In 2011, then-Vice President Biden had a front row seat to a bruising debt ceiling standoff between President Barack Obama and House Speaker John Boehner. That fight arguably derailed the Obama presidency and the nascent economic recovery. After that experience, Biden and his team had insisted that this time they would not negotiate over a debt ceiling increase. Yet here we are, and the current administration is doing exactly that. According to the Treasury Department, we're just days away from the so called "X-date" (when a US default would occur) and both the White House and new House Speaker Kevin McCarthy have been debating what conditions a hike in the debt ceiling should come with. So how did they get into this situation? And what were the other options? On this episode we speak with Skanda Amarnath, executive director of Employ America, and Arnab Datta, senior counsel of Employ America, about the current state of play and how it might have been avoided. The transcript has been lightly edited for clarity.
Key insights from the pod:
How the debt ceiling serves as a ransome note — 5:11
The White House’s bad bet — 7:07
The big miscalculation — 11:01
The failure to prepare — 12:17
What is the 14th Amendment? — 14:35
How perpetual bonds could circumvent the debt ceiling — 17:10
Why it's so hard to get the debt ceiling hiked cleanly — 21:25
The operational challenges of consol auctions — 24:13
The problem with payment prioritization — 30:42
How will the fight end? — 35:29
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Joe Weisenthal: (00:11)
Hello and welcome to another episode of The Odd Lot podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:16)
And I'm Tracy Alloway.
Joe: (00:18)
Tracy. The stupidest law in the world. The debt ceiling. We're still here.
Tracy: (00:22)
I was going to say, you'll have to narrow that one down. But I know exactly what you're talking about. Yeah, the debt ceiling. I am really struggling with this one. I'm struggling to get into it because I feel like we've been here before and we kind of know how it's going to play out. But of course, the wild card this time around is just, I guess the lengths to which a certain portion of a certain party is willing to go in using this as political leverage.
Joe: (00:50)
Well, you know, I think what you said sort of captures the spirit perfectly. We know how this plays out and it probably will play out as you have in your head, except that the potential in the scenario where it doesn't play out — that is very bad, people think. And so you have this situation where you're like, “oh, everything, you know, we all we know, we all know how it works out. It's all theater. They resolve it.” And that's probably true. And yet the possibility that somehow it doesn't get worked out, it would be unprecedented and potentially very calamitous.
Tracy: (01:24)
The other thing that's happened this time around, and again, I am sort of struggling to get excited about this particular debt ceiling episode, but the other thing that's happened is that the White House started out this whole thing saying that it wasn't going to negotiate on the debt ceiling. And yet here we are, we're recording this on May 23rd. It seems like they're negotiating.
Joe: (01:46)
They're absolutely negotiating. And it made sense for the White House to say that. And the reason I say that is because Biden was there in 2011 when Obama negotiated the debt ceiling deal with the House Republicans and sort of saw firsthand how that sort of derailed Obama's presidency. And Biden had a front row seat to that.
And so you figure from Biden's perspective, it's like, “Well, I'm not going to go down that road again. I saw how this derailed the White House, the last time I was in in the White House.” And yet here we are. And I would say at a minimum the White House has failed to stick by that and failed to sort of void the same path that Obama went down.
Tracy: (02:28)
What if saying you're not going to negotiate was in itself a negotiation tactic?
Joe: (02:33)
It may have been. It may have been, but it seems to have failed.
Tracy: (02:41)
Here we are. I don't think the intent was that in late May of this year, we would be talking about the President potentially invoking the 14th Amendment to deal with this issue. That couldn't have been the game plan. And can I just say one more thing about this episode? I really resent having to turn this into a constitutional law podcast and I never wanted that for my career. And yet here we are.
Joe: (03:08)
And yet here we are. Exactly right. And again you said it. The President, the White House might have to invoke the 14th Amendment, except that the White House has already said that's not a great option. It doesn't really want to do that option. And so if there are these various off-ramps, like if there are these various alternatives to just sort of raising the debt ceiling, it's been done dozens of times in the past, the White House has like trashed every one of those options.
