The United States has a time bomb written into federal law, and no one knows whether it is constitutional or not.
As anyone who has paid attention to the last dozen years of fighting over the federal budget knows, Congress must periodically raise the nation’s debt ceiling, the amount of money that the US Treasury is allowed to borrow, because the US spends more than it takes in. If the debt ceiling is raised or repealed on schedule, nothing happens. The Treasury will continue to pay for all federal expenses Congress has ordered it to pay, and it will continue to borrow money to pay for these obligations when necessary.
If the debt ceiling is not raised, by contrast, it will trigger an immediate economic catastrophe. Mark Zandi, the chief economist of Moody’s Analytics, predicts that a debt ceiling breach would cause as many as 7 million people to lose their jobs. Beth Ann Bovino, the chief US economist at Standard and Poor’s, predicted in 2017 that “the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.”
This completely unnecessary threat to the US economy arises from the odd way Congress manages the federal budget. As a general rule, Congress enacts one set of laws that govern taxation and revenue; these laws determine how much money the United States brings in every year. It enacts another set of laws, known as appropriations, that determine how much money the United States will spend every year. If appropriations exceed revenue, then the United States will run a budget deficit and will need to borrow money to cover the gap.
But, rather than automatically authorizing the Treasury to borrow however much money is necessary to cover this deficit, Congress also enacted a third law — the debt ceiling — that prohibits Treasury from borrowing more than a set amount of funds. Once this limit is hit, the country is unable to pay its bills unless Congress raises the debt ceiling. And that will cause the United States to default on at least some of its financial obligations, triggering the same spiral of reduced creditworthiness that faces consumers who refuse to pay their credit card bills. (Oddly enough, this Rube Goldberg-like way of authorizing borrowing is better than the previous regime. Prior to 1917, Congress would authorize each new issuance of Treasury bonds.)
All of this matters because House Republicans are currently trying to use the debt ceiling to extract policy concessions from President Joe Biden, and their pitch to Biden more or less boils down to “that’s a pretty nice economy you’ve got there, would be a shame if someone broke it.” The idea is that, by threatening a debt default that would trigger an economic calamity, Republicans can force Biden to agree to spending cuts — such as cuts to Medicaid or rolling back much of Biden’s signature Inflation Reduction Act — that they could not obtain in a budget negotiation without this leverage.
But is this point of leverage — a law that will cause the nation to default on its debts unless Congress affirmatively stops that from happening — even legal? The answer to this question is surprisingly unclear. The 14th Amendment provides that “the validity of the public debt of the United States ... shall not be questioned,” and officials within the Biden administration are reportedly debating whether to challenge the constitutionality of the debt ceiling under this provision. Biden said on Tuesday that he is “considering” this option.
There are very strong legal arguments that the debt ceiling does, indeed, violate the 14th Amendment. But these arguments have never been tested. No court has ever ruled on whether the debt ceiling is unconstitutional. And only one Supreme Court case has ever even applied the 14th Amendment’s public debt clause — and that case, Perry v. United States (1935), did so only briefly.
Meanwhile, an even more ominous question looms over any legal fight over the debt ceiling. Even if we assume that the Supreme Court, with its 6-3 Republican supermajority, would declare the debt ceiling unconstitutional if it is breached, would such a breach cause irreparable damage to the United States’ credit, even if it were later fixed by a Supreme Court order?
The constitutional case against the debt ceiling, briefly explained
The 14th Amendment was effectively a treaty between the victorious Union and the treasonous Confederate states that were defeated during the Civil War. Every one of the rebellious former slave states was required to ratify it as a condition of their readmission back into the United States.
The amendment had many provisions, including a section that guaranteed citizenship to freedmen and that promised that all state governments abandon racial discrimination. It also included the public debt clause, which was enacted to punish the Confederacy’s creditors while simultaneously protecting lenders that helped finance the Union. It declares that all debts “incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave” shall be “illegal and void.”
The framers of this amendment feared that white Southerners and their sympathizers might regain control of Congress, and use that control to retaliate against the North by canceling its war debts as well — a fear accentuated by the fact that, after emancipation, former slaves would no longer count as only three-fifths of a person when determining how many representatives each state would have in the House. As legal scholar Jacob Charles wrote in a 2013 law review note, “as a consequence of emancipation and the passage of the Thirteenth Amendment, the South and its interests would receive increased representation in Congress.”
Accordingly, the public debt clause also included language intended to prevent a future Congress from repudiating the Union’s war debts. It provides that “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.”
This language, however, is much broader than a mere guarantee that the Union will pay off its war debts. Its explicit text protects the “validity of the public debt” in perpetuity. And it doesn’t simply say that the federal government’s debt shall not be canceled, it makes the sweeping demand that this debt “shall not be questioned” — language that is so broad that it seems to forbid any law that would even raise uncertainty about whether the United States will pay what it owes.
