Presumptive Republican presidential nominee has an unusual plan for our nation’s finances: intentionally refuse to pay back America’s debt.
Trump offered this idea during an interview with CNBC last Thursday. “I would borrow,” Trump said. “knowing that if the economy crashed, you could make a deal.” The “deal” Trump envisioned was an arrangement that would allow America to effectively repudiate some of its debt by not paying its creditors in full.
It’s a plan with breathtaking implications, as anyone who lives through the Republican Congress’ threats not to raise the nation’s debt ceiling will recall. As Matt Ygelsias explains, investors throughout the globe “treat US government bonds as the least risky financial asset in the universe.” Should a President Trump show those investors that they cannot expect a full return on their investment, however, that would blow up this assumption. The result would be a catastrophic ripple effect:
if risk-free federal bonds turn out to be risky, then every other financial asset becomes riskier. The interest rate charged on state and local government debt, on corporate debt, and on home loans will spike. Savings will evaporate, and liquidity will vanish as everyone tries to hold on to their cash until they can figure out what’s going on.
Trump’s proposal, however, also suffered from a more basic problem — it is almost certainly unconstitutional.
During the fight over the debt ceiling, many legal experts raised a strong argument that the debt ceiling itself is unconstitutional. The Fourteenth Amendment 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 provision raised serious questions about whether an act of Congress such as the debt ceiling could prevent our debts from being paid.
The debt ceiling is an odd quirk of American law that makes little sense as a matter of accounting. Like any other budget, the federal government’s bottom line is determined by a simple formula: income minus expenses. Congress determines how much money the United States shall raise, mostly through taxation. It also determines how much money the government will spend through appropriations bills and other legislation calling for federal officials to spend money. If annual revenues exceed the cost of annual expenses, then the government has a surplus. If expenses exceed revenues, then the government has a deficit and must borrow money in order to cover the gap.
The oddity in American law is that the government does not simply treat Congress’ decision to appropriate more money than it collects in taxes as an implicit grant of authority to borrow. Rather, the debt ceiling caps the amount of debt the United States is allowed to issue even if Congress has effectively instructed federal officials to spend in excess of that ceiling. That creates a risk that the government will default on its debts because it could not have sufficient funds on hand to cover its obligations when the bill comes due.
For this reason, many legal scholars argued that such a default would violate the Fourteenth Amendment. If the “validity of the public debt of the United States . . . shall not be questioned,” then how can Congress pass a law — the debt ceiling — that artificially prevents the federal government from paying its debts?
The constitutional case against Trump’s proposal is even stronger. As Garrett Epps explains, the Fourteenth Amendment’s language regarding debts was added to the Constitution to prevent Southern lawmakers from capturing Congress and using that control to repudiate the Union’s Civil War debts. Many former Confederates resented that the federal government was using tax revenue collected from ex-rebels to pay back these debts. As one Southern voiced this objection, the government planned to “ruin us, and then make us help pay the cost of our own whipping.”
Thus, loyal unionists placed language in the Constitution ensuring that our debts would be repaid regardless of whether future elected leaders agreed with our moral obligation to pay them.
Trump’s plan, to run up debts and then enter into explicit arrangements not to pay them all back, is far more analogous to the kind of debt reputation that the framers of the Fourteenth Amendment feared than the debt ceiling. Had America run up against the debt ceiling and failed to meet an obligation, that would have been comparable to a consumer failing to pay their credit card bill. When that happens, the consumer is still legally obligated to pay the debts they’ve incurred (most likely in addition to late fees and interest payments). Similarly, if the United States had defaulted on its debt, it would still owe its creditors the money it had promised to pay in the first place.
Had the United States hit the debt ceiling, in order words, that could have simply meant that our payments to creditors would be delayed — not that they would never be paid at any point in the future.
Trump, by contrast, proposes working out a “deal” where certain obligations are never paid back, at least not in full. That’s much more similar to the sort of debt reputation the Fourteen Amendment’s protections against questioning the federal debt is supposed to prevent than a temporary failure to make a payment triggered by the debt ceiling.