As the Treasury Department rattled markets on Thursday with a recession warning about a potential government default, one controversial option remains off the table: raising the debt ceiling by invoking the 14th Amendment.
Jack Lew (left) at recent event
The U.S. Treasury heated up the tone of Washington’s debt-ceiling debate on Thursday, with a report that warned of possible economic disaster if Congress and President Obama can’t reach a debt-ceiling deal.
The latest report will draw critics who will state its stark language supports the bargaining position of the Obama administration. And that language is frightening indeed.
“In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression,” the report said.
“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008.”
In a statement accompanying the report, Treasury Secretary Jack Lew said the situation was dire.
“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy,” Lew said. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need—a self-inflicted wound harming families and businesses. Our nation has worked hard to recover from the 2008 financial crisis, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy.”
In its report, the department stopped short of saying a recession was a certainty.
“A precise estimate of the effects is impossible, and the current situation is different than that of late 2011, yet economic theory and empirical evidence is clear about the direction of the effect: a large, adverse, and persistent financial shock like the one that began in late 2011 would result in a slower economy with less hiring and a higher unemployment rate than would otherwise be the case,” the department said.
In a September appearance at the Economic Club of Washington, Lew said the concept of prioritization—paying some of the nation’s bills, and not others—wasn’t feasible.
“As administrations of both political parties have previously determined: these ‘prioritization’ proposals are unworkable. They represent an irresponsible retreat from a core American value: Since 1789, regardless of party, presidents and Congress have always honored all of our commitments,” Lew said.
The Wall Street Journal also said on Thursday that a senior Treasury official dismissed a much-discussed 14th Amendment option on a news conference call, after the report was released, saying the Obama administration wasn’t considering an interpretation of the amendment as a means to raise the debt ceiling without congressional approval.
“There is no alternative. Congress has to act. That’s the only way out of this,” said one Treasury official.
White House spokesman Jay Carney also repeated the same mantra at a later press briefing.
“This administration does not believe that the 14th Amendment gives the power to the president to ignore the debt ceiling,” Carney said.
“Moreover, even if the president could ignore the debt ceiling, the fact that there is significant controversy around the president’s authority to act unilaterally means that it would not be a credible alternative to Congress raising the debt ceiling,” Carney added.
Supporters of the 14th Amendment argument believe the president has the power to take actions, independent of Congress, to make sure the public debt is paid.
The exact language from the amendment states the “validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Opponents believe the 14th Amendment language is specific to the period immediately after the Civil War.
But the Obama administration backed away from discussing a 14th Amendment move in 2011 and this spring, and other administration officials said on Tuesday that it wasn’t an option.
“Our folks have never found that there was such extraordinary authority,” National Economic Council Director Gene Sperling said at a luncheon.
Obama administration adviser Dan Pfeiffer said such a tactic, without a sound base, would cause problems with investors.
“Would people buy bonds that are legally questionable?” Pfeiffer said. “If you were buying a car, would you ever buy a car when the title was in doubt? The answer to that question is no.”
Also, after a meeting between President Obama and congressional leaders on Wednesday, House minority leader Nancy Pelosi said the president will not use the 14th Amendment to raise the debt ceiling if there is a potential default.
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