The Debt Limit and the Constitution

In order to stampede a deal on the debt ceiling, various Democrats have cited the constitution (at their convenience) regarding the debt of the United States. Here is the specific language, from the 14th Amendment, section 4.

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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

The language was intended to ensure that the victorious side, the Union did not repudiate its debt and reward its creditors and punish creditors who supported the rebellious South. So if the Congress fails to raise the debt ceiling, aren't they violating the constitution? Of course not. First, tax receipts are still flowing into the federal treasury. And there is plenty of revenue to cover the interest on the debt that has already been issued. In fact, tax receipts stand at 55 percent of expenditures. It would be up to the President to halt expenditures that required the issuing of fresh debt and ensure that interest on the debt is paid. The real question would be what would be cut. Obama could play with fire and cut social security payments for example, and blame the Republicans for not passing a tax on corporate jets. I would love to see how his re-election chances would fare then.

Further, the federal government holds considerable assets it could sell to pay down the debt. This is similar to an idea I saw floated for the Greek situation. In that scenario, the Greeks would issue bonds backed by real assets, islands, their airline, that bondholders could seize if the Greeks defaulted. Eventually, the United States is probably going to have to deal with its debts by selling off assets as well. The federal government sits on vast mineral deposits, national parks and other assets that will eventually be needed to deal with our own overhang of debt, just the way a family going through hard times might hold garage sales and auctions on eBay.

The federal government owns about 800 million acres of land. Could that yield $1000 per acre? Maybe, so there is an asset that might be worth $800 billion. Some of the land might fetch considerably more. The submarine base in Point Loma comes to mind as particularly pricey. The 1981 value of mineral rights held by the feds was once estimated at $800 billion in a 1986 research paper. Using the U.S. inflation calculator, that would be almost $2 trillion in today's dollars. The point is that the feds hold assets that might have to be sold to get the debt reduced.

Of course, the smart money will bet that we will inflate our way out of the debt, which help the well connected and harms the average American, but spreads the pain over time.