Failure to raise the ceiling doesn’t mean default
By Donald J. Boudreaux
The popular narrative about this summer’s struggle to raise the federal government’s debt ceiling centers on the word “default.” If the debt ceiling isn’t raised, we are told, the U.S. government will be forced to default on many of its financial obligations, reducing Uncle Sam’s creditworthiness and decreasing our government’s ability to effectively carry out its duties. Sounds scary.
But a failure to raise the debt ceiling wouldn’t necessarily cause a default or any reduction of creditworthiness. Indeed, keeping the debt ceiling fixed might actually increase investors’ willingness to buy U.S. bonds.
A debtor defaults when it fails to pay its creditors in a timely fashion. So who are the government’s creditors?
The government’s chief creditors are holders of U.S. government bonds. People who bought these bonds loaned money to the government in return for a promise of repayment of principal and interest. Some of the country’s other creditors are vendors who sold supplies or services to the federal government but have yet to be paid. Still other creditors are government workers (including active military personnel) who haven’t yet been paid for work they’ve done in recent weeks; retired government workers who are due pension payments; and, finally, taxpayers who are due tax refunds.
That’s it. Only a failure to pay some or all of these people will result in an actual U.S. government default and be interpreted by investors as evidence of a decline in Uncle Sam’s creditworthiness.
So, must failure to raise the debt ceiling keep the government from paying its creditors in full? Emphatically no.
In August — after reaching the current debt ceiling — the government will receive about $172.4 billion in cash payments, mostly from taxes. But the country’s scheduled payments that month to creditors total only $84.6 billion, less than half of what the government will take in as liquid revenue. There’s no reason to believe that the months following August will be significantly different on this front. Clearly, no default is required.
What the failure (or “refusal”) to raise the debt ceiling will require is that Congress and the president make politically unpopular decisions either to raise taxes or cut spending elsewhere, or both.
After paying creditors, the government will have $87.8 billion on hand in ready cash in August to spend on its myriad programs — such as Social Security, wars in the Middle East, subsidized farming and maintaining a court system. With an un-raised debt ceiling preventing the federal government from borrowing more money, it will indeed be unable to fund the full range of these programs.
To renege on promises to pay subsidized farmers and other non-creditors, however, is not to default; rather, it’s to belt-tighten.
Election after election, Americans go to the polls and elect representatives who frequently promise to make the “tough choices” about allocating scarce government revenues. Now is the time to make those tough choices.
Nearly everyone agrees that paying for basic law and order is a top priority. No problem. The $87.8 billion in ready cash Uncle Sam will have on hand in August, after paying creditors, will more than cover those relatively modest expenses.
What about Social Security? If President Obama follows through on his threat to withhold paying August’s Social Security obligations of $49.2 billion, it will be because he chose not to send out Social Security checks. But the federal government can pay in full its $49.2 billion in Social Security obligations and its $28.6 billion in Medicare obligations — in addition to paying all of its creditors — and still have $10 billion remaining.
The problem is that $10 billion in August isn’t sufficient to pay for all of the other programs. An un-raised debt ceiling, therefore, will oblige Washington politicians to do what they’ve refused to do for generations: make tough choices instead of shifting the costs of today’s spending onto tomorrow’s taxpayers and continuing to spend wildly.
Of course, politicians could choose to default in order to keep more cash on hand in order to shovel subsidies to recipients who have often wheedled these pots of money through political pressure and influence. Such a move would indeed call Uncle Sam’s creditworthiness into question.
But if Washington pays all of its creditors and then — obliged by an un-raised debt ceiling — cuts spending, investors will know that the U.S. government is, for the first time in living memory, serious about keeping its fiscal affairs in good order.
Donald J. Boudreaux is professor of economics at George Mason University and an advisory board member for EconoStats. He blogs at www.cafehayek.com.
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