The Debt Ceiling

Last week, members of the Democratic Party in the U.S. Congress spoke about encouraging the President Barrack Obama to unilaterally raise the debt ceiling by invoking the 14th Amendment to the Constitution. Not only that, but there have been academia who have interpreted the 14th Amendment to empower the President to take this action. This course of action is absurd and undoubtedly unconstitutional.

The 14th Amendment contains five different sections. Sections four and five are the only relevant sections to this issue. Section Four states "The validity of the public debt of the United States, authorized by law...shall not be questioned." There's more to this particular section but it is unnecessary to present it all. There is nothing stated in this section that could reasonably be interpreted as empowering the President of the United States to raise a debt limit ceiling. Furthermore, all this section does is legitimize the debt incurred by the Government of the United States.

Section Five of the 14th Amendment puts the nail in the coffin. It states "The Congress shall have power to enforce, by appropriate legislation, the provisions of this article." So how does the President have the power to raise the debt ceiling? He doesn't. It clearly states that Congress is empowered to enforce the 14th Amendment.

Clearly the 14th Amendment does not empower the President to raise the debt ceiling. Thankfully the White House has itself dismissed this course of action stating that it is unconstitutional.

China's Hidden Economic Growth

From 2007 to the present, China has seen a growth rate in GDP as high as 13%, and as low of 6.2%, and an average growth rate in this period of 9.97%. These are extraordinary numbers that no doubt can be attributed to China’s decentralization and liberalization of their economy. This has caused the media to question whether other the American economic model should supersede the Chinese economic model. However, I am not too sure if China’s GDP growth is as good of an indicator as speculated.

Given that China is a communist nation, their regulatory policies pushed a good deal of their economy into a black market. This has been observed in every nation with excessive red tape and costly regulatory policies. The Soviet Union experienced that same issue. Latin American countries have had the same issue. Hernando De Soto’s excellent expose’ in “The Mystery of Capital,” accounts for this. In this book, De Soto shows how excessive red tape moved much of the economy into the illicit black market. This consequently resulted in the GDP of various Latin American countries being underreported. As these countries liberated their economy’s their GDP began to grow as businesses operating under the table began to come out and operate within the legal realm.

I attribute what De Soto displayed and explained in Latin America to what is being experienced in China. Prior to liberalizing, China’s GDP has been underreported due to the very nature of an existing black market. As businesses in China emerge from the black market and are able to operate openly and under legal and property protection, China’s GDP has grown to figures that more truly represent their economy.

Essentially, we cannot simply attribute China’s model to its excellent production capabilities. If we were to follow anything from China, it is that our regulatory framework needs loosening.

The Benefits of Federalism and States' Rights

After a brief and failed experiment with the Articles of Confederation, our Nation’s Founding Fathers created a unique and ingenious system of governance called federalism. This system produced an additional checks and balance system and separation of powers between the national government and the states’ governments, while recognizing the difference in interests between the 13 states. The most important aspect of Federalism can be seen in the 10th Amendment to the Constitution, which states “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” This is a paramount system that is more evident and important today as it was 200 years ago. It is the foundation that has allowed economic prosperity when respected, all while allowing for economic collapse when violated.

The largest benefit of federalism is that it has provided for a system of competition between the states. One state’s policies can not only affect it, but can affect another state. For example, recently, Illinois, in dealing with its budget crises, chose to raise income taxes. This negatively affects residents and small businesses of Illinois. At the same time, Wisconsin, Illinois’ neighbor to the north, has introduced a climate friendlier to businesses and individuals. The effect of this will be movement of individuals and businesses from Illinois to the north, and to surrounding states with similar legislation to Wisconsin’s. In other words, there is competition. In essence, this system allows for policy experimentation, 50 different experiments to be exact, to best suit their needs.

This further becomes essential when the states learn from each other and begin to model policies after each other. When Wisconsin’s Governor Walker signed the public employee collective bargaining bill, Indiana soon followed suit. As the benefits to Governor Walker’s bill have been realized, more states have begun to introduce similar legislation seeking similar results. We see similarities with Right to Work States. Those states, such as South Carolina, are attracting more business, allowing for job creation. If the federal government dictated these policies, it would be difficult to find the best, most efficient policy.

The benefits of this system cannot be seen if the federal government dictates a national economic policy. Essentially, what works in one state will not necessarily work in another state. What works in one region, may not necessarily work in another region. The best federal economic policy is to allow the states to determine their destination, to compete with each other for the most beneficial policies.

QUANTITATIVE EASING

As the economy continues to produce dismal results, Board of Governors Chairman Ben Bernanke is considering implementing round three of quantitative easing (QE). Aside the fact that quantitative easing failed miserably in Japan, and failed two previous times in America, the Federal Reserve might try this tactic again to try to stimulate an economy that honestly, can no longer be stimulated. Other than the fact that this effort is going to fail, there are three reasons why this Congress needs to step in and regulate this independent government body called the Board of Governors.

Quantitative easing is the process where the Federal Reserve buys bonds from the market. These bonds are purchased ex nihilo, or out of nothing. This results in increasing the money supply. Any study of economics and the money supply shows that this policy will be inflationary. Other than continued government spending, this is the last thing our economy needs. With 9.2% unemployment and many more dropping out of the labor market, an inflationary policy is the last thing needed for our economy. Making consumer expenditures more expensive is the last thing this economy needs.

Inflation has the effect of weakening the dollar. This leads to another impact QE will have on the economy. Because inflation will devalue the dollar, the exchange rate for the dollar will become weaker. It will take more dollars to buy foreign currency which makes foreign products more expensive. At the same time, however, this will make American goods exported cheaper and more competitive abroad. However, because the U.S. imports the majority of petroleum, a weak dollar will result in an increase in gas prices, exacting additional budgetary pressures on Americans.

Lastly, QE is unconstitutional. Article I, Section 8 of the Constitution directs Congress to regulate the value of the money it creates. Essentially, because QE is inflationary by its very nature, the Federal Reserve’s policy is unconstitutional in that it subverts the ability of Congress to control the value of the dollar. The Constitution does not empower the Federal Reserve to affect the value of the dollar. In fact, from the Federal Reserve’s own website, the Federal Reserve Act mandates the Federal Reserve to maximize employment and to stabilize prices. Well, inflationary policies do not stabilize prices. We need to only look at South America to see how unstabilized prices become as result of reckless money printing.

In Conclusion, the Federal Reserve’s QE policy undermines a constitutionally explicit power of Congress. QE results in an increase of the money supply, which contributes to inflation. In a time when many Americans are out of work, and many American’s facing pressure on their budgets, an inflationary policy like QE cannot be good for our current economy. Additionally, inflation weakens the dollar, causing important imported commodities such as petroleum to be more expensive. The Board of Governors needs to seek a different approach.