No, It Looks Like the House Has Not Unintentionally Eliminated the Debt Ceiling After All

By Dan Kervick

In my previous post I argued that, in passing H.R. 807 on May 9th, the House of Representatives might have unintentionally eliminated the debt ceiling “as a serious political and operational consideration going forward.”

But upon further reflection, and benefiting from the insightful reactions of several commenters, I now think my reading of the act is incorrect, and that if it were passed by the Senate and signed by the President it would not provide the Secretary of the Treasury with a way around the debt ceiling, other than for the limited, intended purposes of paying off maturing debt and Social Security obligations.

There are really two problems with my previous reading: one problem is interesting but not quite as important, while the other one is very important.  Here is the first problem: I said that the act authorizes the Treasurer to issue a new kind of obligation in order to pay off other obligations, and I then elaborated on that claim as follows:

But the version of the act that was actually passed on May 9th authorizes the Treasurer to issue “obligations … to pay with legal tender”, the principal and interest on the obligations described in subsection 2(b).   Now, an obligation is just another debt instrument.   So the act basically permits the Treasurer to issue IOUs to pay the principal and interest on public debt.  It permits the Treasurer to redeem conventional government debt obligations – all of the usual bills, notes and bonds the government issues, and that count against the debt subject to the debt limit – with a new kind of debt obligation.

Call these new types of obligations “807-obligations”.  The Full Faith and Credit Act then says the Secretary of the Treasury can issue an 807-obligation whenever it has reached the debt ceiling, and use it to pay off public debt.  If you have a T-bill with a $10,000 face value that matures on June 1st, and the government is at the debt limit, then on June 1st the Treasurer is authorized to give you an IOU for $10,000.

The last sentence is key.  I interpreted the law as authorizing the Secretary of the Treasury to issue IOU’s and then use the IOU’s to pay creditors, something like the way California did back in 2009.  I based my reading on section 2, subsection (b) of the act:

In the event that the debt of the  United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.

But this passage can be read in two ways.  We can bring out the two readings by reorganizing the language a bit and inserting some bracketed phrases to make potentially implicit ideas explicit.  The way I initially read the passage was somewhat as follows:

… the Secretary of the Treasury shall, under chapter 31 of title 31, United States Code, issue obligations to pay with legal tender, and shall use such obligations to pay the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act, and shall use such obligations solely for that purpose.

But here is another way of parsing the passage which renders it this way:

… the Secretary of the Treasury shall issue [and sell] obligations under chapter 31 of title 31, United States Code [in order to raise legal tender solely for the purpose of] paying with legal tender the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.

I think the second reading is more likely the one that legislators had in mind (although I’m not sure – see the comments by JKH on the original post).  The first reading calls for a fairly radical new innovation, and so you would think the legislators would have strenuously debated the issue if that was the intended reading of the law.  But in the House debate on H.R. 807, I don’t think see any record of such a concern, which tells me both the supporters and opponents interpreted the act in the second way rather than the first.

I discussed these two readings in an addendum to my previous post, and said that I didn’t think the choice between them made much of a difference to my main point.  And I still think that’s right.  But this brings me to the second and more important problem with my original argument.  I argued that 807-obligations do not count against the debt ceiling, once the debt ceiling has been reached.   I then said, “This is made plain by section 2(d) of the act itself,” and cited subsection (d) of the act in support:

(d) OBLIGATIONS EXEMPT FROM PUBLIC DEBT LIMIT.—Obligations issued under subsection (a) shall not be taken into account in applying the limitation in section 3101(b) of title 31, United States Code, to the extent that such obligation would otherwise cause the limitation in section 3101(b) of title 31, United States Code, to be exceeded.

But this part of the law doesn’t actually say that the new obligations the law authorizes would not count against the debt ceiling tout court.  It only says that they wouldn’t count against the debt limit it to the extent that counting them would bring the total government debt over the limit.  The clear implication here is that they would count to the extent that counting them does not bring the total debt over the debt ceiling.

