Home > Main > Not understanding how money works creates Constitutional Problems

Not understanding how money works creates Constitutional Problems

July 8, 2011

The 14th amendment argument has moved from the fringe to the mainstream.  In doing so, its highlighted the fact that understanding how money works is crucial to the proper execution of our government.

Laurence Tribe says the debt ceiling is perfectly constitutional.  Why?  Here is the core of his argument:

“This argument goes too far. It would mean that any budget deficit, tax cut or spending increase could be attacked on constitutional grounds, because each of those actions slightly increases the probability of default. Moreover, the argument is self-defeating. If it were correct, the absence of a debt ceiling could likewise be attacked as unconstitutional — after all, the greater the nation’s debt, the greater the difficulty of repaying it, and the higher the probability of default.”

Note that his misunderstanding of money drives his entire argument that the debt ceiling is constitutional.   He clearly hasn’t read solvency and value, insolvency and debasement.    The U.S. is never in danger of insolvency.   We cannot go broke.  If you doubt that article, you need to know the the mainstream understanding of Government Budget Constraints is based on a belief in ghosts.

So his arguments based on the possibility of the U.S. not paying its debts are wrong.  The first argument is wrong because spending more, or lowering taxes does not slightly increase the possibility of default, because we cannot default.  The second argument is wrong because it is not harder to repay the debt if the debt gets higher for the United States.  The 14th amendment argument isn’t self defeating.

I hate to call a prominent Harvard professor clearly and undisputedly wrong.  But he is. Lawrence Tribe is wrong. He doesn’t understand money and sovereign money, so his legal arguments and theories are incorrect.

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  1. wh10
    July 8, 2011 at 11:01 am

    TC,

    This is how I first reacted to the article, but then I realized that isn’t the crux of his argument (though I agree, he is wrong on this point). The crux of his argument is:

    “The Constitution grants only Congress — not the president — the power “to borrow money on the credit of the United States.” Nothing in the 14th Amendment or in any other constitutional provision suggests that the president may usurp legislative power to prevent a violation of the Constitution. Moreover, it is well established that the president’s power drops to what Justice Robert H. Jackson called its “lowest ebb” when exercised against the express will of Congress.”

    That may be harder to argue with.

    However, Beowulf’s idea of the platinum coin should get around this, since in the code it says the Secretary of the Treasury has the authority to mint, not Congress.

    • TC
      July 8, 2011 at 12:24 pm

      The continued spending would be part of appropriations bills already passed. Congress already committed to the spending.

      This is about being able to pass contradictory laws.

      • wh10
        July 8, 2011 at 12:31 pm

        Agreed that is what it is about, not monetary sovereignty, though if you were going up against him, and he tried to make that argument, you could slam him (man, imagine MMT rising to fame in the Supreme Court). An interesting case indeed.

      • TC
        July 8, 2011 at 12:39 pm

        And I’d also say this is totally related to the “not even wrong” no-Ponzi assumption.

        When people believe something that cannot be shown to be false, it’s just a matter of time before they pass laws that contradict each other.

    • beowulf
      July 8, 2011 at 12:53 pm

      Well to be precise, the power to create money rests with Congress, it has simply delegated its power to both the Tsy (in the Coinage Act) and the Federal Reserve (in the FRA). It is impossible (“self-defeating” as Tribe would say) to argue that Congress cannot delegate its power to Secretary of the Treasury but at the same time CAN delegate its power to the Federal Reserve Board (especially since, under certain circumstances the Secretary of the Treasury can switch the Fed governors into zombie mode* where they must do his bidding).

      But then the root cause of the debt ceiling insanity is that the US Govt has a debt ceiling but an agency of the US Govt (the FRB) does not have a debt ceiling. All a jumbo coin would do is adjust for this anomaly by offloading debt from Tsy’s books to the Fed’s.

      *”6… wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”
      http://www.federalreserve.gov/aboutthefed/section%2010.htm

      • pebird
        July 8, 2011 at 2:00 pm

        beowulf – I think that the Congress can delegate powers to the Fed, since their legislation created the Fed, but I don’t think they can delegate powers to the Executive branch/Treasury.

        I realize the Treasury and Fed are operationally combined – this might be a source of the legal/political vs. functional issues.

        • beowulf
          July 8, 2011 at 2:39 pm

          Congress’s legislation created the Department of Treasury as well (in 1789). If anything, its the Federal Reserve that is constitutionally suspect, being a govt agency exercising executive power and yet not under the direct control of the President.
          “The Federal Reserve Board and the Unitary Executive”
          http://volokh.com/posts/1207512634.shtml

  2. pebird
    July 8, 2011 at 12:07 pm

    Wow, this is great – a Harvard Law professor who screws up on both economics and the law.

    The debt “ceiling” has consistently been raised since it has been enacted – his title “A Ceiling We Can’t Wish Away” is technically true, but we have legislated it away many times.

