other option.

Said Lincoln, “To state the question more directly, are all the laws, but one, to go unexecuted, and the government itself go to pieces, lest that one be violated?”

In the present case, of course, the one law would be the debt limit, which Professors Buchanan and Dorf say is less binding on the president than unilaterally cutting spending or raising taxes without congressional approval. Hence, if Republicans are truly mad and absolutely refuse to raise the debt limit, thereby risking default or the nonpayment of essential government bills, Professors Buchanan and Dorf believe the president would have the authority to sell bonds over and above the limit.

There are a host of practical problems any time the president is forced into uncharted constitutional territory, as Lincoln so often was. But when faced with an extortion demand from a political party that no longer feels bound by the historical norms of conduct, the president must be willing to do what has to be done.

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Comments

I wonder if any underwriter's counsel would give a clean legal opinion on the validity of US Treasuries that are issued in excess the authorized debt limit.

Posted by: Douglas Levene | Dec 4, 2012 7:20:08 PM

Oh, bull. Obama is Lincoln and the Republicans are engaged in extortion. Give me a break.

This is not an academic analysis...it's purely left-wing political points. And Grover Norquist is not "anti-tax" but is for "responsible tax," which means no unjustified increases. On the other hand, Obama can't have enough taxes -- on everyone, including the middle class, if you're smart enough to see where he's taking spending and debt.

But, this is Batlett's clincher: "...the president must be willing to do what has to be done." Yeah, like rolling back Obamacare to control overspending?! No, instead Obama keeps pushing spending, ignores laws, and says that he will do what he wants even if Congress objects. We have a Constitution and the American people elected a Republican House in great part to reduce the growth of spending by this Administration.

Obama’s policy strategy: Ignore laws

Rather than pushing new laws through a divided Congress to enact his agenda, Obama is relying on federal agencies to ignore, or at least not defend, laws that some of his important supporters...don’t like.

“If the president says we’re not going to enforce the law, there’s really nothing anyone can do about it,” University of Pennsylvania constitutional law professor Kermit Roosevelt said. “It’s clearly a political calculation."

It's also breaking the law, and Obama is neither Lincoln nor king.

Krauthammer On Obama's Fiscal Cliff Campaign: "It's All About Politics; It's Nothing About Economics

KRAUTHAMMER: It's surprising to me that the president, essentially, who could get revenues he wants from the deductions and exclusions, but insists on rates not for economic reasons but political. He wants to break the backs of Republicans. This is a continuation of his campaign. He thinks he is won it and now he wants to drive a stake through the Republicans. It's all about the politics; it's nothing about the economics.

Meanwhile....Despite 'cliff,' preparations on for Obama Hawaii vacation

Where's my blood pressure medicine?

Posted by: Woody | Dec 4, 2012 10:46:20 PM

I see. Reducing spending is now unconstitutional. If Obama were to sign the House repeal of ObamaCare, that would be unconstitutional too. Obviously Obama has no way out of this box of unconstitutionality.

The Constitution, written in 1787 and amended only modestly, mandates that the federal government spend 25% of GDP transfer payments, a figure that far exceeds any historical norm. Furthermore, the Constitution requires the federal government to print 40% of the money it spends if enough foreign institutions don't lend it to us. Who could argue with that legal reasoning?

It's really unfortunate that retrenching from unsustainable promises to the non-needy is unconstitutional. The Constitution requires our government to proceed with all due haste toward a fiscal crash, so that's just what we'll have to do. That's what Lincoln would do, right?

I just have one question: Is "unconstitutional" now defined as anything progressives dislike?

Posted by: AMTbuff | Dec 5, 2012 12:42:54 AM

Countries default on their sovereign debt all the time. To take a reasonably recent high-profile example, it presumably doesn't violate the constitution of Argentina for the Argentine government to fail to meet its contractual obligations to bondholders. We don't like their defaults, but we presumably also wouldn't like it if an Argentine president ignored a recalcitrant legislature and acted extraconstitutionally in order to make sure that foreign bondholders were timely paid. It's certainly no longer acceptable for the U.S. to react to Latin American sovereign defaults by sending in the gunboats on behalf of the creditors. Domestically, we know at a minimum (because the Supreme Court said so in the Gold Clause cases) that if the U.S. government defaults on its obligations to bondholders the Constitution will not be interpreted to guarantee those bondholders any remedy enforceable in the Article III courts, although I'm not sure what the current state of the law might be in terms of statutory remedies. We also have a recent track record of defaults on government-issued debt at the city/county level (and maybe at the state level soon?) where as far as I know no one has suggested that the mayor or county commissioners or what have you had some inherent Lincolnesque power to disregard preexisting legal constraints in order to stay out of bankruptcy.