That’s a crucial restriction.  I had argued that by issuing the new obligations to pay off existing debt once at the debt ceiling, the Secretary of the Treasury would be able to replace debt subject to the debt limit with debt not subject to the debt limit, and would then have space available to sell more ordinary debt in order to carry out other kinds of spending.  But I now think that by giving the proper, and no doubt intended, weight to the phrase “to the extent”, this kind of operation is blocked.   807-obligations issued to pay off maturing debt would themselves become part of the new debt total, and are to be counted against the debt limit up to the point where, added to the rest of the debt, they cause the total debt to hit the debt limit.   Only the portion of the total 807-obligation debt that exceeds that amount is excluded from being taken in to account in applying section 3101(b) of title 31 (the section of the US code dealing with the debt ceiling).  Thus, 807-obligations cannot be used to bring the total debt subject to limit down below the debt limit, and do not open up space to issue more ordinary debt to pay for other things.

As an example, suppose the ordinary public debt subject to limit stand at $16.384 trillion, exactly the amount of the debt limit.  And suppose the Secretary of the Treasury then issues and sells $20 billion in 807-obligations, in order to use $10 billion to pay off public debt and the other $10 billion to pay off obligations held by the Social Security Trust Fund (which the act allows).  After the 807-obligations are issued but before the other obligations are paid, we have:

Ordinary debt subject to limit: $16.394 trillion
807-obligations: $20 billion
Total debt: $16.414 trillion

Since the total debt would be over the limit if any of the 807-obligations are counted, then none of them are to be counted.  But now suppose the payments are made, and the ordinary public debt is reduced by $10 billion.  We now have:

Ordinary debt subject to limit: $16.384 trillion
807-obligations: $20 billion
Total debt: $16.404 trillion

What H.R. 807, subsection 2(d), says is that the 807-obligations shall not be counted toward the debt limit to the extent that counting them would bring the government over the debt limit.  And what that is most plausibly taken to mean is that only $10 billion of the 807-obligations are not to be counted, since counting them would otherwise cause the government to exceed the limit.  But the other $10 billion are to be counted toward the limit, because counting them does not cause the government to exceed the debt limit.  As a result, the Secretary cannot at this point issue more ordinary debt to make other payments.

So that’s my best take so far on the implications of H.R. 807.  Thanks to Ramanan, JKH, Beowulf, Paul Boisvert and others for helping me to get clearer about the correct interpretation of the act.  I have a feeling, though, that there might be further discussion forthcoming, since many people who defended aspects of my initial reading and other people who critiqued it seem to agree that the act contains some clunky and puzzling language.

12 responses to “No, It Looks Like the House Has Not Unintentionally Eliminated the Debt Ceiling After All

  1. Sunflowerbio

    Dan, I think in your haste to post this second blog you inverted the ways that the first point are probably intended to be interpreted by Congress. I think Congress intended the interpretation to be the second and not the first. Is that right?

  2. After reading both of your articles I have to wonder if we need to add one more question about the qualifications of those we have elected to Congress: literacy.

  3. Now, isn’t this typical of so much legislative drafting, which in truth, is far to complicated for most of the legislators to understand, and they then do as they are told and vote on party lines. That then introduces the loophole of potentially handing the issue over to the Supreme Court to interpret where, under the majority system, the interpretation could be decided on the OPINION of one Judge.
    When a small group of, supposedly, the best legal brains in the country cannot come to an unanimous decision on any case before them, that is clear proof that any majority decision is faulty. If unanimity can’t be reached, the duty of the Court is hand the legislation back Congress, detailing the problems, and declare the bill ultra vires until it is either ‘repaired’, revised, or withdrawn.
    This then raises another question – how can the issue get to the Supreme Court? The government is unlikely to do it if the President has signed the bill, but would the Court allow a submission from the public? And a final question, just how competent are the members of the supreme Court in dealing with these sort of complex financial issues?

    • golfer1john

      Both the courts and the legislators have lawyers working for them that have time to fully understand and investigate these things.

      AFAIK, anyone can file a lawsuit in federal court, but in order for it to be heard it has to be filed by or on behalf of an injured party. You’d have to prove some injury to yourself as a result of the law or its execution.

