Sen. Mitch McConnell (R-Ky.) has taken another hostage. As news outlets have been reporting this week, the Republican leader will not provide any votes to resolve the looming debt ceiling crisis. In the face of McConnell’s willingness to threaten the fiscal integrity of the republic just to score political points, the administration should be open to strong measures in response.
There is one strong measure policy makers haven’t considered before, but that could postpone any debt ceiling crisis for many years. Others have proposed fairly outlandish solutions, such as minting trillion-dollar platinum coins.
But the answer is much simpler: Treasury should read the debt ceiling statute.
The debt ceiling was created during World War I, and then refined over the next 20 years to remove Congress from the politics of borrowing. By 1939, the statute left it up to the Treasury to decide when and how to borrow, so long as the amount of debt “outstanding” was below a maximum amount. The statute does not define “outstanding,” but since it assigns Treasury the task of tallying up the debt and determining when the face amount of debts has exceeded the statutory limit, the Treasury must have the authority to interpret what that key statutory term means.
When Congress drafted the first limit on “outstanding” debts in 1917, the members of Congress could not have imagined the modern powers of the Federal Reserve Bank. Today, the Fed holds more than $8 trillion worth of U.S. debt. That’s more than one-quarter of the $28 trillion or so reported by the U.S. Debt Clock organization.
Treasury’s response to the debt ceiling crisis is therefore simple. It should rule that debts technically owned by the Federal Reserve — which after all is part of the federal government — are not “outstanding.” Is a debt “outstanding” if you owe it to yourself? When a corporation buys back its stock, we treat those purchases as reducing the number of outstanding shares. If the Treasury followed this logic and reduced its calculation of the outstanding debt by $8 trillion, our total obligations would fall far below the current ceiling.
It’s also worth understanding why and how the Fed acquired these debts. The debts were originally sold to private investors. The Fed began buying up federal bonds from the banks that held them in 2008, as part of an effort to drive down long-term rates. To do that, it had to raise the price of bonds (interest rates and bond prices move in opposite directions). With trillions in bonds no longer circulating in public hands, the law of supply and demand pushed bond prices up and rates down.
Thus, debts held by the Fed are no longer in circulation in an economic sense, either. By design, they are not available for the public to acquire. If they were, they would not serve the Fed’s goal of keeping rates low.
Government debts held by the Fed also differ from other debt in a deeper sense, as I have explained in recent academic work co-authored with Yair Listokin of Yale Law School. By law, the Fed must turn over its profits to the Treasury. So, when the Treasury pays interest to the Fed, the Fed … pays it right back. Since these debts can be revolved indefinitely, money owed to the Fed could potentially never bear any net cost.
To be sure, the Fed sometimes spends some of the interest it receives. The Fed’s largest expenditure is interest on “reserves,” or the deposits commercial banks hold with the central bank. The Fed pays interest so that banks don’t lend out money, which helps to reduce the amount of money in circulation and cool down the economy. If the economy ever starts to heat out of control, the Fed might have to pay a lot of interest, potentially cutting into the profits it repays to the Treasury.
Perhaps reasonable people could disagree whether debts a nation owes to itself, which may well never have any net cost, are “outstanding.” One thing that’s for sure is that the 1917 Congress could not have imagined such an instrument. The Fed has only been paying interest on reserves since 2008, for instance.
As a result, there is substantial room for doubt about whether the word “outstanding” includes Fed-owned obligations. Treasury should use its regulatory authority to resolve that uncertainty, and free McConnell’s latest hostage — our economy.
Brian Galle is professor of law at Georgetown, where he teaches courses on taxation and the economics of government.