As the government shutdown continues and the U.S. lurches closer to defaulting on its debt, some members of Congress think that is a great plan. Some, like Florida Rep. Ted Yoho, even believe that a default on the federal debt will lead to financial stability.
Compared to Republicans like Rep. Ted Yoho of Florida, however, these debt-ceiling “truthers” are outright responsible. Yoho and several of his compatriots in the House are debt-ceiling denialists who believe the administration is crying “wolf” on the issue. Incredibly, Yoho told The Washington Post that hitting the debt ceiling would “bring stability to world markets.” And Sen. Tom Coburn (R-OK) told CBS News that he “would dispel the rumor that’s going around, that you hear on every newscast, that if we don’t raise the debt ceiling, we’ll default on our debt—we won’t.”
If only we lived in a world where defaulting on the debt brings prosperity. And if we stopped paving the roads, then they will turn to chocolate with all the world’s nuclear bombs turning into lollipops.
These debt truthers note that the U.S. brings in about $250 billion a month and spends about $30 billion a month on interest. They argue that the President just needs to authorize that the Treasury Department pay the interest on the debt first and then figure how to spend the remaining $220 billion.
That could be done, but it would not be easy nor constitutional. The executive branch does not have the authority to decide who to pay and when to pay them. It could almost be considered an impeachable offense if the President decided not to pay the military or social security retirees or the EPA or the federal courts. Barack Obama’s opponents in Congress would love that scenario, even if they were the ones who created it.
Treasury Secretary Jack Lew would not be in an enviable position, as he would have to stop an automated payment process that covers everything from government employees to government contractors. It’s bad enough to decide who is to be paid, much less to stop those who aren’t going to be paid from being paid.
While a household juggles not paying the electricity or the cable bills, Lew will have to juggle not paying a retiree in favor of a soldier, or not paying the soldier in favor of sending out tax refunds.
Experts believe the government will have two choices if the debt ceiling is breached and neither looks that pleasant from Lew’s perspective.
Prioritization: Under this plan, the Treasury would decide which bills to pay. That means some difficult political choices that it admittedly doesn’t want to make and doesn’t have the authority to make. For example, it could be forced to pay interest on the debt, but not food stamps; it could pay active duty military personnel, but not veterans’ benefits. Under this plan, in about the first month of breaching the debt ceiling, the Treasury will have to decide not to pay one out of every $3 that the government is obligated to pay.
Sounds tough, but is it doable? Not according to Treasury officials. They say that the Treasury’s payment system is not capable of making those choices and it would require massive reprogramming of the system. More so, they question the legality of those choices. “Treasury officials determined there is no fair or sensible way to pick and choose,” according to the Congressional Research Service.
Day-to-day: A more likely scenario is that the government would pay its bills day-by-day, that is, wait until it has enough money on hand to make a single day’s payments and then punch the button and pay them all. This keeps Treasury officials from making the difficult legal and political choices surrounding prioritization.
But it’s not without its problems. It will mean delays, sometimes days or weeks. The Bipartisan Policy Center estimates that in the first month, Social Security payments will be made three days late, food stamp payments five days later and active duty personnel would get their checks about 12 days late.
In other words, if you think the government shutdown is bad, then just wait until you meet its big brother: The debt-ceiling limit.
The Treasury department will have one-third less revenue to spend on operating the government because it will not be able to borrow anymore. That’s just the problem with how to spend the money the federal government has. This doesn’t deal with the disastrous consequences of a default on the national debt.
The debt-ceiling truthers want America to believe that a technical default is not a real default because the U.S. will almost certainly continue to pay its interest obligations. However, a technical default is not something to be taken lightly. The U.S. debt of $16.7 trillion is based on the trust that the U.S. will never even consider not paying its debt. If an inkling of doubt creeps in, then investors will demand a higher interest rate. That $30 billion a month interest payments can easily balloon far above that, especially with a principle of $16.7 trillion.
In 1979, the U.S. technically defaulted. Congress stalled at expanding the debt limit, an enormous number of small investors unexpectedly bought securities and a word-processing program for check schedules failed. Altogether, $122 million in payments were delayed. That’s peanuts. It’s a few minutes of operating time in the federal government. Nevertheless, the consequences were far beyond the $122 million late payments. It cost the U.S. government over $10 billion.
The default was temporary and affected a minuscule portion of the nation’s investors, holding an equally tiny share of the debt: about $122 million in Treasury bills, a tiny fraction of a percent of what was then the total U.S. debt. But it cost the government billions. “The primary impact of this default was to increase T-bill yields by 60 basis points,” or sixth-tenths of a full percentage point, [economists] [Terry] Zivney and [Richard] Marcus wrote. “This increase was a one-time, permanent ratchet upwards of yields…[and] translates into a $12 billion increase in interest payments.” U.S. debt was supposed to be risk-free, and it turned out it was not. In fact, it took a class-action lawsuit to force the government to compensate the individual investors in full for the late payments.
As Zandi [Mark Zandi, chief economist at Moody’s Analytics] warned Tuesday, an increase in rates will affect the budget for decades to come. “The impact is smaller at first because only new debt is affected,” Zivney and Marcus said. “But over time, as the older debt matures and becomes refinanced at higher rates, the entire cost of the default is realized.”
Like Obama’s birth certificate and 9/11, the debt ceiling has become a nest of unproven theories and conspiracies. It has also become a haven for right-wing radical economics. An economy the size and importance of the U.S. should not be an experimental testing ground for economic theories embraced by ideologically fanatical politicians.
The damage might be limited to the United States, but the failure to expand the debt-limit could have worldwide affects. At the least, the U.S. economy will be severely damaged and will kick us back into a recession. It will take even longer to dig out of that recession because the full faith and credit of the U.S. government will have been lost. This is not the road anyone wants to travel. We can only hope that there is enough sanity left in Washington to prevent it.