With the Republicans once again playing a game of chicken with the debt limit, there has been a lot of chatter about options that the Biden Administration has if the Republicans continue to make unreasonable demands.

To understand the legal issues, it is necessary to understand the different legislative actions related to the debt ceiling.  First, there are the laws related to the budget process.  There are two key aspects to these laws, the first requires Congress to annually pass a budget resolution.  The problem with this law is that one Congress is unable to bind a future Congress.  So Congress does not always pass a budget resolution.  The key thing to remember is that a budget resolution is a concurrent resolution which means that it has to pass both houses but does not go to the President.  In other words, it is not a law.  Instead, the impact of the concurrent resolution is internal to the legislative process.  The budget resolution sets the broad limits for the two Appropriations Committees in drafting the annual appropriations bills.   Additionally, if a budget resolution passes, the budget resolution triggers the reconciliation process which allows the Senate to pass budget related bills without having to overcome the filibuster.  A budget resolution (like the President’s budget proposal which starts the budget process) will typically contain estimates/target numbers for the other components of the budget.  The budget laws also restrict the ability of the President to refuse to spend or to reallocate the money allocated in the budget.

And here is where we get to the actual laws at issue.  In thinking of the budget, there are three types of laws.  In any budget, there are two sides of the equation:  1) income/revenue; and 2) expenditures.  For the most part, the laws on the income side of the equation are tax laws.  (There are certain other things like mineral leases on federal land and user fees at federal facilities, but the primary source of revenue is from taxes).  By its nature, revenue is not entirely predictable.  If every investor tomorrow decided that now was a good time to sell their current stock holdings and buy an entirely new stock, that decision would trigger a significant amount of capital gains and capital losses which in turn would dramatically alter the total income taxes received by the federal government.  But, while there is a degree of unpredictability, there is also a good amount of predictability — subject to changes in the economic climate. In other words, the revenue estimate for any given year will be close but not exact.

On the spending side, there are two different sets of laws.  The first is what is frequently referred to as entitlements.  Entitlement laws create a government program that is exempt from the annual appropriations process.  They create rights on the part of individuals to receive money.   As with the revenue side of the process, the budget can only estimate what will be spent on entitlements.  For example, how much the Social Security Administration pays out each year depends, in part, on who retires, who becomes disabled, and who dies.  Past experience is a pretty good predictor of what will likely happen (which is how the insurance market is able to function), but there will always be some error in the estimates.  The second is what is commonly referred to as discretionary spending.  Discretionary spending is the subject of the annual appropriations process.

That is the budget side of the equation.  Now, if the U.S. always ran a surplus and had a large bank account, there would be no need for laws about the national debt.  And, for talking about debts, there are three basic concepts to consider.  The first is what businesses refer to as accounts payable and what the average person refers to as bills.  If you go to the doctor and have insurance, you might not have to pay the doctor up front.  Instead, the doctor will first forward your bill to your insurer.  It is only after the insurer has adjusted the bill and paid it’s share that the doctor will send a bill to you for your share of the doctor’s fees.  Until you receive that bill, you have not charged that bill on your credit card so it does not impact your credit limit.

The second concept is what is called the public debt.  The public debt reflects all of the loans that the U.S. government has taken out.  And the debt ceiling is the total amount of loans that Congress has authorized.  Think of the debt ceiling as the credit limit.  If you have reached your credit limit on all of your credit cards, when the next bill comes in, you have to write a check to pay it.  You are unable to use your credit card to pay it.  Likewise, if the government has reached its debt ceiling, it has to pay any money that comes due with the cash on hand in the U.S. Treasury and can’t issue a treasury note or treasury bond to raise additional money.  If there is no cash on hand, the bill goes unpaid until the U.S. government receives additional revenue.

Lastly, there is the debt held by the public.  While this sounds like the public debt, it is not quite the same thing.  The debt held by the public is a subset of the public debt.  If you have multiple credit cards, think of the debt held by the public as one of the credit cards.  The public debt also includes bonds held by U.S. government agencies as trust funds.  Going back to Social Security, when Social Security has excess revenues, it is required to purchase special issue bonds from the Treasury.  Those bonds count against the debt ceiling (which is why improving the financial position of Social Security while valuable in its own right does not help resolve the debt ceiling).

With that background out of the way, we can turn to the legal arguments being made as to why the debt ceiling is either unconstitutional or must give way to other statutes.