Tracy: (03:38)
This is the problem, with talking specifically about the off-ramps, is you kind of tell everyone what your least preferred option is, and all of them are bad options it seems like for the White House. And so they haven't really pointed to this is the thing that would be a massive win for us...
Joe: (03:54)
Right. They just point to the things that would be a loss for them. Should we get started?
Tracy: (03:59)
Let's do it.
Joe: (04:00)
So how did the White House get into a position in which it expressly said it would not? How is the White House negotiating over the debt ceiling when it expressly said for months and months that there would be no negotiation? Today we are going to be speaking with two guests, Skanda Amarnath, executive Director at Employee America and Arnab Datta Senior Council for Employee America. So let's get started. Is the basic intro, Skanda, that the White House said it wasn't gonna negotiate and it's now negotiating?
Skanda Amarnath: (04:31)
Thanks for having me on and thank you. I think that descriptively checks out that they promised to not negotiate. That they wanted a clean debt ceiling increase. And yet here we are where it very likely will not be a clean debt ceiling increase and they're very clearly negotiating. I don't know how to take issue with that description.
Tracy: (04:54)
Can I ask a really basic question just before we go any further? But I would be curious to get either of your opinions on this, but what is it about the debt ceiling that makes it such an attractive pressure point for this kind of political wrangling?
Skanda: (05:11)
I think it's a ransom note sorts, right? So it ends up being this catastrophic risk. If people perceive that if we don't raise the debt ceiling, then we're going to default or it's going to lead to chaos in how government pays for various things. And that chaos is owned by the Executive Branch.
And so if you are in Congress and you want to extract concessions, this is a kind of holdout problem where I can effectively force you into position of giving whatever I want in order to raise the debt ceiling as a matter of procedure. And it's all kind of operating in the shadow of what is a reasonable concession to extract. And I think the holdout problem a very real one that the White House is facing right now.
Tracy: (05:59)
Arnab?
Arnab Datta: (05:59)
I'd add to that too — and thanks, thanks so much for having me — the uncertain timeline, I think, really necessitates that hostage thinking mentality. This is not like the typical appropriations cycle where you have an “X date” from the beginning. You know, when this was first announced four months ago when Secretary Yellen said, we're going to hit the debt ceiling, we have to start taking extraordinary measures, even the date was highly uncertain at that point.
We're now a week before June 1st, which they say might be the X date, but we're still not sure. And so it creates this kind of uncertain environment that I think is really, because you don't have the opportunity to make certain cuts or certain demands during that typical process of authorization or appropriations, it's kind of a convenient place to take hostage the global economy.
Joe: (06:56)
So what was the White House hoping for when it said months ago, we're not going to negotiate over the debt ceiling this time? What was the original vision there?
Skanda: (07:07)
So I think the hope and the gamble was that the extremist nature of the demands or what was perceived to be extreme by the administration, it's called, what is known as the LSGA, the Limit Save Grow Act, would be seen as so dangerous.
And even just the process of getting to that piece of legislation would reveal so many extreme demands all to raise the debt ceiling that you'd have this confluence of political pressure, media-driven pressure, sort of maybe CEO-driven pressure.
There werea lot of reports of Secretary Yellen trying to get major CEOs to talk to Republicans, persuade them of the importance of raising the debt ceiling. And that through this sort of these different pressures, the Republicans would see the light, that they would feel like they had no other choice. The coalition would fracture and they would have to raise a debt ceiling cleanly.
Arnab: (08:08)
I would agree with all of that and say, I think there was this particular decision, that to Skanda's point about CEOs, that these interests would be advocating, lobbying with Congress. You guys have to do the right thing here because they're demanding a clean debt ceiling hike. And I think that was a real miscalculation because Jamie Dimon doesn't have an interest in a clean debt ceiling hike on its own. He just wants a debt ceiling hike. And so I think that's really part of the miscalculation that that happened here.
Tracy: (08:46)
Can you talk a little bit more about the distinction between a debt ceiling hike versus a clean debt ceiling hike? And so what is the differ-ence there? And then secondly, why does it seem like the Democrats were more into the idea of a clean debt ceiling hike this time around?