    Yes, the President cannot borrow money on the credit of the United States. But the President is bound to execute the laws of the land, and where the laws conflict, he must uphold the higher law while Congress figures out how to reconcile the laws.

    The Treasury is a part of the Executive Branch, and the President must ensure that all debts of the United States are honored (14th Amendment). If he takes every effort to ensure that no new debt is created by actions he can control (e.g., current spending), he clearly can direct the Treasury to issue new debt if that is required to honor existing debts (e.g., interest payments). If the net effect of that creates debt in excess of the debt “ceiling”, then let Congress try to impeach him for upholding the Constitution.

    Tribe is trying to give the debt ceiling legislation the force of the Constitution via the Congressional power to issue debt. But Congress has already approved that debt when they appropriated the budget.

    I guess what Tribe is saying is that the President should ignore the 14th Amendment to the Constitution, and instead uphold a lesser law – the debt “ceiling”.

    • wh10
      July 8, 2011 at 12:15 pm

      This is an interesting counterargument. But note, now we are not in the land of the clearcut monetary sovereignty issue, but in the land of a more traditional contestable, legal debate.

      Out of curiously, do you have a legal degree? I wonder what Bill Black would have to say on this (are there other JD MMTers?).

      • pebird
        July 8, 2011 at 1:57 pm

        No legal degree – fair amount of history. Congress used to approve every debt authorization. After a while they either got lazy or didn’t want to have their votes continually attached to debt authorization votes, so they created the debt “ceiling” legislation.

        Regardless of what Congress and the President decide, we remain in the realm of monetary sovereignty – just with the usual politics and legal crap thrown in.

        But I think the debt ceiling legislation is unconstitutional.

  3. July 8, 2011 at 12:09 pm

    TC,

    It has become increasingly clear to me that there are no experts, only people that are right and people that are wrong.

    Rely on one’s self.

    • TC
      July 8, 2011 at 12:25 pm

      yeah, i know. In other fields I am starting to become an “expert”, and it seems a bit strange.

    • beowulf
      July 8, 2011 at 1:07 pm

      You can take Hollywood for granted like I did, or you can dismiss it with the contempt we reserve for what we don’t understand. It can be understood too, but only dimly and in flashes. Not half a dozen men have ever been able to keep the whole equation of pictures in their heads.
      F. Scott Fitzgerald, The Last Tycoon

      :o)

  4. Kris Smith
    July 8, 2011 at 8:32 pm

    I’ve been thinking about this (though admittedly not too hard). What about the debt ceiling mandates default on treasury debt? The administration has other options to avoid default (cutting spending). If the basis for unconstitutionality is the 14th amendment forbids default, why isn’t cutting spending an option? You are ignoring congress’ will either way…

  5. Kris Smith
    July 9, 2011 at 9:43 am

    I don’t know much about the debate that is taking place here, and I know even less about constitutional law. Nevertheless I am troubled by the potential expansion of administrative power implied by this line of thought…What about a situation a few years down the road, the republican minority filibusters and blocks an increase in the debt ceiling and President Bachman says, “Well, I guess we just have to shut down the EPA..” or “So much for Obamacare”, or “I suppose we just need to sell off the national parks”. What about if President Bigstones says, “we’ll have to increase taxes” or “this means we need to start confiscating property”. All in the name of avoiding default under the 14th.

    Whether the debt ceiling is or isn’t consitutional is well above my pay grade to determine. I think the debt ceiling is illogical and that ought to be enough reason to just get rid of it, but if it remains on the books I don’t like the implication that the administration has free rein to do what is needed in order to avoid default.

    • TC
      July 9, 2011 at 12:18 pm

      “Whether the debt ceiling is or isn’t consitutional is well above my pay grade to determine. I think the debt ceiling is illogical and that ought to be enough reason to just get rid of it, but if it remains on the books I don’t like the implication that the administration has free rein to do what is needed in order to avoid default.”

      I only 1/2 agree with this. The idea that the president should follow some law (don’t break debt ceiling) over some other laws (spending appropriations from Congress) cannot ever work. I walked out on my girlfriend of 6 years for behavior like this – laws and people need to have one way to behave properly. The world shouldn’t be a catch 22, where showing that you recognize the absurdity of laws makes you the wrong person to implement them.

      The part I agree with is the creeping presidential power. I hate it. But we have a flawed democracy where the only way to do things is to ignore congress. Our political process is broken. There is pretty much no way for Democrats to get anything done due to obscure laws of the senate and house.

      I am pretty sure that the end result will be a breakdown of some sort, where our democracy goes parlementary or something like a parliment, rather than our current system. The famous check and balances end up being a way to pass the buck instead

      • Kris Smith
        July 9, 2011 at 2:26 pm

        “But we have a flawed democracy where the only way to do things is to ignore congress.”

        But you see where this is going, right? If it is determined that an act of Congress can be ignored under certain circumstances, then it becomes a new political tactic for whichever party holds the executive to create an impasse so their guy can grab the ball and run with it. This is easily accomplished via filibuster.

