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Kevin McCarthy Wants a “Debt Ceiling Depression” - Will SCOTUS Give It To Him?
The US government has never, in our country’s entire history, defaulted on its debt. Neither, in recent history, have most other advanced democracies. Debt default is very much a Third World thing…
Kevin McCarthy is playing with fire, and he’s on very shaky constitutional grounds.
He believes that he can hold hostage payments for goods bought and services already provided to the federal government — debts of the United States — in exchange for forcing the Biden administration to go along with draconian cuts to veterans benefits, food stamps (SNAP benefits), Medicaid, the Inflation Reduction Act (particularly its subsidies for green energy), and the permanent establishment of Trump’s massive tax cuts for billionaires.
Republicans started using the so-called “debt ceiling” — based on a law passed back in 1917 — as a cudgel to beat up Democratic presidents in 1995 during the Clinton administration. It was one of Newt’s “bright ideas.”
Clinton and Obama went along with the GOP, but now their demands have become so extreme that President Biden is threatening a veto (if the bill even gets through the Senate, which it probably won’t).
They’re doing this based on the 1917 Second Liberty Bond Act which established a ceiling for US government debt, a ceiling that’s been breached through amendment over 90 times in the past century.
The act gave the government the authority to issue Liberty Bonds to the public to help finance World War I, but put a cap on how much debt could be incurred through that issuance and other government functions. Today we call that the “debt ceiling.”
Just from 1962 to 2011 it was raised 74 times, including 18 times under Reagan, 8 during Clinton, 7 during Bush, 5 times during Obama’s presidency, and 4 times during Trump’s four years in office.
In the years since Gingrich, when Republicans are in the White House the debt ceiling is routinely raised. When Democrats are in the White House and Republicans control one or more houses of Congress, they hold it hostage — really, holding the full faith and credit of the United States hostage — in exchange for cuts in social programs and lower taxes for billionaires.
The last time House Republicans seriously threatened the full faith and credit of the United States this way was during Obama’s presidency in 2011 (they almost never do this when a Republican is in the White House, per Jude Wanniski’s “Two Santas” theory of politics).
That single 2011 stunt — just having House Republicans walk us up to the edge of default, resulting in a downgrade of our nation’s credit rating — cost working people trillions and caused widespread and long-lasting pain.
As the Treasury Department noted in 2013, looking back on that 2011 experience when Republicans held out until the last minute:
“In 2011, U.S. debt was downgraded, the stock market fell, measures of volatility jumped, and credit risk spreads widened noticeably; these financial market effects persisted for months. …
“The S&P 500 index of equity prices fell about 17 percent in the period surrounding the 2011 debt limit debate and did not recover to its average over the first half of the year until into 2012.
“Between the second and third quarter of 2011, household wealth fell by $2.4 trillion…”
The US government has never, in our country’s entire history, defaulted on its debt. Neither, in recent history, have most other advanced democracies. Debt default is very much a Third World kind of thing.
That’s why the US dollar and US government treasuries are at the core of the international financial system: we have always been considered the most reliable debtor, with the most stable currency and structurally sound economic system, in the world.
If the GOP takes us into default — even for a matter of hours — the consequences will be dire.
CBS News reports that Moody’s Analytics’ Chief Economist Mark Zandi says it would wipe out as many as 6 million jobs and destroy $15 trillion in household wealth. Unemployment would rapidly spike, he notes, to at least 9 percent, and the stock market would fall by a third.
We’ve known how bad it could become for a while. The Treasury Department, back in 2013, noted that:
“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth—with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression.
“Considering the experience of countries around that world that have defaulted on their debt, not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”
Most Americans are not at all enthusiastic about Republicans in Congress causing economic damage that “could last for more than a generation,” although McCarthy yesterday seemed almost giddy waving about that threat.
But there may be a way out.
The Second Liberty Bond Act and the subsequent acts that followed or amended it have only been narrowly tested for constitutionality before the Supreme Court. And it failed that test. In the opinion of many constitutional scholars, it’s patently unconstitutional and unenforceable.
The 14th Amendment to our Constitution, written and ratified after the Civil War, has a section that deals with the federal government paying its debts. It’s there, in part, because the Civil War had threatened the confidence of both the nation and the world around America’s ability to pay its bills.