Arnab: (09:05)
So by a clean debt ceiling hike, it just means raising the limit on the debt ceiling without any other changes in the law. No strings attached. And what's likely to happen now with a deal is you're going to have a hike in the debt ceiling, but it's going to come attached with caps on spending, potentially cuts to spending.
And also there's all these items that make, I would emphasize, very little impact on the budgetary outlook of the country, but are things that a certain party is interested in, for example, like work requirements on certain welfare programs. Those are kind of the concessions that the administration will have to give here without having a clean ceiling hike.
Joe: (10:13)
Okay so again, we have this in 2011 where it went down to the wire at the very last second. The Obama administration and the newly elected Tea Party majority led by John Boehner. They came up with this debt ceiling hike and they had the sequester and there was sort of a limit to growth of both discretionary and defense spending.
And arguably it slowed the trajectory of the recovery coming out of the great financial crisis. Talk to us about the alternatives. We saw what happened in 2011, we saw how that potentially derailed the recovery. What could the White House theoretically have done differently? And we'll get it into details, but months ago, other than say, please just give us a clean dead ceiling hike.
Arnab: (11:01)
The biggest thing I would emphasize here, and I think perhaps the biggest miscalculation was not developing the operational readiness to undertake unilateral actions. So obviously there are a number different avenues that they could take unilaterally that we can talk about more. Platinum coin is I think, a favorite of some people. Perhaps even some people on this podcast.
There's also this idea that's been floating around for consol, these perpetual bonds, all of these things take some operational readiness to be executed. And the president, I think just a couple of days ago said even if we wanted to take unilateral action, we couldn't do so in a number of weeks. And I think that perhaps that lack of operational readiness is maybe the biggest fault that you can put on the Treasury Department, which is when they're, for example, issuing a new security, a new debt instrument, it takes a lot of work.
I'm not, you know, I'm not a debt expert and I don't understand their programs internally, but it takes a lot of coding. There's a lot of different things with auction design and that they need to do to get these securities ready. And they could have taken steps four months ago when they knew they were coming to the debt ceiling to be able to do that if we came to a default moment.
And I think there's a broader principle to abstract here, which is when you are dealing with a environment of high uncertainty, the most important course you could take, I would argue, is to maintain as much optionality as possible. And part of that is developing that operational readiness. And so, yes, let's say six months ago if Treasury had done an operational test to deposit a coin to mint a new coin and deposit it for $10,000, or if it had started taking the steps to issue consol bonds, certainly that would've gotten noticed.
Good agencies do a number of tests and pilots. They don't always get a lot of attention. This probably would. But I think in the broader context of the uncertainty they were dealing with, both with divided government, we saw a very protracted speaker fight, which just is another indicator of the volatility within Congress that you have to manage. Not developing that operational readiness to me is a really big mistake.
Tracy: (13:36)
So I'm just thinking back to the interview with Terry Duffy and he was sort of talking about whether or not he would leave Chicago and he threw out there that they had renegotiated all their leases to make them more flexible. They didn't actually own any property, that seems like laying the groundwork for a possibility.
Joe: (13:52)
Executive leadership.
Tracy: (13:54)
Okay, can we talk about the 14th Amendment? Because all I know about it is that it says something along the lines of the validity of the public debt of the US shall not be questioned. Something like that. What is this option? Where did it come from and why does it seem to be a very big deal about whether or not President Biden will actually invoke it?
Skanda: (14:20)
I'm going to toss this over to my Senior Counsel.
Arnab: (14:25)
Yeah. So basically, I mean, you got the text right.
Tracy: (14:32)
Thanks, I am reading it from a screen to be fair, but yeah.
Arnab: (14:35)
So basically this a post-Civil War amendment that was passed. And there are a number of reasons why it was passed. They wanted to make sure that bonds that were issued to pay for the Civil War were not reneged on. But basically the text of that, that a lot of constitutional scholars who are, I would say, highly respected believe, is that it is unconstitutional for the US to default. Everything needs to be done to avoid a default.
