Can Obama Simply Raise the Debt Limit?

The NY Times editorial board could not be more clear: the talks between President Obama and Congressional leaders that could involve trillions in cut government spending and reformulation of the tax code and major government programs, like Medicare and Social Security, are unlikely to come to well-reasoned ends given the shortness of time available. We have to question Obama’s motives. Is he simply trying to make the best deal possible? Is he trying to rise above the fray, and craft a solution that falls in the middle of a hyper-partisan no man’s land? Is he playing a deeply subtle chess match, hoping to craft a solution that cannot pass in the House or Senate? Does he think that in the final hour, with no deal done, he could unilaterally raise the debt limit, and become the savior of the financial system?

NY Times

A fragile agreement based on blinkered ideology and political ambition could easily fail, and the resulting default and credit-market chaos would probably create another recession.

Under those circumstances, Mr. Obama might want to consider the advice of several constitutional scholars who say Congress may not be able to put the government in default by refusing to raise the debt limit because the 14th Amendment says the public debt cannot be questioned.

We have long thought it was folly to have a debt limit controlled by Congress because it was dangerous, not on constitutional grounds. Such a declaration by the president would probably lead to litigation or even attempts at impeachment, and could create years of unanticipated legal and financial problems. It might require that bondholders be paid off before spending obligations are met. But if Republicans kill a deal because it raises a dime of revenue, or if Democrats will not support it because it leans too heavily on the less fortunate, then the constitutional option may look better than the recession option.

In a companion editorial, Lawrence Tribe states that the President might not have the constitutional oomph to actually take that step, however:

Lawrence Tribe, A Ceiling We Can’t Wish Away

The White House and Congressional Republicans agree in principle that the debt ceiling needs to be raised, but they are at an impasse on how to constrain the deficit’s rapid growth. Meanwhile, some people have theorized that there’s a way to get around the debt limit.

Several law professors and senators, and even Treasury Secretary Timothy F. Geithner, have suggested that section 4 of the 14th Amendment, known as the public debt clause, might provide a silver bullet. This provision states that “the validity of the public debt of the United States, authorized by law … shall not be questioned.” They argue that the public debt clause is sufficient to nullify the ceiling — or can be used to permit the president to borrow money without regard to the ceiling.

Both approaches provide the false hope of a legal answer that obviates the need for a real solution.

The Supreme Court has addressed the public debt clause only once, in 1935, in the case of Perry v. United States. The court observed only that the clause confirmed the “fundamental principle” that Congress may not “alter or destroy” debts already incurred.

Some have argued that this principle prohibits any government action that “jeopardizes” the validity of the public debt. By increasing the risk of default, they contend, any debt ceiling automatically violates the public debt clause.

This argument goes too far. It would mean that any budget deficit, tax cut or spending increase could be attacked on constitutional grounds, because each of those actions slightly increases the probability of default. Moreover, the argument is self-defeating. If it were correct, the absence of a debt ceiling could likewise be attacked as unconstitutional — after all, the greater the nation’s debt, the greater the difficulty of repaying it, and the higher the probability of default.

Other proponents of a constitutional deus ex machina have offered a more modest interpretation of the public debt clause, under which only actual default (as opposed to any action that merely increases the risk of default) is impermissible. This interpretation makes more sense. But advocates of the constitutional solution err in their next step: arguing that, because default would be unconstitutional, President Obama may violate the statutory debt ceiling to prevent it.

The Constitution grants only Congress — not the president — the power “to borrow money on the credit of the United States.” Nothing in the 14th Amendment or in any other constitutional provision suggests that the president may usurp legislative power to prevent a violation of the Constitution. Moreover, it is well established that the president’s power drops to what Justice Robert H. Jackson called its “lowest ebb” when exercised against the express will of Congress.

Worse, the argument that the president may do whatever is necessary to avoid default has no logical stopping point. In theory, Congress could pay debts not only by borrowing more money, but also by exercising its powers to impose taxes, to coin money or to sell federal property. If the president could usurp the congressional power to borrow, what would stop him from taking over all these other powers, as well?

