The Dynamics of Economic Hostage Taking

In 1917, the Congress passed, and the President signed, the Second Liberty Bond Act. Their intention was to help the Treasury Department better respond to rapidly changing World War I conditions when issuing government debt. For ninety four years that law has remained continually in effect, from time to time being modified and broadened. We know it today as "the debt ceiling."

Notwithstanding what some claim to the contrary, the U.S. government has never exceeded the debt ceiling to the point of defaulting on U.S. debt. Never. Though it is, in fact, true, that in a small number of cases delays over raising the ceiling due to wrangling between the President and Congress have pushed the issuance of government debt past a technical limit, clever Treasury accounting tricks have always found sufficient funds to allow for a narrow window between that limit being breached and default. Our current situation is that without new legislation to once again raise the ceiling the U.S. government will breach the technical limit in May, with Treasury able to stave off default until, perhaps as late as July, at which point, without any resolution of the differences between the President and Congress, we will experience financial Armageddon.

U.S. interest rates will skyrocket. The economy will crater. Millions more will lose jobs, many of them their homes. Real estate will again be in crisis. The stock market, in a gut-wrenching lurch, will crash. Tens of millions of retirees will go broke. The contagion will spread quickly to Europe where weaker economies will also default. The Euro will implode. It would take the West at least a decade even to begin to recover, at enormous cost.

Having already extracted far more concessions from the President on the budget than expected (or than the public truly understands), the Republicans think that by holding the debt ceiling hostage they can leverage those previous cuts exponentially. The prospect of the President caving in to some of their most extreme demands even has the Republicans talking about the possibility of raising the debt ceiling for short-term serial increments; for two month periods, for example, at each stage of which they would seek to pry out of him further devastating cuts to social programs. Because Mr. Obama has repeatedly demonstrated a strong aversion to political conflict, the Republicans think his psychological predispositions work to their advantage. Moreover, because the U.S. Constitution explicitly (Article I, Section 8) vests with Congress the power to manage federal debt the Republicans think that Mr. Obama has no choice but to negotiate on their terms — that, in other words, just as with negotiations over the budget, he has no other option. They think they have the proverbial offer that can't be refused. But they are wrong.

While it's possible that Mr. Obama may yet give in to a fundamentally anti-democratic form of political hostage taking, (and if he does the Democrats should replace him) it's also possible that Mr. Obama could just tell the Republican House of Representatives "Nuts!" He can order more money printed and keep paying bills as if nothing had happened.

As President, he can argue, he not only has the power, but the responsibility, to ensure that the full faith and credit of the U.S. government is secure. The Constitution, he can point out, says that "Congress shall ... pay the debts..." not that it might decide it doesn't want to pay them after those debts have already been assumed by law. Since the members of Congress are not doing their job, he must do it for them. No doubt lawyers at the Justice Department can find dozens of constitutional and statutory justifications for the President's action.

Besides, who could stop him? In their rage the House Republicans might well impeach him but it's extremely unlikely that the Senate would find him guilty. The Supreme Court wouldn't want to touch the dispute with a ten foot pole. Public opinion would be entirely on his side.

Best of all, from Mr. Obama's point of view, there's no immediate political conflict involved. He just walks away from the "negotiations." And to the extent the dispute sets up later political conflicts those would be as much a gift from the Republicans as was the Ryan budget proposal.

Over the longer term the downside and the upside are the exact same thing. The office of the presidency will have clearly acquired powers that it was never meant to have, but under such unusual circumstances that, likely, most informed observers will agree the deed had to be done. The true dilemma, then, emerges in stark relief: The fundamental rules by which the U.S. system of government operates cannot cope with the modern world. Something's gotta give...