Does Obama have a plan?

In his news conference yesterday, the President said that he will not allow the Republicans to use the threat of the debt ceiling to gain budget concessions it could not win through constitutional (voting in Congress) means. He said: “They will not collect a ransom in exchange for not crashing the American economy" (read transcript here).

The concept of a debt "ceiling" is related to the distinction between Congress authorizing spending (via spending bills) and Congress authorizing borrowing for this spending when the Treasury has insufficient funds to pay. Initially these two authorizations were made simultaneously by Congress. Beginning in 1917 (in the face of world war) Congress created  the concept of a debt ceiling in order to streamline the process. Borrowing, when necessary to pay for spending, would be automatically authorized up to a certain limit, set each year by Congress. Since that time the debt ceiling has been periodically raised by Congress. This happened more than 70 times in the last 50 years: 18 times under Ronald Reagan alone.

As far as I know there has never been a test of the constitutionality of the 1917 creation of the debt ceiling. As we all have been reminded recently, section 4 of the 14th amendment to our Constitution says: 

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.



Historical analysis of this section shows that it was instituted to keep debt and possible default out of the hands of unscrupulous politicians who might use default as a way of blackmailing the U.S. government -- a situation which, of course, exactly describes what we face now. It seems likely, then, that the debt ceiling and especially its current use by the Republicans, violates Section 4, and is likely to be unconstitutional. The problem is: How to have it declared as such?

Some have suggested that the President simply declare the debt ceiling law unconstitutional, and ignore it. There is a big problem however: the President does not have the power to declare a law unconstitutional -- that is for the Supreme Court to decide. If he simply ignores the law, he could be sued by Congress, declared in contempt, and even impeached. This would create a constitutional crisis that would demand Supreme Court intervention. Given the nature of the current court, the result is quite unclear. For this reason (probably among others), President Obama has already refused to go this route.

(There are many pro and con arguments about the constitutionality of the debt ceiling vis-a-vis the 14 Amendment -- you can read them in many places on the Web, including Wikipedia.)

Another option that has been suggested for the President is to mint coins in large denominations which the Treasury could deposit and use to pay debt. Specifically, a law passed by Congress in 1996 (by Republicans over Democratic opposition) says:

The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time.

Thus, the Treasury could mint several trillion dollar coins -- more than enough to make the debt ceiling irrelevant. Although this sounds ridiculous, no one has advanced an argument making such an action illegal or unconstitutional, even using the law in this way was not the intent its authors. If Obama or his Treasury Secretary tried such a move the Republicans would challenge it; however, as in the case of the 14th Amendment, it is unclear who might have "standing" to test its constitutionality, nor how the arguments would run. They probably would be based on the Congress's sole power to raise money. In any case, the President once again has strongly suggested  that he would not pursue a "constitutional" track (or "trick" if you will).

So what does President Obama have in mind when he says that he will not negotiate the debt ceiling with congressional Republicans?

On the basis of unfortunate past history, I fear that he will once again make a deal with Republicans that will give them 80 -90% of what they want: large cuts in Social Security, Medicare and Medicaid, and other government spending that benefits the vulnerable and non-rich. When confronted with a debt ceiling challenge a year ago, Obama caved. He has already backpedaled on taxes on the wealthy and has recently suggested an openness to decrease cost of living increases for Social Security, even though he had promised not to allow this program to be part of deficit-reduction.

(Social Security has its own budget and is emphatically not part of the deficit problem. If Social Security can not pay out its promised benefits, then it won't pay them. At the moment this problem will likely occur around 2037. All problems with Social Security can be avoided by simply eliminating the ceiling on collecting the Social Security or FICA Tax. At the moment this fact has been suppressed by both parties)

On the other hand, if the Republicans refuse to raise the debt ceiling, the President might, in the name of avoiding default, start making hugely unpopular cuts in certain selected programs: Medicare, Congressional salaries, the military, air-traffic control and security, federal highways etc. He would hope that the outrage resulting from these actions (or threats thereof) could be directed at the Republican party.

At the moment it looks like he will let the PTR (Party for the Rich, formerly GOP) stew in its juices while he attacks them for threatening to trash the US (and possibly the world ) economy in order to attain their ideological ends. Since the Congress -- personified these days by the Republicans to control it -- is sewer-level in popularity, this may have some effect, though there is little room for lowering public opinion of the House. Meanwhile I think he will do some minor selling out behind the scenes -- both as incentive to Republicans to cave on the ceiling and because that is the way he is built. He may also feel that while default is likely to be bad from an economic standpoint, ultimately the world will realize that we will stand behind out debts ... eventually. There is simply no better repository for investment and financial trust than the U.S. economy. China, India and Brazil are still "rising" and Europe is still fighting its demons with respect to stabilizing the Euro while confronting the problems of Spain, Greece, etc that have been exacerbated by the failure of the austerity measures pushed by the conservatives in Germany and Britain.

Would Obama take such a gutsy stand? Would it work? It seems so out of character, at least based on what we've seen politically of the President, that it's hard to imagine him going through with it. Even if he did, would that actually have an effect on the Republicans, many of whom come from pretty safe congressional districts and in any case don't have to face re-election for another couple of years?

There is one other factor that may pressure the Republicans: the business community is very fearful of the uncertainties of default. While certain industries have used the Tea Screamers to push for relaxation of regulation, and certain wealthy people want to stave off higher taxes, basically, from what I've read, Business is pragmatic not ideological, and is already putting some screws on House leadership to back off.

We shall see.