So the arguments for ignoring the debt ceiling are unpersuasive. But even if they were persuasive, they would not resolve the crisis. Once the debt ceiling is breached, a legal cloud would hang over any newly issued bonds, because of the risk that the government might refuse to honor those debts as legitimate. This risk, in turn, would result in a steep increase in interest rates because investors would lose confidence — a fiscal disaster that would cost the nation tens of billions of dollars.

Although an authoritative judicial declaration authorizing borrowing above the debt ceiling might alleviate investors’ fears, obtaining such a declaration is no easy task. Only someone who has suffered a “particularized” harm — not one shared with the public at large — is entitled to sue. It would be difficult to conjure up a plaintiff who has suffered such specific harm from an issuance of debt beyond the ceiling. And even if such a plaintiff could be found, increased interest rates would have already inflicted terrible damage by the time the Supreme Court ruled on the matter.

So Tribe states that the President lacks the power to take on new debt, a power granted to Congress constitutionally. However, the 14th Amendment states clearly that the government must not abrogate its responsibility to pay legitimate debts, so the president may take action in the 11th hour, if there is no chance of a congressional deal, and any challenge to the constitutionality of that action might take years to hear.

Turn it around again: what should the President do if no debt limit deal is reached? Should he sit on his hands and let the country default on the payment of its debts?

There is no doubt that the spectre of a unilateral creation of raising the debt limit under the 14th amendment understanding might be exactly the goad that the GOP needs to agree to serious revenue increases through taxation, as well as the insane plans to trim trillions in the next 10 years.

The realpolitik involved may include the premise that the GOP may very well lose their majority in the house in 2012, if Obama is seen as savior of the nation and the GOP as the lackeys of billionaires and corporations. And at that point, Obama could roll back the most egregious cuts, and raise taxes again.

related

• 14th Amendment, Section 4: Obama Should Simply Raise The Debt Limit (underpaidgenius.com)

How Bad Is The Deficit Mess?

David Leonhardt, O.K., You Fix the Budget

Imagine that Democrats and Republicans somehow came together and agreed on a grand bargain to cut the deficit.

They decided to cut the pay of federal workers over the next several years, close military bases, reduce foreign aid, eliminate earmarks, expand the payroll tax and cut Social Security benefits for high earners, as the chairmen of a bipartisan commission recommended last week.

Democrats also accepted the plan from John Boehner, the presumptive House speaker, to make large cuts to social programs. Republicans accepted President Obama’s proposal to let the Bush tax cuts expire on income above $250,000.

If the two parties managed to do all of this, how much of the country’s long-term deficit would they eliminate?

About one-third of it.

And they won’t. So the remaining two thirds of the long-term deficit — Medicaid, Medicare, and Social Security — are almost impossibly difficult to cut, at least by elected officials.

Unless a wave of anger leads to some group getting swept into office who do not consider themselves professional politicians. Who don’t want to be reelected at the expense of good policy.

Those people will close loopholes in the tax code, and tax rich people and corporations.

These reformers will not be Democrats or GOP.

Love Of Whose Country?

I disagree with a lot of what David Brooks writes, generally, and most of what he writes in his National Greatness Agenda, which is a response to the recent Debt Commission’s report:

David Brooks, National Greatness Agenda

You can’t organize a movement like this around pain — around tax increases and spending cuts. But you can organize one around a broad revitalization agenda, and, above all, love of country.

It will take a revived patriotism to motivate Americans to do what needs to be done. It will take a revived patriotism to lift people out of their partisan cliques. How can you love your country if you hate the other half of it?

It will take a revived patriotism to get people to look beyond their short-term financial interest to see the long-term national threat. Do you really love your tax deduction more than America’s future greatness? Are you really unwilling to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?

Like the civil rights movement, this movement will ask Americans to live up to their best selves. But it will do other things besides.

It will have to restore the social norms that prevailed through much of American history: when narcissism and hyperpartisanship was mitigated by loyalties larger than tribe and self; when competition between the parties was limited and constructive, not total and fratricidal.

