Fiscal Policy for the People? Why Obama Should Invoke the 14th Amendment

In response to the debt ceiling drama, serious people are now talking about the President's ability to use the 14th Amendment to declare the debt limit unconstitutional. That's a welcome development in a debate too often characterized by wrong-headed economics and outright demagoguery. If Obama seizes the moment, we could not only end this damaging political grandstanding, but redirect the national conversation to what really matters: fiscal policy that addresses the needs of ordinary Americans.

As far as we know, the originator of the constitutional arguments against the debt ceiling was former Reagan Administration official, Bruce Bartlett, whose last essay on the subject, "The Debt Limit Option President Obama Can Use," has started to gain significant policy traction. More recently, Treasury Secretary Geithner has made much the same point:

I think there are some people who are pretending not to understand it, who think there's leverage for them in threatening a default. I don't understand it as a negotiating position. I mean really think about it, you're going to say that-- can I read you the 14th amendment?

The Treasury Secretary subsequently did just that, quoting from the amendment to the Constitution adopted on July 9, 1868:

'The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion' -- this is the important thing -- 'shall not be questioned.

Senator Charles Schumer has also invoked the argument. In all cases, the logic is pretty much the same: the Constitution trumps the law regarding the debt ceiling.

What's so great about this? Well, it could kill the debt ceiling -- and perhaps, along with it, other arbitrary constraints which foolishly constrain the efficacy of fiscal policy. Yet curiously, very few champions of aggressive fiscal policy are prepared to go this far, despite the fact that these pointless negotiations are surely undermining private sector confidence. They point to a very real prospect of the US economy going back into recession if the austerity plans that are currently being discussed become law.

In a recent article, Katrina vanden Heuvel makes an excellent point about the opportunity for a more progressive budget arising if Obama goes constitutional: "Invoking the 14th Amendment defuses the bomb Republicans have strapped to the hostage." That's right: the President could well end the debt ceiling negotiations and craft a new budget on purely progressive lines. And he could do so on very solid legal grounds, as she illustrates:

In Freytag v. Commissioner (1991), the Supreme Court held that the president has "the power to veto encroaching laws . . . or to disregard them when they are unconstitutional." The final word still may lie with the Supreme Court, but in the interim, the president need not wait for its opinion. "As a simple matter of constitutional logic, the president can refuse to enforce a statute he believes violates the Constitution," said Professor Barry Friedman of NYU Law School in a telephone interview with me...

It is also unlikely that the action would be successfully challenged in court. Only Congress would have standing to sue, but doing so would require a joint resolution, something a Democratic-controlled Senate would almost certainly block.

But there's more. So far, our fiscal policy has largely been directed toward the top 5% of our population. It amounts to unfair punishment for lower income groups but asks nothing of our financial and corporate elites. Ending the debt ceiling could be an important step forward in redirecting policy away from bank bailouts, wasteful corporate tax subsidies and mooted tax holidays, and toward ideas such as a Government Job Guarantee, a proper health care system (which isn't grounded in private health insurance) and a first-class education system for all.

The budget/debt ceiling negotiations have focused on spending cuts and tax hikes which are neither necessary nor desirable at this juncture. The time to invoke higher taxation or reduced government spending is when our economy is operating close to full capacity, experiencing real resource constraints, and thereby threatening inflation. Progressives need to stop accepting the false logic that we "need to be responsible" and "deal with the budget deficit at some point in the future" on the spurious grounds of "affordability", solvency", or "because the bond markets won't fund us any longer." That's all wrong.

Here's a better idea: Invoke the 14th amendment and then stop talking about the budget deficit altogether. The US is not broke and cannot go bankrupt. Let go of that myth. When invoking the 14th, the President could argue that the deficit reduction principles embodied in the debt ceiling limit should never be an object of government policy. He can point out that non-discretionary elements of the budget -- the automatic stabilizers like unemployment insurance -- will fall as economic growth resumes, thereby reducing the deficit. He can remind us that there is only one reason why growth slows relative to productive capacity: Some sector spends less than before while another sector does not plug the spending drain.

Progressives have gotten into the habit of talking about making "sacrifices" now by starting the process of reducing the deficit. But this is a slippery slope, because it neglects the reality that shrinking the government's deficit will require either that the private sector spend more relative to its income or that the US current account deficit fall sharply. The fact is that households are still heavily indebted and business spending remains flat; the external sector is not adding net aggregate demand to the US economy. That means that the public deficit is insufficient to close the spending gap. So an arbitrary attempt to reduce the overall stock of government debt is doomed to failure.

Remember, the budget deficit (and the corresponding negotiations over the debt ceiling) cannot be considered independently of the other sectors in the economy. Reducing the government sector deficit from the current 9% or so of GDP toward balance will require some combination of a private sector movement toward greater spending (and likely more private sector debt accumulation - which got us into this mess in the first place), along with a reduction in our trade deficit which, in aggregate, would amount to a total of 9% of GDP. That's a massive adjustment.

As Randy Wray has argued:

The problem is that actually trying to balance the budget through spending cuts or tax increases could reduce economic growth... Lower economic growth could conceivably reduce our current account deficit-by making Americans too poor to buy imports, by lowering US wages and prices to make our exports more competitive, and by reducing the value of the dollar. Note that all of those are painful adjustments for Americans. And it might not work, because it requires the US to slow without that affecting the global economy-if it also slows, US exports will not increase.

A sovereign government can always determine spending and taxation levels, assuming the absence of silly self-imposed limits such as a debt ceiling. What it can't do is determine in advance the size of the tax revenue or the overall amount directed to the automatic stabilizers. These are both a reflection of economic activity largely outside the control of government. And that means, as Wray notes, that "the budgetary outcome-whether surplus, balanced, or deficit-is not really discretionary."

The notion of a debt ceiling limit is arbitrary. And it is not grounded in any kind of economic logic. If there are legitimate constitutional reasons to eliminate the debt ceiling, we have a wonderful opportunity to eliminate a host of constraints that foolishly direct government policy away from public purpose.

Too bad the President didn't invoke this last Monday. July 4th would have been the perfect time to invoke the Constitution to rid the government of this self-imposed Congressional tyranny once and for all.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

This article originally appeared in the New Deal 2.0 blog.