Comment & Debate
Eric Posner and Adrian Vermeule. “Obama Should Raise the Debt Ceiling on His Own.” New York Times. July 22nd, 2011: “Our argument is not based on some obscure provision of the 14th amendment, but on the necessities of state, and on the president’s role as the ultimate guardian of the constitutional order, charged with taking care that the laws be faithfully executed. When Abraham Lincoln suspended habeas corpus during the Civil War, he said that it was necessary to violate one law, lest all the laws but one fall into ruin. So too here: the president may need to violate the debt ceiling to prevent a catastrophe — whether a default on the debt or an enormous reduction in federal spending, which would throw the country back into recession.”
Sen. Tom Harkin, D-Iowa, said in a floor speech on July 30th that other presidents have acted when “the vital security of the United States was at stake.” He cited Thomas Jefferson’s Louisiana Purchase, Abraham Lincoln’s Emancipation Proclamation and Franklin D. Roosevelt’s Lend-Lease Program to help Britain fight the Nazis in World War II. “I believe this is just like those times. The security, the future improvement of the United States and future generations depend upon the president taking this action, boldly and forthrightly, to preserve the integrity and to make sure that the obligations and the full faith and credit of the United States is not questioned.”[1]
Michael Kirkland. “Can Obama raise the debt limit by himself?” UPI. July 31st, 2011: “One independent voice, George Pennacchi, a University of Illinois finance professor who studies financial institutions and the bond markets, says the effect of a default could be serious.
“If the [debt] ceiling is not raised by about Aug. 2, spending will have to be cut by almost 44 percent, down to the level of revenues, which are mostly tax receipts,” Pennachi said in an interview with the university’s New Bureau last week. “Then, the U.S. Treasury will be forced to prioritize which spending commitments get paid.
“I would speculate that the Treasury would continue to pay interest on Treasury securities to avoid defaulting on its existing debt,” he said. “Also, it would have enough revenues to pay Social Security, Medicare and Medicaid, unemployment benefits, as well as active military duty pay. Those would soak up about 83 percent of revenues.”
The remainder of the revenue would have to be spread very thinly, and would pay “only about 18 percent of all other federal spending, including defense contractor payments, federal employee salaries and benefits, IRS refunds, and all other veterans, education, agricultural, commerce and housing programs.”
Pennacchi said the worst-case scenario “would be if the Treasury decided to stop paying interest on Treasury securities — that is, to default on its Treasury bonds, notes and bills. Potentially, such a default could lead to a financial market panic if investors decide to withdraw their savings from financial institutions that hold Treasury securities, such as money market mutual funds.”
Pennacchi said other effects could include “a chain-reaction of financial institution failures,” a freeze of financial markets, a substantial decline in the U.S. dollar, an increase in private sector layoffs, a decrease in profits and damage to financial markets, depending on how long the default lasts.”
July 31st letter to Obama from Rep John Conyers, Congressional Black Caucus: “Since the founding of the Republic, the United States has always honored its debts, from assuming the obligations incurred during the Revolutionary War, to the present day. As a result, the United States continues to enjoy an outstanding credit rating and historically low interest rates. We must not allow a political deadlock to cause the United States to default for the first time in our history. The consequences of a default would be catastrophic. All three credit rating agencies have cautioned that default would result in a downgrading of our credit rating and a substantial increase in borrowing costs.
In addition to putting our nation’s bond rating at risk along with increase interest rates that it will cause, failure to increase the debt limit would imperil every aspect of the federal government, from Social Security to Medicare, to veterans’ health care, to national security. States will lose billions in funding, and businesses will not receive payments on their contracts. Default would have a devastating impact on global credit markets and economic growth.”[2]