        I am just exasperated with Obama’s handling of this entire situation. Yes, the Republicans are clearly the problem here, but the debt ceiling should have been sewn up when the budget was passed. Even now when the Republicans keep summoning him to come negotiate with them he should be telling them that they passed a budget which requires an increase in the debt ceiling so either pass the debt ceiling, or pass a new budget. Since I don’t believe Obama is stupid I can only assume this is political calculation to make the Republicans appear unreasonable as often and as long as possible. Instead every unreasonable and unecessary compromise is going to have his and the Senate Dems name on it.

        • beowulf
          July 9, 2011 at 9:13 pm

          Kris,
          An Emory psych professor, Drew Westen (who moonlights as a liberal political consultant), summed up what was wrong with Obama pretty accurately a couple of years ago:

          “What’s costing the president are three things: a laissez faire style of leadership that appears weak and removed to everyday Americans, a failure to articulate and defend any coherent ideological position on virtually anything, and a widespread perception that he cares more about special interests like bank, credit card, oil and coal, and health and pharmaceutical companies than he does about the people they are shafting.”
          http://www.huffingtonpost.com/drew-westen/leadership-obama-style-an_b_398813.html

  6. JCD
    July 9, 2011 at 12:34 pm

    I think you’re reading way too much into this.

    The 14th amendment was ratified in the wake of the civil war. The Point of section 4 is to say “We (the USA) won the war, and they (the CSA) lost. Our debt is good and shall not be questioned. Theirs shall never be repaid. If you take a chance and lend money to a rebellion against the USA and lose, you will not be repaid, ever.”

    By the way, the first sentence of Section 4 reads:

    The validity of the public debt of the United States, authorized by law, … shall not be questioned.

    I think the “authorized by law clearly means that only that debt allowed by law (an act of congress) is valid.

    Also, article 1 Section 8 grants to Congress the power to “borrow money.” As ours is a republic of limited powers, this makes clear that that power is reserved to Congress.

    • TC
      July 9, 2011 at 5:55 pm

      I’d disagree with this. The point of that particular clause was to prevent partizan politics from causing a default. That’s the historical context. And that’s what the republicans are doing right now, playing political games with a default.

    • beowulf
      July 9, 2011 at 8:55 pm

      “As ours is a republic of limited powers, this makes clear that that power is reserved to Congress.”
      Then maybe they shouldn’t have ordered the Secretary to spend per their appropriations nor the authority to borrow what taxes and coinage don’t cover.

      “(a) The Secretary of the Treasury shall…
      (3) issue warrants for money drawn on the Treasury consistent with appropriations;
      (4) mint coins, engrave and print currency and security documents”
      31 USC 231

      “The Secretary of the Treasury may borrow on the credit of the
      United States Government amounts necessary for expenditures
      authorized by law and may buy, redeem, and make refunds under
      section 3111 of this title…”
      31 USC 1004

      • Clonal Antibody
        July 10, 2011 at 1:11 am

        Scott Fullwiler on your coin minting idea – QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

        comments from frequent MMT commentator Beowulf and several previous posts by fellow MMT blogger Joe Firestone (see the links at the end of Cullen’s post and also here)—that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins.

  7. Kris Smith
    July 9, 2011 at 11:16 pm

    “Obama, like so many Democrats in Congress, has fallen prey to the conventional Democratic strategic wisdom: that the way to win the center is to tack to the center.”

    That’s an interesting article Beowulf, thanks for posting. The above quote is from the article. The especially aggravating thing is Obama has a gift for explaining the complicated and counterintuitive and has still chosen to tack to the right.

  8. Andrew P
    July 10, 2011 at 9:04 pm

    This dispute is not about MMT or how the monetary system actually functions. It is about separation of powers and who gets the upper hand in ruling the USA. If the President usurps legislative power to declare the debt ceiling null and void, it will be because he wants a showdown with the House that he knows they don’t have the votes to win. They can’t remove him from office without 67 Senate votes, and they only got 47. Of course, if he can usurp legislative power in this one instance, he can do it again and again once he proves that everyone votes strictly on party lines and thus the Senate will never vote to remove him from office. And the Supreme Court will never get involved in a dispute like this. Congress can only bring it to the courts with a joint resolution of both houses, which will never happen as long as Reid controls the Senate – and even then it is likely to be dismissed as a political dispute.

    A more interesting question is can the Treasury print dollars outside the Federal Reserve System without adding to the debt? And even if it can, would Obama rather have a showdown to prove the House impotent than simply printing money?

    • wh10
      July 10, 2011 at 11:45 pm

      So can the Treasury use the jumbo coin to fund spending (instead of bond purchases)? Does govt spending have to be ratified by Congress? I’m sure any of the guys here will be able to answer this in a jiffy…

      • beowulf
        July 11, 2011 at 1:04 am

        Congress has power of the purse, there’s no spending until Congress has passed an appropriations bill (usually passed annually, but there are permanent appropriations on the books for debt service and lawsuit judgments), at which point, Tsy MUST spend.

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