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Washington is on the type of dramatic collision course on which some politicians thrive.
Republicans want budget cuts, although they haven’t shared any specifics.
President Joe Biden says he won’t negotiate over the debt limit, which represents spending already authorized by law.
Biden met Wednesday with House Speaker Kevin McCarthy, the start of what’s likely to be a monthslong standoff with the full faith and credit of the United States at stake.
But there’s a legal argument that this silliness is all for naught. Biden has the power to end this debate and move on, according to this line of thinking. Why is he unwilling to try it?
I talked to Robert Hockett, a law professor at Cornell University who specializes in public finance and consults for the International Monetary Fund and the Federal Reserve Bank of New York.
He laid the idea out to me that Congress actually invalidated the debt limit back in the 1970s, and so Biden could essentially ignore it now. It’s interesting, if unlikely, and could represent a fail-safe if debt ceiling negotiations take the US economy to the brink. Excerpts of our phone conversation are below.
WOLF: Public finance – that’s the debt. I think a lot of people misunderstand what exactly the debt is and what it represents. What do you tell your students about that?
HOCKETT: The debt is essentially the outstanding value of US Treasury securities that are issued. Each year, anytime that the federal government spends more than it brings in, in the form of revenue –
WOLF: Which is almost every year …
HOCKETT: Which is pretty much every year and has been for decades now. The difference is added to the debt each year. And the primary form that it takes is US Treasury securities.
What a lot of people don’t really seem to realize, because it runs a little bit counterintuitive, is that the US national debt is not just an amount that the federal government owes, or that it owes to the rest of the world or what have you. It’s primarily a debt that the federal government owes to us, right? To the citizenry itself. Most of the holders of US debt are American citizens.
More importantly still, the US Treasuries component of most people’s investment portfolios is the safest component of those portfolios. … If the federal debt were called into question in some way, or if confidence in the credit worthiness of the United States were somehow to be lost or to be substantially diminished, then pretty much every American would be immediately rendered much less valuable, so to speak. The net worth of every American would instantly plummet.
HOCKETT: It’s such an important component of our portfolios and of both the national and the international capital markets. The last time that there was talk about actually retiring the national debt … during the Clinton administration, people all over the place, all sorts of finance experts and people at the New York Fed and other institutions that focus on national and international capital markets freaked out.
The thought was, well, what are the safe assets going to be? What’s going to be the equivalent of Treasury securities to lend safety to various people’s portfolios?
There was worry that both the national and the global capital markets would sort of shudder and go crazy, just because of the lack of availability of US Treasury debt.
It’s probably worth keeping in mind that in that sense the existence of a large national debt is viewed not simply as a liability of the US government, but it’s an asset of everybody else.
WOLF: You’re veering into what a lot of people sort of refer to, I think, as modern monetary theory (MMT) here – is that right?
HOCKETT: Not really, no. The MMTers are right to emphasize all of that. But this has been known since the time of Alexander Hamilton.
You’ve probably heard this phrase before: Hamilton’s blessing. Alexander Hamilton famously wrote in one of his first state reports as our nation’s first Treasury secretary that a national debt, if properly funded and properly managed, will function as a national blessing. And it turned out to be correct.
WOLF: On the other hand, our debt now is larger than the GDP. It’s larger than it’s been since World War II and the largest it’s ever been, I think. Is it too big?
HOCKETT: It’s nowhere near too big. When we measure a national debt, we look at it as a percentage of GDP. It’s much, much lower than the Japanese national debt is, for example, relative to Japanese GDP. And you don’t see anybody worrying about the integrity or the worthiness of the Japanese national debt or whether Japan’s economy can sustain its debt.
Japan, in fact, has had sort of the opposite problem. It has been concerned that there’s not enough national debt issued by Japan, which is one of the reasons that the Japanese economy is rather slowly growing relative to historic rates.