The debt ceiling is just such a law. The entire reason why it is a potent tool that House Republicans can use to extract concessions from President Biden is that it creates uncertainty about whether or not the United States will pay its debts. As law professor Michael Abramowicz wrote in a 2011 paper, “unless the Secretary ultimately has the authority to borrow to make payments on the public debt, the debt-limit statute leaves open the possibility of default and violates the Public Debt Clause.”
How would this work?
Realistically, if Congress fails to raise the debt ceiling by early June, when Treasury Secretary Janet Yellen says she will run out of authority to borrow money, the process of invoking the 14th Amendment would look something like this:
President Biden will announce that he has determined that the debt ceiling is unconstitutional and thus should not be followed by his administration; he will most likely bolster this argument with a memo from the Justice Department’s Office of Legal Counsel, which interprets the Constitution and federal law for the executive branch. Pursuant to this announcement, Secretary Yellen will continue to issue Treasury bonds as though nothing has changed.
(Some legal scholars have also proposed a different argument Biden could use. Because it is impossible for the Treasury to simultaneously comply with the tax code, the appropriations laws enacted by Congress, and the debt ceiling law, Biden could declare that he will ignore the debt ceiling as the “least unconstitutional” option. For the moment, however, Biden has only said that he is considering the 14th Amendment option.)
It is likely, however, that Yellen will have to offer these bonds at a higher-than-usual interest rate because the debt ceiling and any lingering uncertainty about whether Biden can get away with his invocation of the 14th Amendment will lead investors to demand a higher return as the price of accepting greater risk.
Then the real chaos begins. Republican litigants will undoubtedly file a lawsuit challenging these bonds, most likely in a federal judicial division where they can be sure the case will be heard by a right-wing Republican. If they do an effective job of shopping around for a partisan judge, that judge could issue an order forbidding the Treasury from issuing any more bonds very quickly, and the case is likely to wind up before the Supreme Court in short order.
But what would the Supreme Court do?
Are the courts likely to buy this argument?
The short answer is that we cannot know for sure, but there is reason to believe that the justices may be reluctant to light the nation’s economy on fire.
The Court shied away from causing an economic catastrophe at the height of the Great Depression
Tell me if you’ve heard this one before. The United States, already battered by a weak global economy, faces a catastrophe unless the Supreme Court goes along with the president’s controversial plan to deal with a debt crisis. The Court, meanwhile, is dominated by right-wingers who are openly hostile to the president and have spent much of his first term in office sabotaging that president’s agenda.
These are the circumstances that faced President Franklin Roosevelt in 1935 as the Supreme Court prepared to hear four lawsuits now collectively known as the Gold Clause Cases — one of which was Perry v. United States, the only Supreme Court case interpreting the Public Debt Clause.
The Gold Clause Cases all arose out of the fact that many contracts in this era included “gold clauses,” which required debtors to pay their creditors back in gold dollars valued at the time when the contract was made. Because of rampant deflation during the Great Depression, these clauses effectively increased the amount of debt owed under these contracts by as much as 69 percent.
Had these gold clauses been enforced, they could have shattered the already depressed US economy. Among other things, gold clauses drove up the returns railroads owed on their bonds so high that they threatened to bankrupt much of the nation’s shipping industry. Many federal bonds also contained such gold clauses — the Perry case was brought by a plaintiff who owned a $10,000 US Treasury bond, and who demanded to be paid $16,931.25 by the federal government when it came time to redeem it.
To prevent this explosion of debt obligations, Congress passed a law effectively voiding these gold clauses, declaring that all debts would be discharged “upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts.” Roosevelt, meanwhile, bolstered this law with an executive order that banned nearly all private ownership of gold coins, bullion, or gold certificates.
The Court’s decision in Perry is confusing, but at least one part of it is highly relevant to the current fight over the debt ceiling. The Court held that the law voiding all gold clauses was invalid, at least with respect to US Treasury bonds — and it relied in part on the public debt clause in reaching this conclusion.
Although that clause “was undoubtedly inspired by the desire to put beyond question the obligations of the government issued during the Civil War,” the Court explained that “its language indicates a broader connotation.” The Court concluded that the public debt clause applies to “whatever concerns the integrity of the public obligations,” and thus the law canceling the gold clauses “went beyond the congressional power” insofar as they sought to override the government’s obligations to its bondholders.
So did that mean that the federal government had to pay a nearly 70 percent premium on its bonds? Turns out not so much.
Pointing to Roosevelt’s executive order banning most private ownership of gold, Perry noted that the “free domestic market for gold was nonexistent” when this case reached the Supreme Court. Accordingly, even if the plaintiff in Perry were to be paid the money he was owed in gold dollars, he would be unable to sell that gold on the private market. Thus, he would suffer no “actual loss” if he were only repaid the face value of his bond.