And I think just to take this into a broader context here, because I think sometimes a bit of a challenge, a bit of a mistake in how people understand the 14th Amendment in this context. And basically what I would say is the 14th Amendment is not a verb. You can't “14th Amendment” something. This isn't something that is like, as our mutual friend Carlos Muchaa says, this is not a sword. And so I think sometimes people think that you can just like invoke the 14th amendment like you’re Michael Scott in the office declaring bankruptcy and something will happen.
Tracy: (15:48)
I INVOKE THE FOURTEEEEENTH!
Arnab: (15:50)
Exactly. And that's not really how it works. What the 14th Amendment does is it places a obligation, a duty, on the executive branch to avoid default that places a duty on the executive branch to find every lawful lawful avenue to avoid a default. And that's where you start to get into the different tools that are available at the executive branch's discretion. But that's what I would emphasize about the 14th Amendment.
Tracy: (16:19)
So it's more a frame of mind rather than like an actual set of things that you could start doing.
Arnab: (15:50)
Exactly.
Joe: (16:26)
Biden took an oath to protect the Constitution. In the Constitution is the 14th Amendment. And therefore the argument would be that in order to sort of uphold his oath to defend the constitution, he has to find a way to pay the debt regardless of what the law says.
Skanda I want to go to you because we sort of glossed over something important. You and Arnab were talking about consol bonds. How, if the government is running up against the debt ceiling, is there an argument that there is a type of bond that would allow the government to keep borrowing and not violate that? What is a consol first of all, and why would that not violate the debt ceiling law?
Skanda: (17:10)
So the debt ceiling statute is very short, very easy to read. You don't have to be a lawyer to understand this. I'm not a lawyer, I have a law degree. So I'm in this sort of in between space, but you can read the statute and you can see how it is written is in terms of face value of the bond.
And so there are bonds that have no face value, specifically perpetual bonds. And you can issue perpetual bonds that, obviously they exist in perpetuity. You can put call options on them so that you can take them out of circulation later. But these bonds also have precedent in US Treasury history. We issued them as part of financing the Panama Canal. These were things that existed before the debt ceiling statute was passed and general bond authorities were passed.
So if there are bonds that exist that don't have a face value and you can't issue them under the bond authority. Again, there's also something unique about issuing bonds. There doesn't have to be as per the statute, there doesn't have to be a time limitation where principle must be repaid. This is in contrast to Treasury Notes and Treasury Bills.
Again, these are things that are pretty plain to see in the statutes. You don't have to make exotic interpretations, you don't have to make any sort of particularly strained interpretation of the law to figure out that these things are possible. These things have been done. They were pretty well understood by Congress when they passed the debt ceiling.
And if this is possible, if we all can agree that perpetual bonds are possible, then what the implication of 14th Amendment, at least under certain interpretations. I'm not here to tell you there's only one, but if you think that that is a constraint, if you think avoiding default is a really important thing for both economic and constitutional reasons, you have actually every obligation to find a solution to this problem and to try and reconcile all of the laws of the United States.
That's the part that I think is sort of being glossed over by the Treasury, which says, “We have a bad situation where if the dead ceiling binds, we have no choices. Therefore, we may have to talk about the 14th Amendment.” but it's like, no, you do have other options. Some are probably better than others, but I will, you do have a suite of solutions on the table you could consider one of them could be the coin. There are pros and cons to it from a legal perspective, but it's not, at least in terms of literal interpretation, it's pretty strong.
There are consol bonds, perpetual bonds that are stuff you can just read in the, I say the bond authority is the statute right after the debt ceiling. So you have plenty of room to identify alternative solutions. And if you identify alternative solutions, I guess simple negotiation theory, simple game theory would say that more alternatives, more viable alternatives, strengthens your negotiating position, strengthens the likelihood of a clean debt ceiling increase. And if you play down those alternatives, if you think those alternatives are less viable and you telegraph that to the world, that'll actually reduce your bargaining position.
Joe: (20:17)
Tracy, I have a question for you. It's a serious question actually. Does the idea of issuing perpetuals, consol bonds offend you less than the coin? This is me and Tracy. Coin. Consols. Like both of them are like these sort of accounting legal workarounds and they sort of like appeal to different parts of us.
Tracy: (20:43)
I find comfort in using the traditional language and structure of the existing financial system in solving a looming problem rather than trying to do something completely out of the box. Let's just put it that way.
