Among the solutions offered to avoid the United States defaulting on its debt in the event of not reaching an agreement to raise the debt ceiling is resorting to Article 14 of the US Constitution.
Although raising the debt ceiling is essentially a routine process, in recent years it has become a bone of contention with Republican lawmakers seeking spending cuts in return for raising the ceiling.
What is Article 14?
Article 14, which was added to the US Constitution in 1868 after the War of Secession, stipulates that “the validity of the public debt of the United States permitted by law (..) shall not be questioned.” In other words, expenditures approved by vote must be respected, including pensions. .
Cornell University law professor Robert Hackett told AFP that after the civil war, “fear grew (in the victorious northern states) that southern legislators who were returned to Congress would continue to destroy our federal unity, but from within, by renouncing the federal debt caused by the war.”
The debt ceiling came to be added in the year 1917 to this text.
Can Biden use it?
Mark Graber, a professor at the University of Maryland Law School, stressed that Biden, by hinting that he might resort to this clause, “sought to say that if Congress did not approve raising the debt ceiling, he could in any case pay the obligations because this is his constitutional duty.”
Joe Biden does not need certain measures. Robert Hockett explained that he should “ask Treasury Secretary Janet Yellen to simply continue issuing this debt if necessary to pay the nation’s bills.”
In other words, to act as if the debt ceiling does not exist in the first place.
However, the president has so far ruled out resorting to this mechanism in the short term due to legal complications, preferring to pass the current crisis to think about it.
On Thursday, Janet Yellen questioned, during a press conference on the sidelines of a meeting of the Group of Seven in Japan, the benefit of resorting to Article 14 and considered that this strategy is “a subject of legal discussion,” stressing that she does not want to reach a stage where alternatives to raising the debt ceiling are being considered.
What are the possible difficulties?
The possibility of the Republican opposition resorting to the judiciary may be the main obstacle to the adoption of this mechanism.
However, Robert Hockett does not expect the Republicans to do so, considering that this will put them “in a very uncomfortable position as they will initiate prosecutions to force the president to default on the national debt.”
On the other hand, Mark Gruber saw the opposite, explaining that “Republicans will launch a counterattack and say that he (Joe Biden) does not understand what Article 14 is about debt only and that he cannot pay off the debt (essentially accumulated) without making new expenditures.”
Either way, there are risks, according to University of Florida law professor Neil Buchanan.
Exceeding the level of indebtedness set by Congress would be against the law.
However, failure to honor congressional spending obligations may constitute a more serious violation. In this particular case, there is a possibility of judicial prosecutions also in the form of a collective complaint filed by retirees who are no longer receiving their pensions, as confirmed.
What are the economic consequences?
Fundamentally, markets are very hostile to uncertainty, and may not particularly accept the uncertainty that may result from this situation.
Nancy Vanden Houten, an economist at Oxford Economics, said: “If investors see that the debt that the Treasury is selling may later be considered invalid by a court decision, they may hesitate to buy it,” and this may lead to “a significant rise in interest rates.”
Isaac Boltansky, director of policy research at BTIG, said it was risky, explaining that the court’s affirmation of debt viability “would be positive in the long run for debt markets” because stopping the debt ceiling on a regular basis “may completely avoid making this completely unhelpful maneuver”.
On the other hand, “if the courts reject this maneuver, we will return to the starting point, but with a large amount of (..) economic damages.”
Nancy Vanden Houten said that the measure “may shake the confidence of investors and companies and have a negative impact on the economy,” but the repercussions “will be much more harmful” if the treasury does not pay what it owes within the specified deadlines.
