Obama’s position on the debt ceiling

July 6, 2011
Twitter town hall, President Obama answered a question from Dexter Smith about the constitutionality of the debt ceiling.

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In today’s Twitter town hall, President Obama answered a question from Dexter Smith about the constitutionality of the debt ceiling. It’s a good question for Obama, not least because he used to be a professor of constitutional law: he knows this stuff.

Obama ducked the question, saying that “I don’t think we should even get to the Constitutional issue.” Certainly that’s the first-best solution. But he left it there, saying that he expected “that Congress makes sure that our full faith and credit is protected.”

But clearly Obama is not happy with the way this Congressional debate is evolving: later on, in response to Nick Kristof, he said that “never in our history has the United States defaulted on its debt. The debt ceiling should not be used as a gun against the head of the American people to extract tax breaks for corporate jet owners.”

I’m not sure Obama’s right about the “never in our history” bit — I think he’s forgotten about 1933. But his bigger point is clearly right: the full faith and credit of the United States is not kind of political football to be kicked around in the pursuit of tactical gains for some special interest or other. If Republicans and Democrats can ever agree on anything, they should surely agree that keeping Treasury bonds risk-free is the easiest no-brainer of all: the country derives trillions of dollars of value from that risk-free status, in the form of international capital flows and decreased borrowing rates, and it costs us nothing at all. Artificially inserting politically-driven credit risk into Treasury bonds is the legislative equivalent of poisoning a crucial reservoir.

Giving bondholders a constitutional guarantee that they’re going to be paid in full and on time makes a fair amount of sense. But that doesn’t mean that the president, if push comes to shove, should invoke the Constitution and override a recalcitrant Congress. Personally, I’d be more inclined to keep on paying Treasury coupons out of tax revenue — there’s more than enough money coming in to do that — and to immediately cut back on everything else, including Congressional salaries, so violently that the Republicans end up crying uncle pretty quickly.

Treasury’s position is that such actions would constitute a default, since the US government is just as obliged to pay salaries as it is to pay bond coupons. I don’t believe that for a second — cutting back the primary budget is the standard way to avoid default, it’s not “default by another name.” Yes, it could trigger another recession, if it went on for too long. But it wouldn’t have the catastrophic consequences of a payment default on Treasury securities. And, for better or for worse, there’s no need to invoke the Constitution in order to make immediate drastic spending cuts.


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