Posted by: JWB | Dec 5, 2012 1:43:59 PM

Woody and AMT Buff, I don't think anyone denies that it would be constitutional for Congress to repeal or trim back entitlement spending or other planned expenditures. The unconstitutionality issue comes up because duly enacted laws that are currently on the books basically say the following:
1) Spend a total of $X on various specific things
2) Collect taxes in the following ways, which totals $Y in revenues
3) Don't issue more than $Z in debt.
Simplifying slightly, if X > Y + Z, then at least one of those three laws can't be carried out. If Congress doesn't change at least one of them (and again, everyone agrees that it would be constitutional to do that), then we have a question as to what law should give way to the others. Due to the structure of the federal government, that question largely falls in the lap of the President in the first instance.

Posted by: Puzzled | Dec 5, 2012 2:44:48 PM

Puzzled, thank you for your concise presentation. On item 1, an appropriation bill allows the executive branch to spend $X but it does not require that they spend it. Therefore item 1 should read:

Don't spend more than a total of $X on various specific things (discretionary budget items). Until further notice, spend whatever it takes on various other specific things (entitlements).

Therefore even if Congress or the President block attempts to reduce entitlement promises, substantial flexibility is available in X, the discretionary budget. It would be very difficult to cut that by, say, half, but it would not be unconstitutional.

As a practical matter, Obama can disregard the debt ceiling if the bond market is willing to buy the new debt. This is the reason Obama insisted last time on punting the debt limit past the election. Now he is free to disregard the limit entirely. That's exactly what I expect to happen.

There is a hazard in this approach: What if bond buyers (other than the Fed of course) are spooked and pull back, even for just a week or two? Could that precipitate a stampede to sell US government bonds? If so, we could go off the real fiscal cliff a few months from now rather than several years from now.

Why might there be a stampede? Consider: When a bondholder decides not to roll over a maturing T-bill or T-bond, the government pays out the face amount to the bondholder. If the government is currently unable to borrow that money from new bond buyers, the Fed will step in and print the money. If this becomes the primary way bonds are redeemed, the result will be rapidly accelerating inflation. That in turn will cause a rush to redeem government bonds. Market participants always want to be in front of a trend. That's why they stampede.

What's the chance that the Fed will become such a heavy buyer (printing money) that the markets will be spooked? I don't know, but the markets are primed for disaster. What was the chance that assassination of a minor leader would lead to millions of deaths in World War I? Very low, it would have seemed, except that the world was already on the edge of the cliff. Which is exactly where we are now with the Fed already buying 40% of new US government bonds.

My fear is that Obama has not correctly assessed the probability of a bond market panic. He didn't know or care that health insurance reform would disrupt businesses for years when he signed it during a very deep recession. He doesn't know or care that fiscal uncertainty and regulatory policy uncertainty are paralyzing investment. So why would he worry about a hypothetical bond market panic? Obama will continue to play the role of Alfred E. Newman. We have to do the worrying for him.

Posted by: AMTbuff | Dec 5, 2012 3:39:11 PM

Puzzled, the President has not presented ANY programs that he is willing to cut. Of course, following suit of Bill Clinton, Obama could close the national parks and tell park visitors that the Republicans were to blame for the lack of money.

What is needed are serious proposals to cut spending, and that can be accomplished if the President would agree to work with Congress rather than play games with the country's future. It's not a choice of which law to violate, but rather whether or not the President is going to lead or continue to place political blame.

Posted by: Woody | Dec 5, 2012 3:57:58 PM

A month ago the Republicans were promising to restore $716 billion in Medicare cuts in reimbursements. Now they are threatening a default if there are not an additional $800 billion in Medicare and entitlement cuts.

They must think we all have amnesia.

Posted by: jimharper | Dec 5, 2012 8:31:12 PM