It is expected that an increase in the current United States debt ceiling level will be required by March 1 of this year.
House Republicans threatened to refuse to raise the debt ceiling unless President Obama agrees to cut future spending of the federal government for purposes and in amounts satisfactory to them.
The president has said he will not permit his administration's position about spending cuts to depend on a threat that he, and a great many other Americans of both political parties, consider dishonorable and not capable of debate in rational political terms. There was some softening of the Republican position Friday. But it is still worth considering the origins and meaning of the debt ceiling.
Federal law requires Congress to authorize our government to borrow money needed to carry out programs passed by Congress. Debt financing is obtained by issuance of promissory notes sold by the U.S. Treasury Secretary to finance obligations already incurred. Holders of U.S. Treasury notes rely on the full faith and credit of the United States to pay the notes and interest on them.
U.S. Treasury notes have become the world's standard of value because our economy is understood to be the strongest in the world. In the event that the debt ceiling of our country were not raised and there occurred a default on our Treasury notes, our economy and much of the world would be plunged into disarray.
The Republicans do not claim that the outstanding debt of the U.S. was not authorized. By definition, it was authorized by Congress. Nor do they claim the debt is not due on its terms. The only claim they make is that they intend to use the threat of withholding approval of an increase as a chip in the game of poker they want to play to get their own view of federal spending enacted into law.
If one imported the game the Republicans are playing into the governance of a private-sector corporation, anyone familiar with business would know the folly of the tactic: As soon as a company announces it doesn't intend to honor its debts, it has committed an "anticipatory default'' on its obligation to repay those debts. Under a typical bank loan agreement, an anticipatory default of this kind would permit the bank to declare payable in full the entire debt owing to it, regardless of when the debt would have been due on the terms of the loan agreement. What's more, this sort of anticipatory default could be deemed to render the company insolvent, making it subject to bankruptcy or insolvency proceedings.
We obviously don't want this result for our country.
The reality of the anticipatory default/insolvency analysis should capture the attention of the U.S. business community, particularly the financial business community. If financial service company leaders emphasize to Republicans in Congress the serious national and international economic consequences of failing to provide an increased debt limit or of threatening to do that, one might well believe the threat would be withdrawn.
As part of allying with the business community, the Obama administration should use every possible means to lower the temperature of its seemingly perpetual confrontation with the Republicans in Congress. It may not be easy to do this, given the heat recently generated in the president's decisive victory over the Republican candidate in the 2012 presidential election. But détente in the name of the common interest of the political parties in sustaining the recovery of the American economy should be within reach.
The other possible solution would be for the president to appeal to his executive power under the 14th Amendment to the U.S. Constitution to prevent interference with the payment of the just debt of the country.
Obama was urged to invoke that power and to bypass Congress in its 2011 threat to use the debt ceiling as a negotiating chip. He decided against it then and and has said he does not plan to use it now in 2013.
When it was adopted by Congress in 1917, the concept of a ceiling for our federal government debt was not intended to be a device to limit the ability of the U.S. to incur debt, but rather to be a statement of a spending goal. Since its adoption, the debt ceiling has been increased routinely 70 times since 1917. Only one of those increases -- in 2011 -- was made the subject of a budget-cutting controversy.
What is needed is a no-drama increase of the debt ceiling and a real effort by both the president and Congress to lower spending now and for future sustainability of federal entitlement obligations, combined with creation of additional revenue, including through federal tax reform.