Tuesday, October 8, 2013

Default Is Not A Constitutional Option (excerpt)

It’s a sad day when Beijing has to tell Washington to get its fiscal act together. That’s exactly what happened yesterday when a Chinese official said “the clock is ticking” and urged US officials to “ensure the safety of the Chinese investments.” Of course, if the fiscal stalemate continues and the debt ceiling isn’t raised, there are more than enough tax revenues to cover the interest payments on the federal debt. As I noted yesterday, a section of the 14th Amendment of the Constitution says that the public debt of the US “shall not be questioned.”

The current statutory debt limit is $16.7 trillion and must be raised by October 17, according to US Treasury Secretary Jack Lew. Over the past 12 months through August, net interest paid by the US federal government totaled $219.5 billion. Over the same period, tax receipts totaled $2.7 trillion.

Let’s for expository purposes assume that the debt ceiling isn’t raised over the next 12 months and that tax receipts and interest payments remain the same over the next 12 months. That would leave $2.5 trillion in tax receipts after interest is paid. Outlays, at $3.4 trillion over the past 12 months, would have to be cut by nearly a trillion dollars to match revenues after interest payments. That would still cover all federal entitlements spending, but would leave us literally defenseless, and park-less.

If the President decides to default on the federal debt rather than cut other outlays, he would be violating the 14th Amendment. These may be extreme times, but such an extreme measure is highly unlikely. The President could also interpret the Amendment as giving him the power to unilaterally raise the debt ceiling. So the Chinese can rest assured that their investment in US debt is safe.

Addendum (Wednesday, October 9, 2013):

I am considering going back to school to get a law degree specializing in constitutional law. This seems to be a skill necessary to assess Washington’s looming debt ceiling crisis. As noted above, the 14th Amendment of the US Constitution states that the public debt of the US “shall not be questioned.” That implies that the President could unilaterally raise the debt ceiling if Congress doesn’t do so.

Today, Bloomberg reported: “President Barack Obama rejected calls for him to invoke the Constitution’s 14th Amendment to skirt Congressional approval for issuing new debt, as both political scholars and legal experts said such a crisis-aversion plan would be risky and potentially illegal. ‘If you start having a situation in which there’s legal controversy about the U.S. Treasury’s authority to issue debt, the damage will have been done even if that were constitutional, because people wouldn’t be sure,’ Obama said in a news conference with reporters yesterday. ‘It’d be tied up in litigation for a long time. That’s going to make people nervous.’”

The President should know since he taught a course in constitutional law at the University of Chicago Law School. In any event, the article concludes: “Among lawyers studying the president’s options is a third view, which argues that without a deal, Obama will be left to choose among multiple unconstitutional options-- unilaterally raising taxes, unilaterally cutting spending or ignoring the debt ceiling with the issue of new bonds.”

Today's Morning Briefing: Cabin Fever. (1) Beijing tells Washington to shape up. (2) The 14th Amendment says default is not a constitutional option. (3) Plenty of tax revenues for everything but defense and parks. (4) An angst-free earnings season ahead? (5) Revenue expectations are rising. (6) Stay Home or Go Global? (7) Going abroad to get away from Washington. (8) More good happenings in Europe. (9) ECB official likes banks. (10) Abe’s missing arrow. (11) Labor unrest and stalled commodity prices weighing on EMs. (12) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

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