But actually could I, since we're on the topic of more reasonable solutions versus large novelty coins, can I ask about another basic solution that I have seen, you know, people talk about a little bit. Couldn't you just have like a vote on the debt ceiling and just maybe create a situation where some more moderate Republicans could switch sides and make it happen?
Skanda: (21:25)
Yeah, you can pass the debt ceiling increase. The challenge with doing this through Congress when it's under divided government is the legislative procedure where again, there're certainly better experts and more thoughtful people than myself, but a discharge petition in which you can actually get something through government even while the Speaker of the House very intently wants to have the dead ceiling increase be attached to other policy itself. That takes a long time. That takes a long time.
And it's not something that's very easy to execute on. And I think these are things that get to talked about a lot in maybe sort of more kind of wishcasting of like, “Oh, there will be a clean debt ceiling increase because there'll be a discharge petition that'll undercut Kevin McCarthy.” And these things have always been kind of a hopes, wishes, dreams, as opposed to the realities of how long it takes to get some of those things through. And it may even take longer than trying to identify alternative lawful solutions on the part of Treasury.
Tracy: (22:24)
Wow.
Arnab: (22:24)
These processes take time. I worked in the Senate so I don't have a good sense of House procedures, but these things take a lot of time and there's a lot of maneuvering that can happen even with the Discharge Petition. And so, you know, you're, you're kind of in that place where if you had tried some of that stuff a couple of months ago, maybe the urgency wouldn't be there for the moderate Republicans that Tracy mentioned. And so you're always trying to balance those issues. And I think it's really hard to do this stuff legislatively.
Tracy: (22:56)
So this is one of those instances where a technocratic solution that could be, I mean hopefully done fairly quickly, might be the more viable option?
Skanda: (23:05)
Yes.
Arnab: (23:06)
Yeah.
Joe: (23:24)
So I want to actually talk about the operational aspect of some of these workarounds. So you know, the coin theoretically could be minted tomorrow. And according to Philip Diehl, who we had on the podcast, it could be done in a few days.
You mentioned, Arnab, the coding. So let's say Janet Yellen woke up tomorrow and was like “You know what? We're going to issue consols. We're going to issue these perpetual bonds because it'll allow us to keep borrowing money without adding to the face value of the debt.”
What do we know about operational preparedness, which the Treasury could have been working on six months ago. What do we know about what it would take to even like launch consol auctions the way we have for like 30-year and 10-year and 5 year bonds, etc.?
Arnab: (24:13)
So there’s a number of things that happen when — and I should clarify, this is not my area of expertise — I'm kind of just going off what smart other smart folks have told me. So apologies if I get something slightly wrong. But basically when Treasury issues a new security, they go through a number of tests and a number of calculations, and they test kind of how, how this is going to be priced by the market, whether they're actually going to sell.
So there's all of that prep work first that has to go into it. And the coding challenge itself of they've never priced a perpetual bond before, at least on their new auction system. So I think the highest they've gone is 30 years, maybe they've done 50, but they've never really tried to price a perpetual bond.
And so once you've put that into the coding, the computer mechanism, you then also have to go through all that analysis and Treasury just doesn't have, I think, the muscle memory. There was a new security that was issued sometime during the Obama administration and it took about six, seven months for it to get off the ground.
And I don't think you can — and unfortunately you saw this in a different context during the Covid recovery — during the pandemic when they passed the CARES Act and had these great additions to unemployment insurance and state agencies couldn't change their COBOL programmed systems to actually give out money in time — And so I think Treasury is probably better equipped and probably has better software systems, but these things still take a lot of time.
Skanda: (26:00)
If I could just give a quick more recent example. Obviously under Secretary Mnuchin they launched the 20-year bond, right? And that took a long time to sort of plan out. This is going to be an emergency. And look, I think Arnab’s probably selling some of his knowledge a little short in terms of we've talked to a few people who've worked in Treasury and can gave us some insight into how the time it takes to execute this.