This movement will have to build institutions to support the leaders who make the hard bargains. As in the civil rights era, politicians won’t make big changes unless they are impelled and protected by a social upsurge.

Most important, this movement will have to develop a governing philosophy and a policy agenda. Right now, orthodox liberals and conservatives have their idea networks, and everybody else is intellectual roadkill. This coming movement will have to revive the American System: a governing philosophy that believes in targeted federal efforts to arouse growth, social mobility and responsibility.

Like the chairmen’s report, this movement could demand that Congress wipe out tax loopholes and begin anew. It could protect federal aid to the poor while reducing federal subsidies to the upper-middle class.

The coming movement may be a third party or it may support serious people in the existing two. Its goal will be unapologetic: preserving American pre-eminence. It will preserve America’s standing in the world on the grounds that this supremacy is a gift to our children and a blessing for the earth.

Cue the violins.

First of all, what is with the conservatives trying to co-opt the civil rights movement? I guess so long as you think the struggle for civil rights is long over, in the comfortable past, it makes for pleasant hagiography. But the civil rights movement is alive, and ongoing. We continue to live in an unequal society, where an unconscionable proportion of young black men are incarcerated, where gays and lesbians are denied the right to marry or to serve in the military openly, and where the poor are sending their children to bed hungry. Note that these inequalities can be traced — at least to a great extent — to policies supported by the GOP in the past and present. So, let’s tone down the civil rights references, please.

Brooks’ call for a new patriotism is just tired jingoism. I can almost hear the drums and bugles. It’s like a locker room speech, intended to get our juices flowing, so we’ll run out for the second half, and tear the heads off the other guys. Brooks dreams of a self-referential patriotism: where we are proud to be part of a country that is full of patriots, who are willing to… do what exactly? Suffer? Accept tax increases? So we can grow the country and then be proud? Whose country, though? Who benefits by this austerity?

Brooks makes some good points — the fact that hard bargains are necessary — but fails profoundly because he — and the GOP — won’t accept, or even mention, the most critical problems underlying the current world situation, like climate change, and a global economy based on unsustainable business practices and inequity.

The yammering about which tax loopholes to close and how to handle social security and other entitlements is a hot potato because there is no agreement on how to draw a circle around the problems confronting us. The GOP wants to draw a very small circle, and include entitlements, taxation, health care, and other direct functions of governments, but excluding the rest of the world. Lefties like me want a big circle, that encloses climate change, energy, transportation, localism, trade protections, civil rights, income inequalities, and so on.

So this faux patriotism, where we are supposed to drop past enmity and come together… will not materialize. Not without a rallying cry better than patriotism.

Brooks may be hearing something coming, though. Not a triumphal marching band, with all of us neatly in line, marching to celebrate a new austerity and love of country. What he might be hearing is anger. The not too distant shouting of a mob, upset at the established order of things, surging to disrupt the current left-right ideological dualism that paralyzes the country.

I agree with Brooks that a third party challenge will emerge. My feeling is that it will be narrowly defined, and not based on love of country or each other, or love at all. The third party will be based on anger at the world order, and specifically, directed at those distant countries, large corporations, and the wealthy elite that appear to be benefiting while the average American is being screwed blue. It will stand in opposition in all the areas that Democrats and Republicans seem to have common cause, and it will be neutral and disinterested where the two parties are divided.

What will bring the people together will be anger, not love. They will elect leaders that point at China and Wall Street, who say “These are our enemies, who grow rich at your expense, who steal and pollute the earth, and let you go hungry while they feast.” Once elected, they will enact wrenching changes to the country’s policies.

We are in a time of currency manipulation and trade wars? Then they must become open statecraft, and not tools to make the wealthy wealthier. Tax policies are crazy? Change them to benefit the average American!

