In anticipation of upcoming debt ceiling negotiations, top Senate Democrats are calling for the President to employ the "Constitutional option" -- if no deal is reached, Obama would declare that government default violates the 14th Amendment, which states, "The validity of the public debt of the United States ...shall not be questioned." [1], [2] But the President disagrees. White House Press Secretary Jay Carney recently told reporters, "This administration does not believe that the 14th Amendment gives the President the power to ignore the debt ceiling -- period." [3]
Let's take a look at the viability of this 14th Amendment strategy and how the threat to pursue it affects the outcome of the debt ceiling negotiations. As we shall see, managing expectations about the likely outcome of this strategy is itself an important element of this game.
On the other hand, the Treasury would have to sell bonds that had no statutory guarantee. This insecurity could lead bondholders to demand a higher interest rate, leading to a corresponding interest rate hike worldwide. [6] Thus, the financial consequences of the Constitutional option cannot be known with any certainty, because they are dependent on the impact this unprecedented action would have on bondholders' confidence, which is unpredictable.
First, consider the simple version of this game WITHOUT the Constitutional threat. The House GOP can either pass a compromise bill that raises the debt ceiling and also raises some taxes, or they can pass a Tea Party budget that raises the debt ceiling but includes no compromises with the Democrats on the budget. Then the Senate Democrats either pass the House's bill along to the President or vote it down. If they pass the bill, then the President can either sign or veto it. If no deal becomes law the debt ceiling is not raised and the US defaults, provoking global economic crisis.
The House GOP would look ahead and realize once the bill is on Obama's desk, he will have to sign it or face default. The Republicans also know the Senate Democrats would likely pass any bill in the end in order to avoid default. On the other hand, if the Republicans agreed to a compromise budge that includes many of Obama's priorities, then Obama would win. So the House GOP's optimal strategy would be to tie an increase in the debt ceiling to a "no-compromise" budget, forcing the Senate and Obama to cave in order to avoid default.
Now let's add in the Senate Democrats' new strategy calling for Obama to invoke the 14th Amendment and declare the debt ceiling to be unconstitutional.
Even if the President believed he could fall back on the Constitutional option without generating a financial panic, it still might not be in his interest to declare this from the start. Suppose Obama announced that at the last minute he will have the option to declare the debt ceiling to be unconstitutional and avert a default. Then the House GOP would expect that if they tied a debt ceiling increase to their no-compromise budget, the Senate Democrats would vote it down and Obama would invoke the 14th Amendment, avoiding default. House Republicans would surely prefer this outcome over voting for a compromise budget, which would violate their no-tax pledge. Tea Party Representatives would get to remain ideologically pure, and Obama would take 100% of the blame for any consequences of his 14th Amendment maneuver. In fact, this strategy could embolden the House GOP because they believe the actual threat of default has been lifted.
If the Administration determines the economic risks associated with the Constitutional option are preferable to accepting whatever bill the House GOP ends up passing in the end, the President may ultimately decide to invoke the 14th Amendment. But even if that is Obama's plan, there is no advantage to revealing this until the last minute, because the threat of using the Constitutional option would not change the House GOP's optimal strategy.