It would not be easy to do it super quickly, but it certainly would be a little, it could still be done if you gave it enough time. The question really is, is the Treasury even thinking or working about on this in the background, is there something that's like they, they've been trying to keep their cards close to the best? They're trying to indicate that they're not looking at alternatives, but they really are. I don't know why they would trash alternatives while still working on them, but it's possible they are. And if they are that it would be good to know because that would obviously create the kind of pathway to avoid default and avoid a lot of the chaos that's tied to the debt ceiling itself.
Arnab: (27:02)
There's no opportunity like a crisis. And I think there's obviously this process that they go through with issuing these bonds, but I hope that someone at Treasury is thinking, okay, let's say we can't do it through our existing process. We can't do it like that 20-year issuance that Secretary Mnuchin did. Is there another way? Is there some, you know, bond issuances and new bond issuances before all this software is created.
I hope that someone there is going through and trying to find an avenue to do this quickly if possible, but that also doesn't take away from the fact that they should have been doing the operational readiness exercises six months ago.
Tracy: (27:41)
Is there any indication why they wouldn't have done that? Do we just think they sort of dropped the ball and thought that this issue would be resolved even though there's quite a lot of evidence out there that there is a sort of more extremist element of the Republican party who is maybe to more willing to take this down to the wire?
Arnab: (28:01)
I think it's good to give a lot of these people the benefit of the doubt, they're good faith actors. I think that what they would probably tell you is that if we take these steps, people are going to notice and then it's going to become, “Oh, you're doing an operational test for the coin. Biden is thinking about minting the coin” and it becomes a story. And I think they view some risk in that.
To me that just comes down to a different risk calculation. I think that there is risk to those stories coming out, I think that's a risk worth taking. And I think if anything, it also would strengthen your hand in negotiations knowing that you're taking the steps to do this. And if Congress wants to take away that authority, they can go ahead and do it. But until then we're going to make sure we have the operational readiness to do what we need to do.
Tracy: (28:58)
I would just like to say that Treasury has an open invitation to come on this show and reveal that they have in fact been working on either premium bonds or the coin. Just throwing that out there.
Joe: (29:08)
The invite is open 24/7. you wanna schedule something at two in the morning. We’ll wake Carmen up and say, “Hey, we're talking to the treasury about consols and the coin, we're recording in 15 minutes. Let's do it.”
I wanna talk about one, one more option that we haven't talked about. And I think there's two dimensions to it, which is the ideathat if we hit the debt ceiling and then the Treasury theoretically prioritizes interest payments. And so it preserves the incoming revenue from taxation so that it can meet its constitutional obligations to honor the debt.
And I feel like there's two dimensions to this question. Is this possible on the software-side? Do we know if the Treasury has the software capabilities to set aside certain payments as going ahead while other payments don't go through? And then B, is that legal in the sense that can the executive branch just decide, “Hey, these are the payments we're not gonna make, even though the Congress has authorized x and Y welfare and defense and all this stuff, we're just gonna not make them.” Can we talk about both the software and legal of prioritization?
Skanda: (30:13)
I'll leave the legal aspect of this question to Arnab, but at least in terms of feasibility, there was a lot of reporting about Secretary Geithner taking the steps to make sure that prioritization became a possibility of feasibility. So I think at least there was reporting for that effect.
Joe: (30:29)
So from a software perspective at least could theoretically be done.
Skanda: (30:32)
This kind of prioritization would become more feasible. I would be curious from the standpoint of the law what Arnab's take is?
Arnab: (30:42)
So I do not believe that would be lawful. I think there's the 14th Amendment constitutional challenges that you run into that we've already talked about.
But then there's this separation of powers issue that you would run into with prioritization. I'll go a bit more into detail on that, which is the Executive Branch does not have the authority to prioritize mandatory payments.
So the federal government spends trillions of dollars on a number of different things. Some of that spending is discretionary and some of it is mandatory. And mandatory spending includes things like Social Security, Medicare, certain veterans programs, certain student loan programs and a couple of other small things.
And regardless of who is in power, what the president's ideological persuasions even if we're in government shutdown, those payments continue to be made because the congress has simply given no discretion to the President to do so.
