The Debt Limit Is Unconstitutional—But It's Not What You Think!

Anna Gelpern, Stephen Lubben and I have an article in The American Prospect entitled The Debt Limit Is Unconstitutional—but Not for the Reason You Think. Various commentators—and members of Congress—have suggested that the President “invoke the 14^th Amendment” to declare the debt limit unconstitutional. They're right to argue that the debt limit is unconstitutional, but the constitutional problem isn't the 14^th Amendment. Instead, it's Article I of the Constitution, namely Congress's power to enter into contracts. The tl;dr version is that Congress has a power to make binding commitments for the United States and the President is constitutionally obligated to perform those commitments. If the Treasury lacks the funds, then the President must borrow. No specific authorization is needed. Instead, it is implicit every time Congress appropriates funds to perform a binding commitment.

Relocating the constitutional problem with the debt limit isn't merely an academic exercise. It has two implications.

First, it changes the nature of the legal debate and puts the administration on much, much firmer legal footing. The 14th Amendment argument is weak because it simply is not a prohibition on defaulting. It's a prohibition on repudiation, and a default is not a repudiation. An Article I argument reframes the issue as being about the validity of the debt ceiling, rather than the ability to default. In other words, it goes to question of whether the House GOP has holdup power, rather than whether the administration is under some cryptic constitutional limitation that it must affirmatively "invoke."

Second, it means that the President not only can, but must disregard the debt limit in order to fulfill his own constitutional duty to "Take Care" that the laws are faithfully executed. In other words, breaching the debt limit is not merely an option, but a legal requirement if Treasury is short of funds. Once Congress has appropriated funds, the President must carry out the authorized spending.

Debunking Debt Ceiling Myths

The commentary on the debt ceiling standoff has featured a bunch of mistaken conceptions from across the political spectrum. Let's address them. 

Myth #1:  The 14th Amendment Prohibits a Default

A variety of commentators claim that the 14th Amendment prohibits the United States from defaulting. It does nothing of the sort. Read the text of the Public Debt Clause: 

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

The Public Debt Clause is a prohibition on disputing the validity of US debt obligations--that is disputing whether they are legitimately owed. There's not a word in the 14th Amendment about default. The drafters of the Public Debt Clause included some very experienced commercial lawyers. They understood the difference between defaulting on an obligation and disputing or repudiating an obligation.  For example, I might acknowledge that I owe a loan, but just not be able to pay it. That's different than saying "I don't owe the money."

The Public Debt Clause is a prohibition on Congress, the Executive, and the Courts from disavowing US debt obligations. It's not a prohibition on defaulting because such a prohibition would be meaningless. If a country is unable to pay its obligations, no constitutional commitment device can change that. A constitution cannot fill a bare cupboard. And if a country is simply unwilling to pay its obligations (but admits to them), then its creditors are left with whatever legal recourse they might have. But prohibiting default doesn't get creditors anything. Prohibiting disavowal does because it means that creditors retain their right to be paid.

What all this means is that "invoking the 14th Amendment" is meaningless, unless it is shorthand for "treating the debt limit as unconstitutional." Now it just so happens that the debt limit is unconstitutional—but not because of the 14th Amendment!

 

Community Financial Services of America v. CFPB Amicus Brief

This fall the Supreme Court will be hear a case captioned Community Financial Services of America v. Consumer Financial Protection Bureau, dealing with the constitutionality of the CFPB's funding mechanism. I'm pleased to announce that Patricia McCoy and I filed an amicus brief today in support of the CFPB. We were very capably represented by Greg Lipper of LeGrand Law.

The tl;dr version: if the 5th Circuit's opinion is upheld it will result in market chaos--all of the CFPB's existing regulations will be void, and that includes things on which market actors rely, such as TILA disclosure safe harbors and ability-to-repay rule safeharbors. Moreover, there's no way to cabin the 5th Circuit's opinion to the CFPB--if the Bureau's funding is unconstitutional, so too is that of every federal banking regulator, including the Federal Reserve Board. There's simply no credible way to do a surgical strike on the Bureau's funding without collateral damage of economic havoc.

14-4: Any Questions?

Anna, Adam, and myself have a piece up on Alphaville about section four of the 14th Amendment, which is all the rage these days.