This later part of the Perry decision is, admittedly, not one of the most persuasive legal arguments produced by the Supreme Court. But it did have the virtue of averting an economic calamity. Though Perry concluded that the Constitution does not permit Congress to alter US debt obligations, it also refused to enforce this limitation on Congress in a way that could have done extraordinary harm to the nation’s economy.
Both of these conclusions have obvious implications for the debt ceiling, should it be breached and threaten similar economic harm to the United States. Perry’s broad reading of the public debt clause — the holding that it embraces “whatever concerns the integrity of the public obligations” — suggests that the debt ceiling may not be applied to prevent the United States from paying those obligations in full.
Meanwhile, the Court’s pragmatic decision not to impose a remedy that would endanger the broader US economy suggests that the justices should show similar forbearance if the debt ceiling is breached.
But will the current Supreme Court show the same wisdom the Court showed in 1935?
The biggest reason to fear that the current Supreme Court may uphold the debt ceiling if it is breached is that the Court is dominated by conservative Republicans who frequently hand down decisions sabotaging the Biden administration’s policies. But similar things could be said about the Court in 1935.
When the Gold Clause Cases reached the Supreme Court, the Court was in the death throes of the Lochner era, an age when far-right justices frequently struck down progressive labor legislation in decisions that took extraordinary liberties with the Constitution’s text. Roosevelt spent much of his first term (1933-1937) butting heads with a Supreme Court that was hostile to early New Deal programs — eventually threatening to add seats to the Court in order to give it a pro-New Deal majority. (The Court reversed course and abandoned Lochnerism in 1937, thus obviating the need for court-packing.)
The events of 1935, in other words, suggest that even a deeply reactionary Supreme Court may stay its hand when faced with the risk of economic catastrophe.
And there is also some evidence that the present-day Supreme Court, despite its 6-3 Republican-appointed majority, is willing to set aside conservative ideology when necessary to protect the nation’s economy.
In Collins v. Yellen (2021), the Court heard a lawsuit claiming that potentially every single action taken by the Federal Housing Finance Agency (FHFA), an agency created in 2008 to prevent the US housing market from collapsing and bringing down the entire global economy with it, was null and void.
If you want to read a deep dive into this monstrously complicated case, I wrote a detailed explainer on it here. The short version is that there were fairly strong arguments, under the Court’s then-existing precedents, that the FHFA’s actions were invalid. But, if the Court had accepted this conclusion, it could have meant unraveling hundreds of billions of dollars worth of transactions and potentially triggering an economic depression.
Ultimately, the Court voted 8-1 to leave the FHFA largely unmolested. Only Justice Neil Gorsuch accepted the arguments that could have triggered a global depression.
If the debt ceiling is breached, a case seeking to invalidate the debt ceiling will likely reach the justices amid extraordinary economic turmoil. As Mark Zandi, the Moody’s economist, writes, “if lawmakers are unable to resolve the debt limit in time and the Treasury begins paying its bills late and defaults,” the immediate aftermath is likely to resemble Congress’s initial failure to pass a bank bailout during the 2008 economic crisis.
“Spiking interest rates and plunging equity prices,” would occur almost immediately. Meanwhile, “short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well.” By the time the case reached the Supreme Court, the stock market would most likely have lost an enormous share of its value, workers across the country would be unpaid because their employers could not obtain short-term loans necessary to make payroll, and moneyed interests of all kinds would likely file amicus briefs begging the justices to save us all.
That may be enough to inspire even this Supreme Court to side with President Biden.
So the bottom line is, if the debt ceiling is breached and Biden declares the limit unconstitutional under the public debt clause, we cannot know in advance how this Supreme Court will respond to a lawsuit against that approach. But it is at least possible that the arguments against the debt ceiling will prevail even in this Court.
Can the Supreme Court undo the damage that would be caused by a debt ceiling breach?
The long-term threat from a debt ceiling breach arises from the damage it would do to public trust in the United States. Right now, US Treasuries are widely viewed as one of the safest, if not the safest, investments on the planet. The United States’ wealth, enormous tax base, and ability to print more dollars at will ensures that it will never default on its debt unless it chooses to.
Should House Republicans effectively make that choice for the rest of the country, Zandi predicts, “Americans would likely pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized and that a time may come when they would not be paid what they are owed when owed it.” Once a default occurs, investors are likely to “demand higher interest rates on the Treasury securities they purchase” moving forward, permanently diminishing the nation’s ability to borrow at low interest rates.
Thus the worst-case scenario, even if the Supreme Court ultimately invalidates the debt ceiling, is that even a brief debt limit breach could irreparably harm public confidence in the United States, causing economic harm that will last for many years.
That said, Zandi has also suggested that a swift decision overturning the debt limit could be a long-term benefit for the United States economy because it would eliminate the threat of debt ceiling brinksmanship forever and increase investors’ confidence in the United States Treasury.
Still, given all the uncertainty about whether the courts will even buy the 14th Amendment argument against the debt ceiling, we should all hope that the looming questions about what happens if the debt ceiling is breached are never answered.