The first theory, which is part of a case currently pending brought by federal employees, is based on a potential conflict between the debt ceiling law and the other budget laws.  Those other laws compel the government to spend money (and do not give the President the option of refusing to spend it).  When we hit the debt ceiling, the government will not be able to get the money to spend and the President will have to pick and choose which bills to pay.  The theory being presented is that the budget laws forbid the President from refusing to spend appropriated money or picking and choosing which appropriated money to spend.  There are two problems with this theory.  The first has to do with the basic approach that courts take when dealing with conflicts between laws.  When there is an apparent conflict between laws, courts are supposed to find a way to harmonize the various statues so that they all remain valid.  In some cases, this is easy and just requires the rejection of a hypothetical conflict.  In other cases, it is impossible and requires the courts to interpret the laws to determine which controls those circumstances in which the conflict is real.  But there are various rules that the courts use to resolve real conflicts, and, often, the rules themselves conflict.  For example, one rule dictates that the “last” legislative act controls over the prior acts.  For the most part, that would give the appropriations acts priority over the debt ceiling, but the debt ceiling would control over revenue laws and most entitlement programs.  To try to avoid that, the argument turns to a different rule — that specific acts control over general acts.  For example, if you had one law saying that the government could not purchase any land for more than $2,000,000 without specific congressional authorization, and a separate law saying that the Department of Defense could pay up to $4,000,000 to purchase land, a court would find that the specific limit for the Department of Defense controlled over the general limit for the rest of the government.  But what act is specific and what act is general is often in the eyes of the beholder.    In short, a court could issue a ruling under this theory which would effectively nullify the debt ceiling, but there is a lot of ways that a court could legitimately reflect this theory.  My hunch is that a court will  find no conflict and hold that the appropriations process (and other laws) allow the government to incur bills up to the limit authorized by those bills, but that payment depends on the government having cash on hand.  While the debt ceiling may mean that, today, the government is unable to pay those bills, it does not prevent the government from incurring those bills, and that any solution — borrowing more money or cutting future spending or raising future taxes — to catch up on those bills is for Congress to determine.

The other theory is based on the Fourteenth Amendment.  The basis language of Section 4 of the Fourteenth Amendment is that the “public debt of the United States, authorized by law,  . . . shall not be questioned.”  Now clearly, this provision bars the United States from simply disavowing its debt.  The U.S. government can’t say that treasury bonds that are currently due in July are null and void and will not be redeemed ever.  But, as some conservative scholars have noted, default is not a declaration that the debt is void.  The government still acknowledges the debt and will pay it when it can.  We just do not have the funds today to pay what is due today.  The other tricky part of the Fourteenth Amendment argument is the “authorized by law” part.  As noted above, Congress has defined what constitutes the public debt which it has authorized.  While I think that most judges would find that accounts payable qualify as the public debt for the purposes of the public debt, there is a chance that a court would hold that the only public debt authorized is the debt authorized by the debt ceiling statute, and, therefore, there is no issue under the Fourteenth Amendment with the government not paying additional bills as they become due.  Of course, such a ruling would put a big crimp in the ability of the President to actually spend the appropriated money.  It would not be the unwillingness of the President to purchase the superweapons called for in the Defense Appropriations bills.  It would be the unwillingness of defense manufacturers to deliver the weapons without the government paying for the weapons up front.  The current budget laws assume that the government’s credit is good and that a promise that the bills will be paid as received and simply do not dream of a world in which people refuse to deal with the U.S. government.  With a conservative majority on the Supreme Court, it is unclear if the Fourteenth Amendment argument would prevail although it might buy a couple of weeks of time.

The last option is supposedly the issuance of the U.S. Mint of a special coin or set of coins to cover any payments which may be due.  The law allows the U.S. Mint to mint platinum bullion coins in any denomination designated by the U.S. Treasury.  In theory, such a coin is possible, but it would run a risk of being highly inflationary.  (Even a one time infusion of an extra $1 trillion would be a massive flow of new money.  And the precedent would certainly cause concerns about future resort to such coins whenever Congress is unwilling to approve additional borrowing.)  Technically, the coin would be legal tender.  So the Federal Reserve would have to accept it as payment for the repurchase of treasury bonds held by the Federal Reserve.  It’s just the nuclear weapon of the current negotiations.  It will work to solve the immediate crisis, but the fallout could be extreme.

Of course, the real system is reform of the debt ceiling law.  The U.S. is the only major power that: 1) has a debt ceiling; 2) has set the debt ceiling at a level which is likely to be reached in the near future; and 3) when it resets the debt ceiling, only increases it by a small amount which assures that it will be reached again within a couple of year.  Until the U.S. walks away from its self-created system of a regular threat of default and disaster, we will repeatedly play this game.  To paraphrase a movie from when I was younger, the only way to win the debt ceiling game is to not play the debt ceiling game.