Plan B for raising debt ceiling: Obama should invoke the Constitution

President Obama has reopened the issue of the debt ceiling – and not a minute too soon. Heated debate over the looming fiscal cliff has obscured the fact that the US government will run out of money as early as next February, unless Congress approves an increase of the debt limit, now fixed at $16.4 trillion. 

Failure to raise the borrowing limit would trigger a widespread government shutdown and default on debt payments to creditors, because the US government would no longer be able to finance day-to-day operations or service its debt.

Even a protracted debate on the debt ceiling, such as took place in the summer of 2011, could have dire consequences. The financial markets would react negatively to the threat of default and to the uncertainty posed by indecision. As last year, the credit agencies would likely regard political gridlock as a reason to further degrade America’s credit rating.

That’s why Mr. Obama was right to tell corporate executives this week: “I will not play that game.”

He also wisely suggests a grand bargain that resolves both the debt ceiling and the fiscal cliff (automatic tax increases and drastic spending cuts due to take effect Jan. 1). Resolving these two issues now is the best solution for the country.

The president’s debt-ceiling proposal would have him notify Congress when the debt ceiling needs to be raised, and also request an increase in the borrowing limit – but lawmakers’ approval is not required. Should Congress pass a resolution to deny a request, the president could veto it.

Such an approach would avoid another political crisis in the new year and return the debt ceiling to its previous role as a matter of bookkeeping, as opposed to political brinkmanship.

Although such a mechanism was previously proposed by Senate Minority Leader Mitch McConnell, Republicans are resisting now. They fear a loss of leverage over spending cuts if congressional approval is no longer required to increase the borrowing limit.

If Obama should fail to secure a long-term solution to the debt ceiling in the context of the current fiscal-cliff negotiations, there is another way out – invoking the US Constitution.

In the wake of the Civil War, the government wanted to make clear that loans to the US government were still good (while Confederate debt would not be honored). Accordingly, the 14th Amendment includes the following provision: “The validity of the public debt of the United States, authorized by law... shall not be questioned.”

In a 1935 case (Perry v. US) the Supreme Court determined that Congress does not have the authority to renege on its obligations to its lenders. The president, then, could declare as unconstitutional the current debt-ceiling law – which requires congressional approval to raise the limit – or at least use such a threat as leverage.

The law goes back to the amended Second Liberty Bond Act of 1917. Its intent was to facilitate the financing of WWI through the issuance of long-term bonds. Until last year, when it became a political issue, Congress routinely raised the statutory debt limit as needed – always with bipartisan support.  

What is different now is the willingness of House conservatives to use the debt ceiling as an instrument to force spending cuts by threats of government shutdown and credit downgrades if their demands are not met. Such political gamesmanship is beyond the intent of the law. It poses a current and serious danger to our democracy.

It is one thing to put a legal limit on spending or to try to control spending through talks such as the fiscal-cliff negotiations. But it is quite another to establish a retroactive process for refusing to pay debts already owed. Such a process was relatively harmless when both parties treated debt-ceiling increases as simply necessary when the limits were approached. Not so in today’s acerbic climate of congressional gridlock and winner-take-all mentality.

It is the well honored tradition that the US government pays its debts. Why else are so many nations around the world continuing to buy America’s bonds, even at historically low interest rates? The security of lending to the US government is what motivates both public and private investors. It is not in the national interest to put that tradition and US credibility to the test.

If President Obama should fail to solve the debt-ceiling limit as part of the fiscal-cliff talks, he has another means of leverage: the Constitution. He should use it.

L. Michael Hager is a co-founder and former director general of the International Development Law Organization in Rome.