Business groups, like the U.S. Chamber of Commerce and the Business Roundtable, want quick action. Federal Reserve Chairman Ben Bernanke is among those urging lawmakers not to diddle. In a speech to the New York Economic Club on Nov. 20, Bernanke said Congress and the White House should refrain from contributing to the “headwinds” that are slowing the economic recovery.
“Early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation’s Treasury securities and other obligations,” Bernanke said. “As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs.”
The administration may be considering other routes around the debt ceiling headache. During a recent “Twitter Town Hall,” Obama didn’t rule out invoking Section 4 of the 14th Amendment to the US Constitution to resolve the issue. That provision reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion shall not be questioned.”
Some constitutional law scholars argue the article provides the president with the authority to address the nation’s debt if Congress balks. Geithner has on occasion cited it while discussing the debt.
“I don’t think we should even get to the constitutional issue,” Obama responded during the Town Hall. “Congress has a responsibility to make sure we pay our bills. We’ve always paid them in the past. The notion that the U.S. is going to default on its debt is just irresponsible, and my expectation is that over the next week to two weeks that Congress, working with the White House, comes up with a deal that solves our deficit, solves our debt problems and makes sure that our full faith and credit is protected.”
The debt limit is the sum that the federal government is authorized to borrow to meet its obligations. Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments are part of the mix. The debt limit does not authorize new spending — it only allows the government to finance existing IOUs.
The administration and most economists maintain that failing to increase the debt limit would lead to disastrous results. It would force a government default, which has never occurred in the nation’s history. Default would create a financial crisis and likely lead to recession, threatening jobs and savings.
Congress has never refused to raise the debt limit. Since 1960, lawmakers have acted on 78 occasions to raise, temporarily extend or revise the debt limit.
That tradition nearly crashed in 2011 when majority Republicans in the House initially refused to approve the president’s request without significant spending cuts. On May 31, 2011, lawmakers in the lower chamber voted to retain the existing $14.3 trillion debt limit — $1.9 trillion less than required to avoid default.
The result was a lowering of the nation’s credit rating – rendering it more expensive to operate government – and an economic slowdown at a time when the U.S. was still recovering from the 2009 recession.
Congress and the White House finally reached a consensus that retained financial stability. Ironically, according to the Bipartisan Policy Center, a Washington think tank founded by four former Senate majority leaders – Republicans Bob Dole and Howard Baker, and Democrats Tom Daschle and George Mitchell – the delay will cost the Treasury $18.9 billion during a 10-year span because of elevated interest rates.
The Treasury has not revealed a plan of action if default occurs.