Other suggestions include President Biden invoking a clause in the 14th Amendment designed for Civil War finances, or using a Nixon-era law to bypass the need for Congress to raise the debt limit. Republicans want the Treasury to avoid default by prioritizing who gets paid from limited incoming revenues, while Democrats are considering a complicated legislative petition process.
All of these ideas have one common thread: They very likely won’t work.
The desperate search for an escape hatch in the partisan standoff highlights the increasing fear that the Treasury is headed for its first-ever default in the next few months and that politicians are incapable of coming together to address the core problem: The federal government spends vastly more money than it collects in taxes.
Members of the new House Republican majority are intent on leveraging the need to raise the debt limit to force major spending cuts, to slow the fast-rising national debt. House Speaker Kevin McCarthy promised Thursday that Republicans “won’t touch Medicare or Social Security,” but it would be almost impossible for any GOP plan to significantly reduce the large annual budget deficits without cutting those programs because they oppose any tax increases.
The Biden administration has said Republicans want to cut Social Security and Medicare, which it strongly opposes. Biden has criticized large corporations and the wealthy for not paying their “fair share” of taxes, and administration officials have indicated they’re open to talking about fiscal reforms. But the White House is refusing to tie any such talks to the debt limit, saying it will not negotiate over what one official called the “sacred obligation” of Congress to increase the limit to accommodate spending it already has authorized.
“In the United States of America, we pay our debts,” Biden declared Thursday.
While both sides insist that default is unthinkable and won’t happen, their contradictory policy positions belie that optimism. So the scramble has begun to find some kind of workaround, no matter how ridiculous it might sound.
But all of these convoluted proposals — most of them unrealistic and some, such as the $1 trillion coin, already dismissed by the Biden administration — contain a fatal flaw. While they might technically allow the nation to continue paying its bills, it would not be without shaking the confidence that helps make the United States the world’s dominant economy.
“The whole crux of this debate centers around the full faith and credit of the United States government. … That’s the trust that underpins the entire US economy and our financial system and the global financial system,” said Neil Bradley, executive vice president of the US Chamber of Commerce.
“So the reason that prioritization, or the 14th Amendment, or trillion dollar coins, or any of those things, ultimately fails isn’t the mechanical operation,” he said. “It’s the fact that you have the federal government essentially calling into question whether it actually does pay its legal obligations.”
During a similar 2011 debt limit showdown, Congress and the White House reached a last-minute compromise and raised the debt limit just before a default. But the edge-of-the-cliff path to a deal still spurred one of the three major credit rating firms, Standard & Poor’s, to issue the first-ever downgrade of the nation’s AAA rating, a move that raised the nation’s borrowing costs.
A repeat of that crisis could lead the other two credit rating firms to downgrade their AAA ratings as well. Many pension funds can only invest in AAA-rated securities, which would reduce demand for US Treasury bonds and force the federal government to pay higher interest on them to lure investors.
Just as in 2011, all the tumult would roil financial markets and no gimmick like the $1 trillion coin would be able to stop that even if it manages to avoid a technical default on US Treasury bonds, said Jack Ablin, chief investment officer at Cresset Capital, an investment advisory firm.
“It’s essentially the biggest broom sweeping dirt under the rug … and it will be pretty apparent to everyone involved,” he said. “The bottom line is we can issue the $1 trillion dollar coin and still get our debt downgraded.”
In reality, the gimmicks already have started.
The nation technically hit its debt limit on January 19. Since then, Treasury Secretary Janet Yellen said her department has been employing accounting maneuvers it calls “extraordinary measures” to allow for continued borrowing by shifting money between federal accounts.
All that financial sleight of hand makes the $1 trillion coin solution seem less outlandish, particularly if the alternative is a devastating government default, said Rohan Grey, an assistant professor at the Willamette University College of Law in Oregon.
“The point is the entire budget process is a gimmick. … What Janet Yellen is doing right now is moving around numbers between different accounts and trust funds and things that are a series of accounting gimmicks,” said Grey, a leading evangelist of the $1 trillion coin. “The problem with the coin is not, I think, that it’s a gimmick. The problem in the public’s mind is that it’s a gimmick that sounds so simple that it … must be a trick.”
It might not be a trick, but it does stretch to the limit a loophole in a provision of a 1995 law designed to allow the Treasury to mint collectible commemorative coins. The Treasury secretary has the discretion to “mint and issue bullion and proof platinum coins” in any denomination. The author of the provision says it was never intended for something like a $1 trillion coin.
The idea would work like this: The Treasury mints a $1 trillion platinum coin and then deposits it at the Federal Reserve. The Fed gives the Treasury a $1 trillion credit that it can use instead of borrowing to pay the nation’s bills. Repeat as necessary. The idea was first broached in 2011. When it surfaced again during a minor 2021 debt limit skirmish, Senator Mike Lee, a Utah Republican, introduced the Cancel the Coin Act to close the loophole.
Yellen recently dismissed the idea of minting such a coin. But Grey said it might be the only way that would hold up in court to avoid a catastrophe if Congress and the White House can’t reach a deal.
“The plain language is on our side. You have to actually read into this law constraints that don’t exist for it to seem weird and crazy,” he said. “So all we’re suggesting is, in a moment of crisis, read the law on its face to create … a pathway to avoid default.”
Invoking the 14th Amendment or the Congressional Budget and Impoundment Control Act of 1974 are other alternative pathways. Proponents say either would allow Biden to assert that the debt limit is invalid because it conflicts with other legislative directives. In the case of the 14th Amendment, it’s a clause born out of disputes over Civil War bonds that declared “the validity of the public debt of the United States … shall not be questioned.”
But going that route almost certainly would draw Republican legal challenges, said Shai Akabas, director of economic policy at the centrist Bipartisan Policy Center think tank and an expert on the debt limit.
“All it takes is one judge across the country to say, ‘You are issuing debt above the debt limit. That debt is not currently valid and needs to be put on hold,’ ” he said. “It’s hard to even fathom what that scenario even looks like.”
The White House has said it is not considering going around Congress on the debt limit. And Yellen has said prioritizing paying some bills and not others might not be technically feasible given complex automated payment systems. But on top of that, prioritization would involve paying holders of US debt ahead of funding some important government services and would not solve the problem because some bills still would not get paid.
“A failure on the part of the United States to meet any obligation, whether it’s to debt holders, to members of our military, or to Social Security recipients, is effectively a default,” Yellen recently told reporters.
A legislative maneuver known as a discharge petition is the least gimmicky of the potential solutions because it would allow the House to authorize a debt limit increase by forcing a vote. Six Republicans would need to join Democrats in signing a petition in order to bring up the bill, and then vote for it, to raise the debt limit.
But the signatures are the easy part, the rest of the process comes with complex procedures that would make it difficult to pull off quickly when the Treasury is running out of borrowing authority, Akabas said. On top of that, the Senate still would have to approve the measure, which would require at least nine Republicans to go along to meet the 60 vote threshold.
Ultimately, there’s no magic trick to get the nation out of this mess, experts said. And the economic damage could be long lasting if the two sides can’t reach a legitimate agreement to raise the debt limit before the government breaches it for the first time in history.
“Once we cross that threshold,” Akabas said, “I’m concerned that the reaction of various economic actors will make it such that you can’t put the toothpaste back in the tube.”
Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him on Twitter: @JimPuzzanghera.
