July 28, 2011 7:55 pm

Obama faces legal bind if time runs out

If Congress does not raise the debt ceiling on time then President Barack Obama and the Treasury will struggle not to break one or other law passed by Congress.

The law will fence the administration in; but the ambiguity of the situation might also free it to invoke all manner of creative legal arguments, including a claim that the debt ceiling is illegal under the 14th amendment to the constitution.

If there is no increase in the debt ceiling by August 2, then the Treasury will not have enough money to meet all its commitments without borrowing more money, which it will not be able to do without breaking a wartime law from 1917 that created the debt ceiling.

But it is also bound by laws that tell it to make various payments, including the latest appropriations act passed by Congress in the spring, as well as an apparent instruction in the constitution to keep paying US debts.

The 14th amendment, adopted in 1868, says that “the validity of the public debt of the United States ... shall not be questioned”.

The purpose of the clause – originally formed to settle any doubt that the US would pay debts it incurred during the civil war – was tested in a Supreme Court case after the US left the gold standard to fight the Great Depression in 1933.

The court said that Congress could not tear up its promise to bondholders to pay them in gold and interpreted the 14th amendment as applying to “whatever concerns the integrity of the public obligations”.

“The Supreme Court, citing the 14th amendment among other law, has made it clear that Congress does not have the power to alter its own contracts,” said Michael Bradfield, former general counsel of the Federal Reserve Board and author of a memorandum being circulated among Capitol Hill staffers looking to bypass a congressional vote on the debt ceiling.

By that logic, Mr Bradfield said, “if an impasse were to occur, the legal case for invoking the 14th Amendment would be very strong”.

There are legal, political and practical counter-arguments, however. A practical argument is that doubt would hang over any Treasury bonds issued in defiance of the debt limit pending a Supreme Court review.

Bill Clinton, former president, has said he supports using the 14th amendment, but how it would play politically if Mr Obama were to override Congress to keep on borrowing is unclear. Mr Obama’s advisers have suggested that they do not think invoking the 14th amendment is an option. At least one Republican congressman has said that such a decision would be an impeachable act.

A legal counter-argument is that, if Mr Obama were to prioritise debt payments, then he could satisfy both the 14th amendment and the debt ceiling law.

It is not certain, however, that Mr Obama has the power to prioritise payments. “On the question of legality, I think it’s very unclear that the administration has the legal power to choose between Congress’s spending priorities,” says Jay Powell, visiting scholar at the Bipartisan Policy Centre in Washington. The Treasury might be obliged simply to pay what bills it can as they come due.

Even if the president decided that a debt ceiling crisis would allow him to use emergency powers to prioritise payments, then he would have few good options to make the necessary cuts of 40 to 45 per cent.

According to simulations run by Mr Powell, if the administration chose to prioritise big spending programmes such as Social Security and Medicare, then it would have to shut down almost everything else – from nuclear security to federal prisons.

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