America's Debt Dilemma: Hitting the Ceiling.

"The Republican Elephant."

Thomas Nast, 1874.

Public Domain.

via Wikimedia Commons.

The Economist this week writes about America's continued struggle with the debt ceiling. As Congress and the White House continue to negotiate, America is in danger of defaulting on its debt in a few weeks, with neither Republicans nor Democrats willing to compromise. The Treasury could bypass the debt ceiling by minting a colossal commemorative coin and depositing it into the government's account at the Federal Reserve, which would allow for the payment of government expenses without borrowing from public markets. The Biden administration has a few options including invoking the 14th Amendment and issuing high-coupon low face-value bonds, to bypass the debt ceiling and resume borrowing. 

Despite the risk of litigation and the potential for market disruption, the possibility of brutal austerity as a workaround for Treasury debt payments has pushed policymakers to consider unconventional, yet ingenious plans. Treasury officials are uncertain of their ability to implement prioritization of payments and regularly sell bonds in order to pay off their debt, and if dealers decline to participate, the whole plan could be thrown into jeopardy. Faced with the risk of default, prioritizing payments to bondholders may be necessary to get both sides to reach a deal, but could have big costs. However, as almost every observer has noted, the world's biggest economy should not be managed in this manner. 

I've written previously on this, noting that the Biden administration's exploration of using the 14th Amendment to challenge the current federal borrowing limit has prompted heated debate among economic and legal advisors. Meanwhile, Kevin McCarthy is facing his first major test in leading the House of Representatives in Congress' negotiations to lift the debt ceiling, a controversial issue that requires bipartisan compromise while weighing both fiscal responsibility and the need for austerity. The ripple effects of the rise of the far-right within the Republican Party have left lasting damage to both faith in the political system and the party's overall stability. The rising tensions within the Republican Party over the debt ceiling are making it increasingly difficult to present a unified stance. To move ahead successfully, the Republican Party must find ways to address the factors contributing to its internal divisions and disarray.

Presidential Limits in the Debt Ceiling Showdown.

14th Amendment of the United States Constitution, page 2.

(Section 4, shown above, concerns public debts.)

Work of NARA, Public Domain. 

via Wikimedia Commons.

As the standoff between House Republicans and President Biden over raising the nation's borrowing limit continues, the administration is reported by the New York Times today to be considering a constitutional challenge to the debt limit based on the 14th Amendment. The 14th Amendment states that the validity of the public debt of the United States shall not be questioned, which presents an apparent conflict with the current $31.4 trillion statutory borrowing limit. Jim Tankersley, the author of the article, writes that this has led to an intense debate among top economic and legal officials.

President Biden is set to meet with Speaker Kevin McCarthy on May 9 to discuss fiscal policy, but it remains unlikely a compromise can be reached in time to avoid a default. The president has consistently maintained that it is the job of Congress to raise the limit in order to avoid economically catastrophic consequences. Once again, gimmicks meant to circumvent Congress on the debt limit, such as minting a $1 trillion coin to deposit with the Federal Reserve, have surfaced.

It is clear that the federal government is barred from defaulting on the debt, while at same time, only Congress has the power to borrow. Tankersley reports that inside the administration there is an open question about what the Treasury would do if Congress does not raise the limit in time. Officials who support invoking the 14th Amendment and continuing to issue new debt apparently argue that the government would be exposed to lawsuits either way, which I think is correct. However, the right answer here is that the statutory borrowing limit is binding and that an attempt to ignore it would result in an immediate legal challenge that would likely traverse the Supreme Court's shadow docket and result in an affirmation that Congress has the exclusive power to borrow. There are no shortcuts out of this situation; the political branches, the Congress and the Executive, will have to resolve this issue between them.