WOLF: You’re saying not to worry about the debt, but do you agree with the commonly held belief that the safety net programs and government spending are currently on an unsustainable path? I think that’s a bipartisan view.
HOCKETT: I don’t think that that’s a bipartisan view. And I don’t think that that’s actually a serious issue.
I think the only reason that has been talked about, at this point, is simply a matter of politics. It’s because of who has taken control of the House. They find political hay can be made by talking about that.
But of course, if you ask any of them what they actually want to cut, only a few crazies will talk about looking at Social Security or other programs that are not discretionary budget items.
And so then, if you ask them all, ‘What would you cut?’ They come up short; they don’t really have any answer for you.
WOLF: But we’ve had bipartisan panels – I’m thinking of the Simpson-Bowles Commission some years ago. Every year, the Treasury Department puts out a financial statement for the US government – under Republican and Democratic presidents – that essentially says things are unsustainable. That the government pays more than it brings in and that it’s a cause for concern.
HOCKETT: That would be a concern if we knew that there was some sort of ceiling, some non-artificial ceiling, some natural ceiling to how much federal debt there could be. But nobody seems to have any idea as to what that “natural ceiling” might be.
The other thing that’s maybe worth bearing in mind is that a lot of the legislation that’s been passed over the last year is designed to restore the productive capacity in this country that we outsourced over the last 30 years. As productive capacity comes back and the US economy begins growing at a robust rate again, that’s of course going to grow the size of the GDP quite rapidly.
And then the debt will shrink as a proportion of that. And that’s always been the way it’s been historically. Any time that the deficit has been channeled in productive directions, the national economy has grown very rapidly, and then debt has shrunk as a percentage of the national debt.
WOLF: It sounds to me like you’re arguing the government should be spending a lot more money, not a lot less.
HOCKETT: Depending on what it spends it on, yes. Insofar as more can be spent to speed up the rate of the green transition and to speed up the rate at which the US reindustrializes in the industries of tomorrow, rather than in the industries of yesterday, then yeah, I think that would be money very well spent.
It’s worth noting also that there was a time in the past when private sector capital expenditures were productive as well. But over the last 30 years or so, as the economy has increasingly financialized, most deployments of private capital seem to be really speculative.
That is to say they’re blown on the secondary financial markets and the tertiary derivatives markets. Those just stoke inflation in the asset markets. They don’t actually bring about greater productive capacity or greater production or greater employment. For that reason, I think that the federal role has to be bigger in investment than it used to have to be.
WOLF: I was reading today in Axios about how people like Elon Musk and companies like Ford and GM are bragging to shareholders about all of the multiple billions they are going to get in tax breaks to prop up an electric vehicle battery industry. It seems like even though that’s frustrating to hear – that federal money is going to go a corporation’s bottom line – you might think that’s actually a good thing. Because it’s helping create a new industry.
HOCKETT: Actually a very, very good thing. But it only works, of course, if there are strings attached and if those strings are enforced.
So if, for example, a firm is benefiting from some sort of a tax break and then using the benefits to engage in share buybacks, or to engage in more speculative activity or to engage in building abroad in cheap labor jurisdictions outside of the US, then of course, it’s not helpful.
And for that reason, most of the legislation that we’ve been talking about does come with strings attached. Everything’s going to ride on the zeal with which the administration enforces those conditions that come with the benefits.
WOLF: OK, so we’ve gone down a major rabbit hole here. I originally called you about the debt limit, or what I guess you’d call an artificial debt ceiling.
HOCKETT: Yes. It’s not only artificial, but I think it’s also legally invalid. The only reason we haven’t heard that definitively from the courts yet is that both parties have benefited, I think, from the grandstanding opportunity that it affords them.
The bottom line here is the 1917 Liberty Bond Act, in which the debt ceiling is rooted, was rendered obsolete in 1974.
