The United States will be unable to pay its bills in one month absent a change in government policy. That was Treasury Secretary Janet Yellen’s message to Congress on Monday, in which she revealed that failure to increase the debt limit by June 1 (or, potentially, a little after) would leave the government incapable of meeting its obligations to borrowers and constituents, likely leading to financial chaos.
This was sooner than expected. The Senate and House will be simultaneously in session for less than one week between now and June 1. Even if Congress found the will to pass a short-term extension to buy more time, it is far from clear that the Democratic and Republican positions are reconcilable. For this reason, the Biden administration must prepare unilateral options for avoiding default in the event of a debt-ceiling breach. The ideal policy would simultaneously (1) nullify the threat of the U.S. government defaulting on its debt indefinitely and (2) rest on a minimally controversial legal foundation. Happily, at least one policy at the Treasury’s disposal seems to fit the bill.
First, though, let’s examine the prospects for a legislative solution to the debt-ceiling standoff.
At present, the Democratic leadership’s official position is that a debt-limit increase is nonnegotiable: It is not permissible for the House GOP to threaten to engineer a global financial crisis unless a co-equal branch of government does its bidding. Such hostage-taking is antithetical to responsible governance in a constitutional system that is biased toward divided government. Democrats and Republicans will of course need to strike a compromise on fiscal policy eventually. But the debt limit should have no role in those negotiations. After all, raising the limit merely enables the Treasury Department to finance spending that Congress has already authorized by issuing new bonds. And the alternative to a debt-ceiling hike is economic sabotage. Every lawmaker in Washington should be able to agree that it is not a good idea to deliberately make the American people poorer for no reason.
House Republicans’ position, by contrast, is that they would be doing the Democratic Party a huge favor by not instigating a needless financial crisis, and thus Joe Biden must gut social-welfare programs and his own climate law in exchange for GOP cooperation on raising the debt ceiling. Indeed, in order to pass a debt-ceiling increase out of the House on a party-line basis, Speaker Kevin McCarthy had to pair it with a 14 percent cut in overall federal spending along with a defunding of the Inflation Reduction Act, the imposition of work requirements on various social programs, and policies promoting fossil-fuel production.
According to Politico, McCarthy told his caucus’s hard-liners that “he would personally oppose and fight against any debt ceiling agreement that doesn’t include all of the red-meat provisions in the House bill.” Which is to say the Speaker only got the bill out of the House by promising the Freedom Caucus that it represented the bare minimum that Democrats would need to offer in order to secure a debt-ceiling hike.
So it’s hard to see a way around this impasse.
The most plausible route to congressional action on the debt limit looks something like this: The Republican leadership somehow gets conservative hard-liners to extend the debt limit into October, when last year’s government funding bill will expire. At that point, Democrats and Republicans will be forced to reach an accommodation on fiscal policy under pain of government shutdown. It may take a week or two of shuttered public services to break the respective wills of progressives and conservatives. But eventually a deal will be struck. After all, Democrats and Republicans routinely find a way to compromise on fiscal policy. Even when one party controls both the House and the Senate, the filibuster ensures that annual spending bills require bipartisan buy-in. And once the two parties have a deal over federal spending, it will be easy to fold in a long-term debt-ceiling increase.
Alas, there are a few problems with this game plan. One is that forging a compromise between McCarthy’s narrow, extremist majority and congressional progressives could present unprecedented difficulties. Plenty of past GOP Speakers had to manage far-right factions. But they typically had larger margins of error than McCarthy does with his nine-vote majority. Meanwhile, the Democratic Party’s left flank has grown increasingly intolerant of Republican blackmail. Of course, with respect to funding the government, there is no alternative to an eventual compromise: Keeping the government running past September 30 will require nothing less. But adding a debt-ceiling hike into the mix could exacerbate the difficulty of the task.
In any case, the bigger problem with the just-kick-the-debt-ceiling-can-to-October plan is that House Republicans have evinced no interest in approving a debt-ceiling extension of that length of time. It is possible that as the deadline approaches, and markets slide, the GOP will develop an openness to that option. But it is far from certain.