That is what our new populists will be saying. The Tea Party is — or was — part of this. But the GOP co-opted that movement, and it was too ideologically conservative to attract the equally angry left wingers. Obama’s support, especially among the young and independents, was about change. And Obama’s supporters have melted away  because his idea of change turns out to be a new carpet in the Oval Office. (Oh sure, he passed health care, but it hasn’t changed anything yet. It’s all in the future, unfelt, unexperienced.)

So this is not about all Americans coming together to support ‘American preeminence’, it will be about angry, oppressed Americans coming together to get the other American’s feet off our necks. At least that’s what the new populists will say.

Note that the new populism will fail, from my viewpoint, because it will be neutral about climate change, or will be based on ‘solving other problems first’. I can’t be a new populist, therefore, even though I might support the reorientation of America politics, and the end of the Democratic/Republican political stranglehold.

So, it won’t be a neatly ordered parade, playing patriotic music. It will be a mob, singing Smells Like Teen Spirit at the top of their lungs:

With the lights out, it’s less dangerous
Here we are now, entertain us
I feel stupid and contagious
Here we are now, entertain us

I’m worse at what I do best
And for this gift I feel blessed
Our little group has always been
And always will until the end

Hello, hello, hello, how low?
Hello, hello, hello, how low?
Hello, hello, hello, how low?
Hello, hello, hello

One Billion Will Reach Retirement Age By 2050

The world’s most advanced economies are headed for a seriously ‘explosive path’ regarding retirement entitlements:

Mary Williams Walsh, S. and P. Warns Governments on Costs of Elder Care

Credit analysts at Standard & Poor’s said on Thursday that the cost of caring for the world’s aging populations would be “on an explosive path” and could swamp the budgets of many countries in the next 40 years unless governments accelerated belt-tightening efforts that are already proving highly unpopular.

Demographers have long known that more than a billion people would reach retirement age by 2050. Standard & Poor’s new research, published Friday morning in London, tried to predict how their mass departure from the work force and increasing frailty would affect their nations’ economies and their governments’ ability to borrow. The agency looked at the economies of 49 countries, which it said accounted for about two-thirds of the world’s population.

The research comes not long after several countries in Europe found themselves shut out of the credit markets, as lenders balked at the daunting cost of their government-paid retirement programs. When governments lose their ability to borrow, they cannot function and a crisis ensues.

Standard & Poor’s said it was not predicting another all-out crisis, because its analysts believed most governments would eventually take steps to slim down their retirement programs, which include pensions — the biggest item — health care, long-term care for the frail and unemployment benefits.

“It is inconceivable that governments will allow debt and deficit burdens to spiral out of control,” it stated in the report. It did not say how governments would persuade citizens that cutbacks were necessary, though.

[…]

Standard & Poor’s said that without changes, sovereign credit ratings could be expected to start falling around 2020, and fall faster from 2030 onward. When a country’s credit rating falls, its cost of borrowing money rises.

The report said the mature, industrial economies in Europe were the most vulnerable, and that some might lose their investment-grade ratings. The smaller and poorer countries of Europe and the rest of the world were seen as being better able to ride out the coming demographic storm, because their economies were growing faster, and because their governments tended to have promised less of a safety net to the elderly.

This is one of the facets of the trade populism of the hypothetical trade populism third party I wrote about recently. A large segment of the US population is expecting to live on government and other pensions (Social Security is a form of pension), and the possibility that the various pensions could fail is a serious motivator for many.

Imagine a Huey Long sort of demagogue, appealing to the fears of the old, the unions, the government workers (including the military), and all those whose employers have underfunded pensions or gone bankrupt. He might promise a Big Rock Candy Mountain sort of bail out, and raise trade barriers and start taxing the rich and businesses to fund it.

Trade Populism As The Defining Issue Of 2012

Geithner is hoping that the US and its financial cartel can get the “competitive non-appreciation” genii back in the bottle:

Sewell Chan, Geithner Calls for Global Cooperation on Currency

As finance officials from around the world gather here this weekend for the annual meetings of the I.M.F. and the World Bank, American officials are concerned that the degree of cooperation that was evident in the recent financial crisis is eroding as countries go their own ways. In particular, the Obama administration is looking to the I.M.F. to help bring about what months of negotiations have failed to achieve: greater exchange-rate flexibility by China.