Section 4 of the 14th Amendment says:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
It was first tested in a dispute about payment of government debt, a $10,000 Liberty Bond that the holder, Mr. Perry, wanted redeemed with an additional $7,000 to cover changes in the value of gold.
This led to the 1935 Supreme Court ruling in Perry v United States, explicitly stating that the federal government must pay its debts as incurred.
The syllabus of the case states:
“11. Section 4 of the Fourteenth Amendment, declaring that, ‘The validity of the public debt of the United States, authorized by law, ...shall not be questioned,’ is confirmatory of a fundamental principle, applying as well to bonds issued after, as to those issued before, the adoption of the Amendment; and the expression ‘validity of the public debt’ embraces whatever concerns the integrity of the public obligations.
“The Joint Resolution of June 5, 1933, is a direct violation of §4 of the Fourteenth Amendment, expressly limiting the delegated powers of Congress, and making the public debt of the United States inviolable at the hands of Congress.”
The body of the decision itself goes even deeper into asserting that our government must pay its debts:
“When the United States, with constitutional authority, makes contracts, it has rights and incurs responsibilities similar to those of individuals who are parties to such instruments. …
“In Lynch v. United States, 292 U. S.571, 580, with respect to an attempted abrogation by the Act of March 20, 1933 (48 Stat. 8, 11) of certain outstanding war risk insurance policies, which were contracts of the United States, the Court quoted with approval the statement in the Sinking-Fund Cases, supra, and said:
“’Punctilious fulfillment of contractual obligations is essential to the maintenance of the credit of public as well as private debtors. No doubt there was in March, 1933, great need of economy. In the administration of all government business economy had become urgent because of lessened revenues and the heavy obligations to be issued in the hope of relieving widespread distress.
“‘Congress was free to reduce gratuities deemed excessive. But Congress was without power to reduce expenditures by abrogating contractual obligations of the United States. To abrogate contracts, in the attempt to lessen government expenditure, would be not the practice of economy, but an act of repudiation.’” (emphasis mine)
The simple fact is that the Trump and Biden administrations have made obligations to pay for goods and services ranging from military hardware to Social Security, and McCarthy and his buddies in the Republican Party are trying to force a default on those debts.
Such a default, according to Treasury Secretary Janet Yellen and numerous finance experts, would be disastrous, perhaps even shaking the worldwide economy. America has never defaulted on her debts, and such a default could take decades to recover from.
It could throw America and the world into a depression as bad or worse than the Republican Great Depression of the 1930s.
President Biden is demanding that Congress pass a “clean” debt ceiling increase “without conditions.” It’s extremely unlikely McCarthy — weak as he is, with multiple members of the Sedition (“Freedom”) Caucus actually arguing that default would be a good thing because it would teach Democrats a lesson — will be able to get such a clean bill through the House.
As Tennessee’s Congressman Tim Burchett said:
“We just tell the world we’ve reached a limit. The consequences, of course, are shutting the government down.”
So far, because we’ve already hit the debt ceiling, Treasury Secretary Yellen has been “moving money around” to pay the most urgent bills, but the end of that road is just weeks away. Without congressional action, the next step would be default.
But what if the president were to call a press conference and say:
“The Constitution requires America to pay her bills. I fully intend to do that.”
If President Biden were to call McCarthy’s bluff and simply restart fully paying America’s bills, ignoring the Liberty Bond Act and the debt ceiling, Republicans will almost certainly sue him before the Supreme Court, which has original jurisdiction in disputes between the Executive and Legislative branches.
And under normal and rational circumstances, the Court would do what it did in 1935 and order the bills paid, citing the 14th Amendment’s fourth section as the basis for the decision.
These are not, however, normal and rational times, and this is not a normal and rational court. Clarence Thomas and Brett “Beerbong” Kavanaugh have both publicly declared a desire for revenge against Democrats, and Alito and Gorsuch are both visibly pissed off about their integrity being questioned.
Still, I believe it’s unlikely the Court would side with Congressional Republicans and force America into default (a similar lawsuit was tossed out in 2016, but for lack of standing).
This has the potential to get wild. Get some popcorn, but also buckle up tight…