Constitutional Nonsense on Debt - John Berlau - National Review Online

Constitutional Nonsense on Debt
What the 14th Amendment really says about the debt ceiling and debt default

Lo and behold! As we celebrated this Fourth of July amid the debt-ceiling fight, the netroots and progressive pundits suddenly discovered the Constitution’s relevance in fiscal matters. It doesn’t seem like that long ago — because it wasn’t that long ago — that they ridiculed the very idea of constitutional limits on Congress in economic policymaking, and even mocked the GOP’s public reading of the Constitution at the beginning of the current session.

Of the new House rule requiring a statement of the constitutional authority for bills, Ian Millhiser wrote at ThinkProgress that “the constitutional lunatics are now in charge of the GOP’s asylum.” It was completely unnecessary for Congress to cite constitutional justification for its actions, Millhiser proclaimed, because “Article I of the Constitution gives Congress broad authority” and “leaves budgeting decisions almost entirely to the judgment of Congress.”

But now that the GOP Congress is exercising this “broad authority” — or rather, what has always been its basic authority — over the nation’s purse strings to press for spending cuts as a condition of hiking the $14 trillion debt ceiling by another trillion or so, Millhiser, the Huffington Post, and The New Republic have suddenly discovered that in at least this one instance, the Constitution supposedly limits Congress’s economic powers. Section 4 of the 14th Amendment, which states that “the validity of the public debt of the United States, authorized by law . . . shall not be questioned,” makes the debt ceiling itself unconstitutional, their argument goes. Folks who were railing against the “unitary executive” a few years ago now argue that if Congress doesn’t give Obama what he wants, this section gives him the constitutional authority to issue new debt by himself; otherwise, there would not be enough money to pay the existing debt, and the 14th Amendment does not allow that.

Just a few months after arguing majestically about how the Constitution puts virtually no limits on the “judgment of Congress,” Millhiser now hopes the White House begins “seriously exploring whether the Constitution will save America’s economy from the GOP’s extortionary tactics.” And David Dayen of FireDogLake, who thought it was “silliness” for members of Congress to read the Constitution in its entirety at the start of the session, now thinks it’s okay to read this one little section. He urges Democrats to stop tussling with Republicans over spending and taxes and just go with “a strategy that works: reading the Constitution.”

But this tortured interpretation of the 14th Amendment actually shows why members of Congress — as well as the pundit class — should have participated in the public reading of the entire Constitution earlier this year. If they had done that, they might not have skipped over an essential passage regarding the power to borrow. Article I, Section 8 — the same part of the Constitution that gives Congress the power to tax, appropriate, and “regulate commerce . . . among the states” (long the Left’s justification for any regulation of activity, or in the case of Obamacare, the inactivity of not buying health insurance) — also explicitly states: “The Congress shall have power to . . . borrow money on the credit of the United States.”

The 14th Amendment doesn’t affect this power one bit. It applies only to debt “authorized by law,” and as Catholic University Law School distinguished scholar John S. Baker wrote recently in NRO, “Only Congress — not the president — makes law.”

What it perhaps does do — based on one Supreme Court case — is require the Treasury Department to prioritize payment of existing debt to bondholders over other spending in the event the debt ceiling isn’t raised. So if the government finds itself short on cash, it has to keep paying the bondholders and find the necessary savings in some other part of the budget. This is exactly what conservatives like Sen. Pat Toomey (R., Pa.) have been trying to codify through legislation. As Michael McConnell, the distinguished director of the Stanford Constitutional Law Center, has put it, “the real effect of Section Four of the Fourteenth Amendment is almost the opposite of what hopeful voices in Washington are saying.”

Here’s why Professor McConnell is right:

1. The debt ceiling is a consolidation of borrowing authorization that Congress has always exercised.

When reviewing the debt ceiling’s constitutionality, it’s important to recognize that what is now called the “debt ceiling” or “debt limit” was actually created as an expansion of the Treasury Department’s ability to borrow, rather than a constraint on it. As the Congressional Research Service noted in a 2008 report, before World War I, Congress “authorized specific loans” and “allowed the Treasury to issue specific types of debt instruments.”

