Here's What Obama Can Do if Congress Doesn't Raise the Debt Ceiling

When the federal government shut down on Tuesday, the resulting lose-lose stalemate presented a small preview of what will come later this month if lawmakers refuse to raise the debt ceiling, the maximum amount of money Congress allows the government to borrow. Around Oct. 17, the Treasury Department is expected to run out of money to pay the bills; if it cannot borrow more, the Obama administration will find itself in a constitutional crisis, a position in which, no matter what President Barack Obama does, he will have to break his oath of office. There are three illegal paths the administration could take if it doesn't get a debt ceiling deal.

The debt ceiling's legal gray area
Many observers assume that if the government runs out of money, it will have to simply stop paying bills, leaving soldiers without their paychecks, seniors without Social Security, and federal employees like air traffic controllers and prison guards out of work. Alarming, to be sure; a complete and sudden cutoff of all federal payments wouldn't just throw the economy into disarray, it could well cause significant social disorder. However, it's not obvious or inevitable that the federal government would stop payments. That's because even though it would be illegal to borrow money above and beyond the debt ceiling, it would also be illegal for the president to do anything else.

This is uncharted territory, since never before in the nation's history has Congress failed to raise the debt ceiling and allowed the government to run out of money. To understand the choices confronting the Obama administration, we have to look at three crucial powers reserved to Congress that, as chief executive, Obama is legally bound to uphold: taxing, spending, and borrowing. Collectively and colloquially known as "the power of the purse," Article I, Section 8 of the U.S. Constitution gives Congress the sole right and the responsibility to determine what to tax and how much tax revenue to take in, what to spend money on and how much to spend, and how much money to borrow.


Once Congress has decided these matters, they become laws that the president is bound by oath to execute. Originally, Congress took a direct hand in authorizing any borrowing, actually passing specific legislation to issue each new debt. As American society became more complex, Congress delegated this responsibility to the executive branch, specifically the Treasury. In place of direct oversight, Congress simply passed periodic laws putting a limit on how much money the Treasury could borrow: the debt ceiling. Now, if Obama were to order the Treasury to issue more debt than is authorized by the debt ceiling, he would be illegally breaching the separation of powers by taking up responsibilities the Constitution assigns to Congress.

However, it's equally true that virtually anything the president did, including nothing, would be an illegal, unconstitutional violation of his oath of office. Just as only Congress can decide how much money to borrow, only Congress can decide how much money to spend and how much money to tax. The much talked-about route of simply failing to send out money the government owes isn't just illegal because spending power is constitutionally reserved to Congress; it is specifically outlawed by Title X of the Budget Control Act of 1974. The president isn't just expected to spend the money Congress stipulates in its budgets;he is legally required to spend it. If a president wants to spend a penny less than is spelled out in congressional budget laws, all he can do is request that Congress pass another law authorizing lower spending. He has no legal authority to unilaterally cut spending due to insufficient funds.

The least bad option
That puts Obama in quite a bind. Not paying bills is illegal, but borrowing money to pay them is illegal, and raising taxes to pay them is illegal too. Some politicos have suggested exploiting tricky technicalities to get around this quandary, such as taking advantage of an obscure law allowing the Treasury to issue new platinum coins in any denomination without congressional approval to mint a coin worth literally $1 trillion and use that newly created money to pay the bills. Any such legal loophole, however, certainly circumvents the spirit of the law, if not the letter, and would likely not withstand political or legal challenges.

With both sides deadlocked over the government shutdown, a fight with much lower stakes, it seems plausible for the first time in history that Congress will not allow the president to borrow more money, while simultaneously requiring he spend more money than he is allowed to take in. The laws of Congress should not be broken, but the laws of logic cannot be. Absent strong congressional action, Obama will break the law this month. How should he break it?

Probably the least popular, least effective, and most illegal course of action would be for him to unilaterally declare new and higher taxes without congressional approve. Not only is there absolutely no legal precedent for a president usurping what is arguably Congress' most important power, but it is difficult to imagine any tax that would meet the immediate spending needs of the government. Any such tax would necessarily be very high, and, in order to make payments on time, the administration would need to begin collecting the tax in a matter of weeks. Indignant taxpayers would very likely simply refuse to pay the illegal tax.

That leaves illegally issuing new debt or illegally stopping federal payments. In an article published in the Columbia Law Review, legal scholars Neil Buchanan and Michael Dorf argued persuasively for a legal interpretation holding that when a congressional budget spends more than it takes in, Congress is implying it cares least about debt, making ignoring the debt ceiling the least bad option.

But most Americans aren't legal scholars, and might look at things in more concrete terms. If the federal government stops paying its bills even for a short time, the country could miss payments on the debt, causing interest rates to increase and sending shock waves through the economy, resulting in higher borrowing costs, fewer jobs, and a slower economy. If the bills stop being paid indefinitely, the consequences are so dire most observers don't even like to think about them, but the United States might get a small glimpse of what it would be like to live in, not to put too fine a point on it, a nightmarish hellscape out of an anarchist dystopia.

Illegally ignoring the debt ceiling, on the other hand, would ... well, it would make a lot of lawmakers really upset. Lenders might regard this new debt, authorized only by the president and not by Congress, as inherently riskier, resulting in higher interest rates, increasing future costs to the taxpayer. If enough lenders lacked faith in the new debt, the Treasury may be unable to borrow enough money to meet its obligations, but this would land the president squarely back in a choice between illegally raising taxes and illegally raising spending. If Congress fails to act, a first-resort, least-bad action would be for the president to simply ignore the debt ceiling.

Looking for more information on the national debt
The US government has piled on more than $10 trillion of new debt since 2000. Annual deficits topped $1 trillion after the financial crisis. Millions of Americans have asked: What the heck is going on?
The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!

The article Here's What Obama Can Do if Congress Doesn't Raise the Debt Ceiling originally appeared on Fool.com.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum