Fixing the debt ceiling with the 14th amendment could cause a recession. A top economist says it might be necessary.
President Biden is gradually warming to the idea of unilaterally canceling the debt ceiling by invoking the 14th amendment. An economist often cited by the White House said it might be worth the gamble.
“My sense is, I take the risk,” said Mark Zandi, chief economist at Moody's Analytics.
In the event bipartisan talks fail to solve the crisis, using the Civil War-era law would definitely create turmoil, possibly plunge the US into a recession and surely start a legal fight, Zandi told Yahoo Finance in an interview Wednesday.
But the economic effects, he added, would still be less severe in the near term than a default on the nation’s debt. And it could eliminate the debt ceiling forever, offering "a very significant weight off the economy."
But if the administration loses in the courts, well, “then it’s a mess.”
The comments came in the aftermath of a heated and unproductive meeting Tuesday at the White House after which Speaker McCarthy immediately told reporters "I didn’t see any new movement” from the hour-long conversation.
The debate over invoking the 14th amendment to solve a debt-ceiling crisis stretches back for years and centers around one line in the constitutional amendment ratified in 1868. It reads: "the public debt of the United States, authorized by law...shall not be questioned."
That provision was written in the context of the Reconstruction amid fears that Confederate states would default on their debts. Nevertheless, some say it can be invoked today by Biden to overrule the 1917 law that created the debt limit.
After being dismissed for years, the movement to invoke the 14th amendment around the debt ceiling gained a high profile backer last week when influential Harvard Law School professor Laurence Tribe announced a change of heart after opposing the idea in 2011.
Biden confirmed on Tuesday night that his administration has studied the 14th amendment and he specifically mentioned Tribe's endorsement, saying the maneuver “would be legitimate” as a means to end the debt ceiling standoff.
The president worked alongside Tribe in the Obama administration but only parts ways in one respect on this issue: Biden maintains that the move may not be workable for this current crisis as it could be stalemated by lawsuits.
Republicans have made it clear they would fiercely oppose the idea. McCarthy said Tuesday night the move would be symbolic of a “failure” of leadership on the part of the President. Senate Minority Leader Mitch McConnell (R-KY) warned Wednesday that “unconstitutionally acting without Congress is not an option.
The quickly changing conversation has also led to rapid changes in tone from Biden and his allies. It was just last Friday that Biden told MSNBC “I've not gotten there yet” on the question of invoking the amendment.
But by Tuesday, the president offered a promise to test the maneuver in the months ahead.
“It’s kind of a nuclear option, it’s the ‘in case of emergency break glass option’ on the table,” Strategas Securities managing director of policy research Jeannette Lowe said in an interview Wednesday.
But it has many drawbacks, she added, including uncertainty about whether the problem had been solved. “People would talk about whether or not we are defaulting” if Biden invoked the amendment, she said.
In an accompanying video appearance, Lowe remained optimistic that leaders in Washington will find a deal and are “on a trajectory to actually get this done.”
Biden is set to meet again with congressional leaders Friday as the nation gets closer to a default that Treasury Secretary Janet Yellen has said could come within weeks. Failing a bipartisan breakthrough, the calculus for Biden and his aides may soon become whether the 14th amendment is perhaps the best of an array of bad options.
Zandi says “of all the far out options, [the 14th amendment] is far and away the best option” compared to other ideas like minting a trillion dollar coin or issuing new types of bonds. He added “it makes logical sense” to try and get rid of the debt ceiling altogether.
Either way, Zandi warns, the pressure from the business community may only amplify in the coming days as the markets begin to grapple with the real chances of default.
“Once you see a little bit of selling, then you can see a lot of selling very quickly” he says, adding “it may take something like that to light a fire to get an agreement.”
Ben Werschkul is Washington correspondent for Yahoo Finance.
Click here for politics news related to business and money
Read the latest financial and business news from Yahoo Finance