Instead of the “competitive devaluation” of the 1930s, which exacerbated the Depression, the world faces a threat of “competitive non-appreciation,” Mr. Geithner said, citing a term coined by Edwin M. Truman, a former official at the Treasury and the Federal Reserve.

That was a reference not only to China but also Japan and Brazil, which have taken steps recently to prevent their currencies from rising in value.

“Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies,” Mr. Geithner said. “The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.”

In his speech, Mr. Geithner called the problem a “damaging dynamic” and a collective-action problem that “requires a collective approach to solve.” Later, in a question-and-answer session, Mr. Geithner said that “China will be less likely to move, to allow its currency to appreciate more rapidly, if it’s not confident that other countries will move with it.”

His warnings were echoed, in crucial respects, by the I.M.F., which released its latest World Economic Outlook on Wednesday.

“The world economic recovery is proceeding,” the I.M.F. chief economist, Olivier J. Blanchard, said at a news conference. “But it is an unbalanced recovery, sluggish in advanced countries, much stronger in emerging and developing countries.”

As many as 210 million people worldwide may be unemployed, an increase of more than 30 million since 2007, the report found. Three-fourths of the increase has been in the most-developed economies.

In those advanced economies, growth is now projected at 2.7 percent for this year and 2.2 percent for next year — compared with 7.1 percent and 6.4 percent, respectively, for emerging and developing economies.

Developing Asia, which does not include Japan, South Korea and Taiwan, is expected again to lead the world in growth, with projected rates of 9.4 percent this year and 8.4 percent next year. The fund left its growth projections for China — 10.5 percent this year and 9.6 percent last year, the highest of any major economy — unchanged from July.

The fund slightly revised downward its projections for the United States, whose economy is projected to grow 2.6 percent this year and 2.3 percent next year. The euro area’s economy is expected to expand 1.7 percent this year and 1.5 percent this year.

The European projections were a slight uptick from July projections, largely on account of stronger-than-forecast growth in Germany, whose economy is expected to expand by 3.3 percent this year and 2.0 percent next year.

But the numbers tell the story. Advanced economies, who are staying close to the post WWII levels of minimal trade protectionism, are really taking it in the shorts while the emerging economies are playing by the new rule book. In the new normal, they are holding their currencies lower than the world market would value them to benefit their economies to the detriment of others.

The single point that might lead to a serious third party candidate in the US is economic and trade populism. Both GOP and Dems are aligned in their support for laissez-faire global markets, but a savaged economy and prospects for long-term unemployment could lead to a populist on a platform of US protectionism and anti-globalism. Its easy to blame big banks, the energy companies, and far off state capitalism for our woes. 

Imagine a candidate that pledges this sort of stuff:

1. A fast withdrawal from wars in Asia and a drastic reduction in military expenditures (“Do we need 70,000 troops in Germany? Or 50,000 in Japan?”)
2. Aggressive trade warfare (including currency manipulation) to counter the trade imbalance with emerging countries (“Chinese T shirts are cheap because they’ve rigged the market!”)
3. Federal guarantees for a long list of defaulting state, local, corporate and union pensions, and a promised increase in social security (“Big corporations and corrupt government has taken the best years of your life, and then wants to pay you nothing when you retire! We’ll structure business taxes to make sure everyone can live an old age without want, without poverty.”)

I wonder when we will start hearing this as the dim outlines of a groundswell. But I am sure it’s coming. A candidate that was centrist and moderate in other issues — not taking a hard line on immigration, abortion, or other divisive social issues — could really shake up the 2012 election, and make it seem like he, or she, was on one side of the most important issues, while Obama and the GOP candidate would be on the other.

related articles

• United States warns China on currency policy (washingtonpost.com)
• Global rebalancing ‘not progressing’ enough: Geithner (alternet.org)
• Markets must be allowed to drive currencies: Geithner (reuters.com)