Back in 1917, the president was the formulator of the budget. The Congress just left that to the president. In the 1917 period, the US was beginning to mobilize for involvement in the First World War. A lot of spending was increasing and Congress wanted to remind the president that it does have a certain oversight role when it comes to budget making and so it passed that particular enactment in order to do that.
But all of that changed almost 50 years ago in 1974, when Congress passed legislation pursuant to which it now formulates the budget.
HOCKETT: Congress is at least as active as, if not more active than, the president in formulating that budget. And so there’s no need for the Congress to sort of “remind” the president that it has an oversight role anymore, because any budget is actually congressionally promulgated and duly enacted. It is law.
To reduce it to a slogan: The budget is its own debt ceiling.
If the Republicans tried to take him to court on that, I’m not sure whether they would have standing. But if they did have standing, the court would be very quick to point out to them that the official debt ceiling is just a law that has fallen into what the lawyers would call “desuetude.” It’s just obsolete. It’s no longer good law.
HOCKETT: The reason I suggested that hasn’t gone to court yet, it is my impression at least, is that a lot of politicians make hay out of it.
It gives the Republicans a chance to posture before the public like they’re belt tightening and they’re disciplined. And they can also convey a sense of chaos out there in the world and blame it all on Biden.
Meanwhile, the Democrats, people like Biden, benefit by it because he can lecture the Republicans about how irresponsible they are, how they’re deadbeats.
WOLF: Even this currently very conservative Supreme Court would agree?
HOCKETT: I think so. I think even the currently conservative Supreme Court recognizes that the Constitution is not a suicide pact, that the debt ceiling is not a suicide pact.
And that a complete squandering of the credit worthiness or the full faith and credit of the US, which was very hard won in the late 18th and early 19th century, is not something to monkey around with. I think they would look for any excuse they could simply to validate it.
WOLF: What about the other ideas to get past the debt ceiling? Trillion dollar coins and such?
HOCKETT: The wonderful thing from my point of view here is we don’t need any of those gimmicks. We just have a little garden-variety budget law on our side, and so we don’t really have to resort to anything kind of unusual or surprising or gimmicky.
WOLF: What are the odds that Biden reads this newsletter and suddenly decides that he doesn’t need to negotiate with McCarthy – just makes everybody’s life easier?
(Biden’s White House has said the only path forward is for House Republicans to vote to raise the debt limit “without condition.” As White House press secretary Karine Jean-Pierre said: “No one is talking about eliminating the debt ceiling or the debt limit.”)
HOCKETT: I think the odds are fairly good, at least provided that he’s given enough time to sort of capitalize on the opportunity to sort of lecture McCarthy and the Republicans and make clear to the public how irresponsible they are.
As long as he has enough time to do that first, then I think he’ll have squeezed everything he can out of the debt ceiling imbroglio – and then I suspect he’ll just sort of say go ahead, make my day to the Republicans. I’ll see you in court, assuming that the courts are willing to hear this.
WOLF: I’m not a lawyer or an economist, but I’ll admit that this sounds a little too convenient. That the answer is laying there in plain sight.
(Plenty of Democrats, from former President Bill Clinton to former House Speaker Nancy Pelosi, have suggested Biden try a version of ignoring the debt limit and simply claim the 14th Amendment allows that the “validity of the public debt … shall not be questioned.”)
HOCKETT: Maybe it is. But you know the funny thing is that other people have said this; it is just they don’t get the same attention.
As you mentioned, Bill Clinton has argued to this effect that the 14th Amendment itself invalidates the debt ceiling idea, or at least this particular use of it. A number of folks have been pointing this out for quite some time.
My impression is that everybody talks about the coin or about the consols idea, or about changing the maturities on Treasury debt and sort of refinancing because those are a little bit more eye-catching. They sound kind of wild. They sound more spectacular, more intriguing or interesting, just because they’re so out of the ordinary.
The answer that I’m proposing is just too boring to be interesting for public discussion – but in fact, this is a case, I think, where the real answer and the best answer is just the boring answer.