Congress in the Constitution is afforded the authority to control the purse strings. And so what you would end up in here is you would end up in a situation where, let's say the President decides “we're gonna stop making certain student loan payments to keep making interest payments” that act in of itself the first time that that payment is not made, or the first time that a Social Security payment is not made for a political decision is a constitutional crisis.
Congress is not allowed to delegate that authority to the President. And where they do delegate spending discretion, they have to provide what's called an ‘intelligible principle’ to guide the president's decision making. And they haven't done that here. The debt limit statute has nothing to say about if we run into the limit what payments should be prioritized or what shouldn't. And if Congress were to do that maybe this would be a constitutional law. But until they do that, they can't delegate that to the President. Congress can't abdicate that authority.
Skanda: (33:03)
And if I can just like add on to that part, let's think about it. If any president, whether it's Biden or Trump or Bush or Obama, they have to prioritize payments. Some will have different ideological persuasions about what's important to keep spending on and what's important, what's worth cutting. Let's say there's a President that wanted to cut the entire Department of Defense until the debt ceiling was lifted. Like that's a lot of discretion.
Joe: (33:25)
Someone is cheering that idea. Some listener somewhere.
Skanda: (33:28)
I’m sure I could go on with programs that would scare every single listener here. And that discretion almost certainly scares the Supreme Court. It would scare a lot of legal scholars of a lot of different persuasions about the notion that there's so much unchecked power and discretion that would arise from the situation. And I think that's like actually something worth reckoning with when people say, “oh, we'll just like prioritize payments and make sure we pay bond holders.?” Like this is not actually a very legal solution either.
Arnab: (34:02)
And I should say. And it would set a really poor precedent, right? If, if the debt ceiling allows the president to limit certain types of mandatory spending, what other situations do. Where is that extraordinary power coming from and could a future president abuse it? I think that's like a real constitutional problem that not enough folks are wrestling with, right?
Joe: (34:24)
I guess the situation that arises is what if a President, and one could imagine, let's just say a future Republican president and Democratic house. The House votes to raise the debt ceiling. The President doesn't agree to the debt ceiling hike and just says, “You know what, I'm going to prioritize instead because the debt ceiling has been hit.” So I guess there's all kinds of permutations there where if you sort of like give the executive branch that discretion to prioritize, who knows where you go. Anyway, Tracy?
Tracy: (34:53)
No, I was going to say that makes a lot of sense to me and has been also, ironically one of my criticisms of the trillion dollar coin, which is, okay, maybe you agree with using it in this one instance, but what happens in the next presidency? Maybe it's someone you don't agree with and they decide to use it to fund something outrageous. I don't know.
But anyway getting back to the current situation, what's your base case for how this plays out? I know I joked in the intro that, you know, we've kind of been here before, we've seen it all before, but there are some elements that are different this time. So where do you think we go from here?
Skanda: (35:29)
It seems like the direction of travel is towards what Republicans are seeking and what they can get away with from at least some faction of centrist Democrats, I would call it. So probably it will be some kind of bipartisan increase in the debt ceiling and some kind of government spending deal that will involve spending caps and cuts of a few different kinds. There will be some debate about how much composition that should shift towards non-defense over defense.
I think it's going to be an open question about how much work requirements sort of find their way in to this type of deal. But that's something that's been talked about, the one place of bipartisan interest that may actually serve some administrative, some of the interests of the administration on permitting reform, but that actually will take time to kind of craft well and craft correctly.
And I'm not sure that can be done so quickly on a dime, even though there is actually a lot of mutual interest across party lines there. That's something that's been talked about. I wouldn't want to hype that up too much in terms of this deal, even though it seems like it's a point of mutual agreement that could possibly come about.
But those are the kinds of things that we're hearing. And it does seem to me that for all the talk about clean debt ceiling increase, we're going to get a dirty debt ceiling increase and the incentives to do more, ransom. The hostage taking. this worked. That's what it seems like to me.
Arnab: (36:52)
I am not certain about a lot of things in this environment. One thing I am certain about is that whatever happens, it's not going to change the long-term budgetary trajectory of the federal government. And I think that's something really worth emphasizing because the debt ceiling, you know, a lot of people say the coin is a gimmick or consols are a gimmick.
