The summer of 2011 is not a time any of us would like to revisit, economically speaking. It was during this time that the European Debt Crisis had reached it’s most volatile stage, with many believing that a Greek exit from the union was a foregone conclusion, sparking fears of a messy dissolution of the globe’s largest economy. On top of that, the world began to seriously doubt the American government’s commitment to paying its debts, as Republicans in Congress refused to raise the statutory limit on how much debt the Treasury Department can issue unless President Obama agreed to significant reductions in federal spending.
Unfortunately, the result of that battle was a deal to raise the debt ceiling to allow for another year and a half of full government operations, with significant spending cuts to go into effect this month. This in part created the so-called fiscal cliff, which was postponed by two months in a down-to-the-wire agreement reached by the President and Congress this week. But the Federal government has already reached it’s borrowing limit, and is resorting to “extraordinary measures” in order to avoid issuing new debt to finance government operations. Welcome to the summer of 2011 all over again.
The basic problem is this: Constitutionally, the Congress is in charge of both deciding how much money the government should spend, and deciding how much money the government can borrow. The current House of Representatives, dominated by conservative Republicans, doesn’t want to spend anywhere near as much money as current law dictates the government must. They don’t have enough power to change the law as it stands. But they can use their ability to block further debt issuance as a bargaining chip to force those spending cuts.
Critics of this bargaining strategy view it as legislative terrorism. They say that House Republicans can’t accept their lack of control over the government, so they are willing to risk the United States government defaulting on its debt and all the nasty consequences that would result from that in order to force their vision of the size of government into existence.
So for those who believe the debt ceiling is a harmful anachronism that allows minority factions in the government to hold the majority hostage, there are a few clever strategies for obviating the debt ceiling altogether. One, first highlighted in the Summer of 2011 by Yale Constitutional Law Professor Jack M. Balkin, is for the Treasury to use a loophole in the law meant to enable it to issue commemorative coins in order to issue two $1 trillion platinum coins, and then deposit them with the Federal Reserve. The Fed could then deposit funds with the Treasury in return.
This admittedly ridiculous solution to the debt ceiling issue has gotten a lot of attention in the media lately, with Josh Barro of Bloomberg View endorsing it yesterday, followed by the Huffington Post and New York Post featuring it prominently on their site and paper today. But does it have an realistic chance of being used? Probably not. As Balkin wrote last year, this option hasn’t been publicly considered by the Administration for several reasons:
“First, there may be other legal obstacles to using these options that we don’t know about. Second, because these devices could be used over and over again, they might scare investors and be politically unacceptable. Third, the president’s political strategy has been to obtain a congressional deal lowering the deficit, and these solutions would take all the pressure off Congress.”
In other words, it would be better for everyone involved if Democrats and Republicans can come to some sort of solution to this standoff that doesn’t involve absurd Constitutional workarounds to disagreements of public policy. But the past few years have proven that the current legal framework for deciding on government borrowing and spending is dangerously flawed.