This practice in which Congress approved specific loans and debt instruments did not change in the five decades after the adoption of the 14th Amendment in 1868. As the CRS report noted, Congress approved specific borrowing to finance construction of the Panama Canal in the 20th century’s first decade. It wasn’t until the Second Liberty Bond Act of 1917 that, as the report describes, “Congress enacted aggregate constraints on certificates of indebtedness and on bonds that allowed the Treasury greater ability to respond to changing conditions and more flexibility in financial management.”

But what hasn’t changed is the constitutional requirement that the dollar amount of the nation’s borrowing can be approved only by Congress. As McConnell put it: “The ‘debt ceiling’ is simply the limit Congress has imposed on how much money the country may borrow. The executive branch cannot constitutionally borrow a dime in excess of this amount.”

2. Perry v. United States may require paying bondholders first, but it does not allow the issuing of new debt without congressional authorization.

So far, the new constitutionalists have found just one Supreme Court case that purportedly supports their case for borrowing without congressional authorization: Perry v. United States, 294 U.S. 330 (1935), a case challenging the Roosevelt administration’s repudiation of a “gold clause” in a U.S. bond. But the Court’s opinion in this case reaffirms that only Congress can approve the issuance of new debt. “In authorizing the Congress to borrow money, the Constitution empowers the Congress to fix the amount to be borrowed and the terms of payment,” the Court stated.

The Court also ruled that the U.S. government can’t shirk its obligations to bondholders from existing debt, a point that, if held as binding precedent, works to conservatives’ advantage. As Professor Baker noted, the ruling is somewhat ambiguous. The plurality opinion did not rule that the plaintiff was entitled to payment in gold, but merely upheld the obligation of the government to pay the bondholder in “legal tender currency,” which was the government was already offering.

Nevertheless, the case did hold that the 14th Amendment’s language concerning “the validity of the public debt” went beyond the Civil War debt that had been one of the amendment’s motivating factors. “Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations,” the court ruled.

Given the Court’s ruling in this case that while only Congress can approve new borrowing, the government is obligated to pay existing debt, it is plausible to argue that the Constitution requires the Treasury Department to set up debt-ceiling contingency plans along the lines proposed by Senator Toomey in his “Full Faith and Credit Act.” By ensuring that creditors are paid first, this law would both fulfill the government’s obligations under Perry and reassure the market that a breach of the debt ceiling does not mean a default. And as Toomey has noted, “with roughly 10 times more income than needed to honor our debt obligations,” there is little danger of default if the debt-ceiling hike is delayed.

3. “Public debt” does not include government benefits, the Supreme Court has ruled.

Progressive constitutionalists argue that the term “public debt” embraces every transfer payment of every spending program under the sun. But the Supreme Court has already shot down the argument that government benefits — even if they are labeled “entitlements” — represent contractual obligations. In Flemming v. Nestor, 363 U.S. 603 (1960), the court ruled that a deported member of the Communist party did not have any “earned rights” to his Social Security benefits, and neither did other recipients. Calling benefits a “noncontractual interest,” the Court declared, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.”

Ironically, proposals for personal accounts championed by center-right groups would give recipients a contractual interest in some of the taxes they pay, but the Left shot this down in favor of keeping Social Security as a pay-as-you-go Ponzi scheme with “guarantees” not worth the paper they are written on.

Despite the obvious hypocrisy of these newfound defenders of constitutional limits, they have the chutzpah to attempt to tar the tea-party movement with hypocrisy if conservatives and libertarians don’t profess absolute fealty to this new constitutional theory. But genuine constitutionalists should respond simply that all parts of the Constitution should be honored, and that Article I and the 14th Amendment do not conflict with each other.

The Constitution places a burden both on borrowing and on default of valid existing debt. As difficult as they may make the legislative process, both provisions serve to prevent short-term and long-term fiscal catastrophe.

— John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. CEI counsel for special projects Hans Bader provided invaluable insights and assistance with this article.