The debt ceiling is the real gimmick. It allows people to feign seriousness about the debt picture of the United States without actually doing anything to make a difference. Work requirements on welfare programs are not going to change the budget picture. This is really something that is not a serious thing. No other country has it and it won't impact the debt picture at all. And I think if you believe, I'm not one of the people who believes that we are on an unsustainable debt path, but if you believe that, then what's going to come out of this is probably not something that is actually going to seriously address your concerns.
Joe: (37:54)
Arnab, Skanda, thank you so much for coming on Odd Lots.
Skanda: (37:57)
Thanks for for having me.
Arnab: (37:58)
Thank you.
Joe: (38:14)
Tracy, I thought that was really good. I liked your line about The 14th Amendment, rather than [being] a tool, the frame of mind.
Tracy: (38:27)
That would make a good t-shirt don't you think? “The 14th amendment is a frame of mind”
Joe: (38:30)
There's like touristy t-shirts. “The Bahamas. It's a frame of mind.” I love that.
Tracy: (38:37)
I’m going to make it. But I actually really agree. Well, two things stood out for me there. So one, the point about, like, you would expect the business base of the Republican party to maybe make more noise about this issue and force their hand at some point. That doesn't seem to have happened this time around. That's kind of interesting. Where is everyone? Why isn't everyone issuing, you know, big warnings about this? I know some people are, but there could be more.
Maybe we're just so used to it at this point that it's hard to get worked up about it. And then secondly, Arnab’s's last point about how the debt ceiling kind of has never mattered that much, right? Like it just gets raised and raised and raised and the public debt continues building and — not to go full on MMT — but you know, that can become a problem at certain points with inflation, but not always. And so, I would, my personal preference would be for the debt ceiling to remain as meaningless as it has throughout all of history. And for us to not even be recording this episode — as interesting as it has been.
Joe: (39:44)
Do you regret doing the episode or do you just want to live in a future in which we never have to do it again?
Tracy: (39:49)
I want to live in a world where we don't have to talk about this at all because, you know, it happens automatically.
Joe: (39:58)
Well we did. For years. At one point, and you know there's a lot of history. I think throughout much of the eighties Congress had a rule, which is when they approved a new budget, I think it was called the Gephardt rule, which is when they approved a new budget, they just increased the debt ceiling automatically.
Which is obviously what they should do. And then I think Newt Gingrich ended that. But it is really silly that, you know, we're not going to. That’s the thing, because — I think it was to Skanda's last point, because there is most likely going to be a “dirty increase.” The message to future congresses is this is your chance to extract a concession, right? And so we are going to have to do more in 2025...
Tracy: (40:40)
And every time this happens, the less attention is going to be paid to it because it's sort of like a Boy Who Cried Wolf kind of thing where everyone just becomes very inured to it.
Joe: (40:49)
And then what happened with the boy who cried wolf?
Tracy: (40:51)
I can't remember. No, I remember...
Joe: (40:53)
I think it was bad, eventually something bad happened. I think that's that's why we tell kids this story.
Tracy: (40:59)
I just want to clarify though, I do not regret recording this episode. I really resent having to look up section four of the 14th Amendment and learn about it on ostensibly a finance and economics and markets podcast.
Joe: (41:14)
You know what I thought was is really interesting too, people say like, “oh, just invoke the 14th amendment” and I really appreciated Arnab’s argument about why that really is inherently problematic. That what you're basically saying is let's create a condition in which the President can start picking and choosing which appropriations to make.
So you might have one president who's like a big like pacifist peacenik say, “okay, the Defense Department doesn't get any money. And then another one says, okay, the EPA and Social security and Medicaid recipients don't get any money.” If you think it through what prioritization entails, it is pretty problematic.
Tracy: (41:49)
That was a really interesting and an important point because you do see a lot of people talking about, “oh, this might not be such a big deal because they can just prioritize payments. But actually that opens up a whole other can of warms and a potential, I guess, overturning of political and social norms. So interesting stuff all around. Shall we leave it there?
Joe: (42:11)
Let's leave it there.
You can follow Skanda Amarnath on Twitter at @irvingswisher and Arnab Datta at @arnabdatta123.