Is the Debt Ceiling Legal and Do We Really Have One?

In the frenzied debt ceiling debate, we should stop to ask ourselves an important question. Is the debt ceiling legal? I recently had a discussion with someone who contends the debt ceiling is inherently illegal. I disagree with his conclusion, but the discussion is blog-worthy, in my opinion. He cited Section 4 of the 14th Amendment as his rationale, which I’ve put below in its entirety.

“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.”

He contended that this makes a debt ceiling unconstitutional because it says we have to honor our debts. If we violate the debt ceiling, then we default on our debt, which would mean we’re not honoring our debt. I suppose I see his point because if we default, then the rest of the world would question our debt, however, under this theory, we would also have to say that the credit ratings agencies downgrading our debt is illegal. I don’t really agree with this for two main reasons.

The first reason is that I think he’s misreading this section of the 14th Amendment and misunderstanding the history behind the excerpt in question. This doesn’t read to me as thought it means we cannot legally default on our debt (note that we never have defaulted on our debt, so there’s no actual legal precedent here). It’s not addressing whether we can or cannot default, but whether anyone has any standing to question the legitimacy of the debt.

As for the history, it basically was put in there for two reasons. One was to prevent former Confederates from questioning the legitimacy of US government bonds. However, as you read further, you see that the main purpose of this section is to ensure that the former Confederates (as well as the foreigners who financed the Confederacy, such as the English and French) don’t get reimbursed for their losses of war costs and/or slaves by the US government. In essence, this second part was done to ensure that anyone who tried to finance our downfall/division never gets any of their money back.

(On a side note, while we’re talking about this blurb of the Constitution, Bill Clinton contends that this empowers the White House to raise the debt ceiling via executive order without Congress’ approval. This doesn’t surprise me, but his argument, in my opinion, is simply ludicrous. Like the fellow who contends the debt ceiling itself is unconstitutional, Clinton is misreading and misinterpreting this excerpt. With some tweaks, the same basic logic I use to counter this fellow’s argument can be used to counter Clinton’s. Read on for more.)

If my first reason for disagreeing with him is his selection of what I see as an inapplicable section of the Constitution, then my second reason for disagreeing with him is naturally that I think there are more applicable sections of the Constitution. We consistently see throughout the Constitution, particularly in Article 1 Sections 7 and 8, that the so-called ‘power of the purse’ pertaining to America’s national financial matters often resides in Congress. I contend that Article 1, Section 8, the Powers of Congress, is more pertinent here, specifically Congress’ power, “To borrow money on the credit of the United States.”

My logic is simple. If Congress is empowered to borrow, then they can decide to borrow money (positive borrowing), to not borrow (said another way, zero borrowing), or to lend (which we can also think of as negative borrowing because). Under this logic, the ability to set a legal debt ceiling is well within Congress’ authority. So, the debt ceiling is legal and constitutional.

Do we actually have one? In theory and legally speaking, yes we technically do. We have laws on the books that establish the maximum level of debt we as a nation can undertake, aka a debt ceiling.

In practice, however, we really don’t have a debt ceiling because we consistently raise it every year or every couple years. We set the ceiling, then when we get close to bumping our heads on it, we raise the ceiling. Having a limit we ourselves can move kind of defeats the purpose of having a limit.

It’d be like me calling my credit card company if I get near my credit limit and telling them I’m going to increase my credit limit so I can rack up more debt. It doesn’t work that way in the real world. The credit card company would tell me no. The USA sets the limit on its own credit card, in other words. Sure, one could argue that the market for Treasury bonds sets the limit, but I highly doubt the market will ever completely stop buying Treasuries in the same way a credit card company could refuse to raise my limit and even cut off my credit card.

I think the debt ceiling is really there to appease the credit markets and ratings agencies. They know that if we have a limit, that could, in theory, act as a check on our excess borrowing. In practice, it doesn’t work that way because we can raise it at will, but it’s nice in theory.