One of the biggest stories of the new Trump administration is the president’s attempt to block congressionally mandated spending. So far, most of the discussion over this freeze has focused on whether it violates federal law and the Constitution. But another front is likely to open soon in that legal battle — and it has received much less attention.
On his first day in office, Trump froze all federal spending tied to the Inflation Reduction Act and the $1 trillion infrastructure law passed during Joe Biden’s presidency. Although Trump has since relented on other spending freezes — such as a short-lived block on virtually all federal payments — he has continued to withhold these energy, climate, and infrastructure funds, even after a federal judge ordered their release on Monday.
Continuing this freeze for longer than 45 days would take an act of Congress, and it’s unclear whether the Trump administration intends to get one. It seems to be gearing up to fight a Supreme Court battle over whether the president has an inherent “impoundment” authority to block federal funding unilaterally (more on that later).
That constitutional fight will obviously be extremely important. But as hundreds of CEOs and local government officials are now surely realizing, this battle is not the only legal front on which the Trump administration’s spending freeze will be fought.
That is because — as long as the freeze continues — the Trump administration is going to start violating hundreds or even thousands of contracts and legally binding spending agreements. The Trump spending fight is not only about policy and the Constitution, in other words, but also about contract law.
The companies and local governments that are now being strung along by the Trump administration did not make a vague handshake agreement with the Biden administration. Instead, they signed a contract with the federal government to receive a certain amount of money in exchange for doing a certain activity. The administration might have changed since then. But the government is still bound by its debts and obligations.
Those companies have now spent money — in some cases more than tens of millions of dollars — to fulfill their side of the contract. They have bought equipment, purchased land, and hired workers. Those companies’ contracts with the federal government are as legally binding as any other contract between two parties — and the courts are as empowered to defend those contracts as they are any others.
There is a significant amount of money tied up in these agreements. By the end of 2024, the Biden administration had “obligated” more than $96 billion of grants from the Inflation Reduction Act, while the Department of Energy’s loans office had “finalized” more than $60 billion in lending. Both terms generally mean that a contract has been signed.
As Heatmap has written before, just because the government has signed a contract for a certain amount of money doesn’t mean that the money has gone out the door. Many federal contracts are designed, basically, as ongoing invoicing relationships: A private party agrees to do something for the government, the private party does it, and then the private party brings back its receipts and asks the government for reimbursements.
The government has been refusing to make those private parties whole, even though those private parties have kept up their side of their agreements. (Note that at no point, ever, has the Trump administration claimed on the record that the private entities it’s now refusing to pay are in breach of contract. It is simply saying that it would rather not pay them just yet for political reasons.)
This has several important consequences for what is about to happen next.
The first is that the Trump administration is about to face dozens and perhaps hundreds of lawsuits over breach of contract. The president cannot simply announce that the contracts are void, like Michael Scott declaring bankruptcy in The Office. If the president or his officials want to cut off funding to IRA and infrastructure law grant and loan recipients, then they will need to give specific reasons under the contract for terminating and then defend those claims in court — provided that the recipient sues. Under a law called the Tucker Act, companies can sue the federal government for breaching a contract in the Court of Federal Claims, a special court in Washington, D.C. These lawsuits will not be about MAGA policies, but rather about the facts of each contract and whether the parties are in compliance with them.
At the same time, the Trump administration will likely be waging a fight over “impoundment.” Some officials in the Trump administration — including Russ Vought, the Project 2025 architect who now leads the White House budget office — profess that the president has an inherent authority that allows him to unilaterally block federal funding. This is despite the fact that the Constitution does not mention such a capacious authority, and the Supreme Court has historically rejected other presidential ploys, such as President Bill Clinton’s use of the line-item veto, to accept some parts of the federal budget and ignore others.
This will create, at least at first, a two-track legal fight over the Trump administration’s spending freeze. At the high level, President Trump will be fighting over the political and constitutional question of whether he can unilaterally block funding that has been appropriated by Congress. But at the lower level, federal agencies may be sparring with hundreds of companies about whether they can wriggle their way out of the contracts they have already signed. These dozens of potential smaller fights will command an enormous amount of time and personnel attention — not only from the companies, nonprofits, and local governments trying to secure what they are owed, but also from the Trump administration, which has finite resources.
These skirmishes will have economic consequences — and while these might be small in the context of America’s $29 trillion economy, they will gradually deepen. By refusing to honor its contracts, the Trump administration is forcing private companies to bear public costs. Those companies will delay hiring employees and investing in new equipment as they await repayment; some will furlough workers and go bankrupt. The burden will become more and more significant every day that the Trump administration continues its spending freeze.
These costs will not be randomly distributed through the economy, but rather concentrated primarily in sectors located in rural areas and affecting working-class Americans. Professional environmentalists in Seattle will continue to have a job regardless of what happens to some rural school district’s microgrid project. But the construction workers and electricians set to build that grid will lose income.
For this reason, the energy and infrastructure freeze does not strike me as a very wise move, politically — particularly as U.S. economic sentiment is worsening. One reason it is politically prudent for lawmakers, and not the president, to make spending decisions is that representatives understand their districts much better than federal officials in Washington, D.C.
This suggests the final takeaway: The Trump administration is beginning to play a very dangerous game with the United States. The American economy’s strength and prosperity arises from its territorial resource wealth, its educated and productive workforce, its secure defensive position, and — crucially — a set of financial intangibles that are ultimately backed up by federal contracts. The federal government is the largest counterparty in the global economy because it can be relied upon to pay its debts. If it begins to back out of contracts hither and thither, especially if primarily for partisan political reasons, then it will ultimately damage every American.
This is not a new or novel thought. Writing in 1790, Treasury Secretary Alexander Hamilton said that the “punctual performance of contracts” was the key to maintaining the United States’ good credit. “States, like individuals, who observe their engagements, are respected and trusted: while the reverse is the fate of those who pursue an opposite conduct,” he said. “Every breach of the public engagements, whether from choice or necessity, is in different degrees hurtful to public credit.”
It isn’t unusual for new administrations to pause some spending at the beginning of their terms, and perhaps the Trump administration will soon prove the worriers wrong and lift the spending freeze. But I fear it will not. It is very possible that in the next several months, the administration will begin to breach dozens of its public engagements. This will hurt the energy, automaking, and construction sectors in the near term. It will cause grief for the president — and, I worry, all of us — soon after.
EIA