    • Very far from understanding and analyzing things here to my own satisfaction. But the record of the Supreme Court on the protection of holders of government obligations from (nominal) default is very good and very old (but reaches to the present day) and generally unanimous. (Quelle surprise!) The 5th and 14th amendments protect such holders, such obligations. As any legislation has to be interpreted in light of the Constitution, if such an act is ambiguous, the Constitution may force the more generous interpretation in such cases, or protect an Executive’s more generous interpretation. Such government obligations include but are not restricted to financial ones, or even ones that Congress has made specific appropriations for. So I think the Supremes (or their clerks) are pretty competent financially. Though how it would get there is an interesting question. No time to say more.

  4. golfer1john

    I think there’s some mixup with the 16.384 and 16.394, too.

  5. Nope, still too ambiguous. If congress wants to spend less on programs X, Y, Z, let them pass legislation to do so. They can’t just say, “Pay the debt fully and figure out what to do with the insufficient remainder on your own, Mr. President.”
    See here for why the president is violating multiple parts of the constitution by picking and choosing what bills to pay:
    “…Furthermore, some form of direct money issuance by Treasury is actually REQUIRED constitutionally, when Congress blocks the funds necessary to pay for what it has already approved. From Article 12, Section 9, clause 7:

    “No Money shall be drawn from the Treasury, but in Consequence of Appropriation made by Law; and a regular Statement of Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

    The president, and certainly not the Treasury Secretary, doesn’t have the authority to pick and choose what to spend an insufficient supply of funds upon. The executive branch cannot choose a bit from column A and a bit less from column B and so on. It must spend 100% of the authorized amount for repayment of the debt, just as it spends 100% for the military, Social Security, the highway system, and so on.

    The president must spend what he has available, and if prevented from borrowing, either direct Treasury to issue a TDC, or direct Treasury to issue debt-free U.S. Notes (aka Greenbacks) to pay everything BUT the debt. By law going back to the original legal tender act of Lincoln, Greenbacks cannot be used to pay down the federal debt, but they CAN be used to pay all other outstanding debts for goods and services, leaving the rest of the Federal Reserve created money to pay down the debt. This legal enjoinment is undoubtedly unconstitutional, but instead of challenging it, the president should go along with it and use the new Greenbacks to pay for Social Security, infrastructure, and any other expense that cannot be met with an insufficient supply of money available under the debt ceiling. In short, if Congress will not allow the money to be created, the president should do it himself.

    In fact, it is the executive branch, whether the president or the Treasury, and not Congress, that is in violation of the Congress’ authority under the Constitution to “tax, borrow and spend.” The executive branch does not just have the “authority” to execute the will of Congress to spend on thing Congress has mandated, it has the requirement to do so.

    What other support for this alternative does the Executive have when Congress has imposed an artificial debt ceiling preventing the Executive from spending to fulfill Congressional requirements, or, more accurately, those requirements that have ALREADY been met but simply not paid for (a violation of contract law with every vendor that is “stiffed”)? Well, the requirement to pay the debt under the 14th Amendment has already been much discussed.

    Amendment XIV, Section 4. 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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

    Amendment XIV, Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.

    However, completely unmentioned is a much older precedent set forth in the Constitution’s original Article VI which says:

    “All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.”

    That is twice, once immediately after the Constitution was adopted, and again, after the divisive Civil War, that the American government has specifically promised to repay its debts in the constitution, a continuing document of rights and obligations, even at a time when debts were more onerous than now. This is a pretty clear precedent.”

  6. Dan:

    “obligations… held by the public” includes ALL debts, including debts owed to employees (back pay), debts owed to contractors (such as construction companies), etc.

    So this bill really does authorize the printing of money (“807 obligations”) for the purpose of paying ALL debts of the government.

    It doesn’t authorize incurring new debts, however. For instance, hiring a new salaried employee. Or starting a new construction contract. Et cetera. So hitting the debt ceiling would still cause a government shutdown.

    But everyone who was actually owed money would get it. Default becomes impossible with this bill.

  7. Remember that the anti-impoundment acts force the government to spend money when appropriated, making the situation very funny legally.

    Right now, the government routinely ignores the laws (warrantless spying? drone murders?) so I’m not sure law matters, though.

  8. Ted Theodore

    Seems there is no point to this thread. Nothing like that House bill will be considered in the Senate. And even if were and somehow it passed, it would be vetoed by President Obama. Raised voices are not a substitute for accomplishments.