Therefore, the Biden administration must be prepared to take unilateral action to avert a debt default, which would have grievous economic consequences both at home and abroad.
The White House has several options at its disposal. For one thing, Biden could simply declare the debt limit unconstitutional under the 14th Amendment, which stipulates that “the validity of the public debt of the United States … shall not be questioned.” Some legal scholars therefore believe that it is not constitutional for Congress to prevent the federal government from paying its debts.
Alternatively, the Treasury Department could use its statutory authority to print platinum coins in any denomination to mint a $1 trillion coin and then use it to repurchase government debt held at the Federal Reserve.
Both of these approaches enjoy the endorsement of some legal experts. But they both have the same downside: Either action would represent a dramatic assertion of controversial executive authorities. In the first case, the president would be openly nullifying a long-standing U.S. law. In the second, the Treasury would be utilizing its seigniorage powers in a counterintuitive — and highly amusing — manner that would almost certainly attract sustained public attention and ridicule.
The dramatic nature of both of these moves is liable to heighten public controversy around them. That, combined with the inevitable legal challenges, might unsettle markets, leading to many of the adverse consequences of a default itself: Investors would likely demand a premium on government debt that was at risk of being invalidated by the Supreme Court, and that could lead to higher interest rates throughout the economy.
Either measure would still be preferable to a default. In Moody’s Analytics economist Mark Zandi’s analysis, Biden challenging the constitutionality of the debt limit would lead to a financial-market sell-off and slower growth. But assuming the Supreme Court ultimately upheld the action, the economy would quickly rebound. It is possible that the Court would instead force a default. But engineering a needless financial crisis is not one of the conservative legal movement’s animating ambitions. So it seems somewhat unlikely that the Court’s right-wing majority would be willing to take ownership of a global financial crisis for the sake of making elite conservative constituencies poorer. But it’s difficult to be sure.
In any case, a minimally dramatic or legally ambitious solution to the debt-ceiling standoff would be preferable. And the Treasury Department has one: It can keep funding the government through the sale of consol bonds.
In simple terms, a consol bond is one that never matures. A normal bond commits a borrower to paying back the principal on their loan plus interest at a set date. A consol bond, by contrast, requires the borrower to make annual interest payments forever but does not require them to pay off the loan’s full value at any particular point in time.
This is handy since the legislation establishing the U.S. debt limit defines the federal debt as the amount of principal that the government is obligated to repay. Thus, while a normal U.S. Treasury bond increases the national debt as defined by the debt ceiling, a consol bond does not. If the government borrows money via bonds that have no principal — only interest-payment obligations — then it can continue funding its operations indefinitely, even in the absence of a debt-ceiling hike.
There is a clear downside to the consol-bonds solution. In order to attract buyers for bonds that never mature, the Treasury will need to offer a high interest rate, increasing the cost of government financing. But this would still eliminate uncertainty about the government’s capacity to repay previously issued, normal bonds. So the impact on the cost of credit in the broader economy should not be very significant.
But it has the advantage of being extremely boring and incredibly legal. The Treasury Department has the authority to issue whatever kind of bonds it sees fit. Avoiding default through the sale of consol bonds would not require any epic constitutional confrontation between the executive and legislative branches nor would it involve the creation of an object tailor-made for the ultimate heist. It would merely require the Treasury Department to do something weird — but dully technical — in order to prevent a financial crisis. The Treasury and the Fed have pursued variations on that basic task repeatedly since the 2008 financial crisis and have generally faced little political blowback for doing so.
Of course, in a context where the Treasury’s sale of consol bonds robs the House GOP of leverage, it is likely to spur some controversy. But “it’s not fair for the Treasury Department to prevent a financial crisis by using its well-established authority to sell bonds” does not seem like a winning political argument.
To be sure, the consol-bonds strategy works better as a means of buying time than as a permanent solution to the debt-ceiling problem. After all, it would be more expensive to fund the government through consol bonds than regular ones. Were it 100 percent certain that the Supreme Court would reject a legal challenge to Biden’s invocation of the 14th Amendment or minting of “the coin,” those options would be preferable.
But if the administration wants a lower-risk option for avoiding default indefinitely, it should sell bonds that pay interest in perpetuity.
