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 first way rather than the second.
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.