The Default Lie

Statement

It is always a challenge to have reasonable conversations about difficult issues. However, it is almost impossible to do so if people have bad information about those issues. For example, in August some people thought that the government shutdown would prevent the implementation of Obamacare. Before that, many folks believed that that they could keep their existing healthcare coverage, the implementation of Obamacare notwithstanding. In both circumstances, that was bad information, and as a result we weren't fully able to have productive discussions on the new law and its implications.

There is a similar difficulty right now when it comes to discussing the debt ceiling, as epitomized in this paper Wednesday ("Here's why the debt ceiling is important.") Indeed, while the column is factually wrong in many ways, it is its reliance on what I call The Default Lie that makes it so dangerous.

The Default Lie is simple, and by now you have heard it many times: if Congress does not raise the debt ceiling, the federal government will default on its debt obligations. The results, the Default Liars suggest, are cataclysmic: stock markets would crash, the world economy would be destabilized, the cost of borrowing would skyrocket, etc..

There is one problem: the debt ceiling and debt payments are not the same thing. Put another way, "[T]he debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit ... and a default." That isn't just me saying that, by the way, it is Moody's, the international rating agency.

Indeed, Moody's goes further: "We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact."

Not exactly what the Default Lie has been selling, is it?

Anyway, Moody's (and others, who have been saying the same things since July of 2011, the last time we faced a debt ceiling impasse) didn't make this up out of thin air. Believe it or not, bumping up against the debt ceiling is not that uncommon: we came close to breaching the ceiling in both the 1980s and the 1990s. In 1985, the Government Accounting Office opined that "the Secretary of the Treasury does have the authority to choose the order in which to pay obligations of the United States." A decade later, the Attorney General suggested that the President has "inherent power (to prioritize payments) in the event of a debt crisis."

This just makes sense, plain and simple. The President, in charge of the executive branch which includes the Treasurer, is supposed to pay the bills: "The Secretary of the Treasury shall...prepare plans for ...managing receipts of the United States Government and managing the public debt. " That is the law (13 USC $1321). Indeed, that language has been almost unchanged since 1791. We even added the 14th amendment in 1868 to guarantee that the public debt "not be questioned."

Simply put: we pay our debts. First. Debt ceilings or not.

Importantly, there is plenty of money coming in to pay the interest on our debt. And the only person -- the only one -- who has the power to default in such a situation is the President of the United States.

The Default Lie isn't the only place that the column is wrong --- it suggests, for example, that the 14th Amendment was "added (to the Constitution) precisely to (prevent) a faction of Congress using the debt ceiling as a bargaining chip...." , which is impossible, as the 14th Amendment was ratified in July of 1868 whereas the debt ceiling didn't even exist until 1917 --- but those are secondary issues.

All of that being said, the column does contain one kernel of truth. When dealing with the repercussions, it suggests, "painful choices would have to be made."

We are $17 trillion dollars in debt. We have balanced our budget five times in the last 50 years. We are addicted to spending. Yes, getting off that addiction is going to require "painful choices." And anyone who tells you anything else is lying to you.

Not raising the debt ceiling has significant and tangible real-world implications. About 25% of the government would immediately lack funding. There would be enough money to pay Social Security and Medicare, and to fund the military, but not enough to also fund FBI investigations, USDA food inspections, or food stamps. That would be a real government shutdown -- not the "slowdown" we have today where most of the government is open. But that is a far, far cry from saying that stock markets would crash, we would lose reserve currency status, and the world would basically end.

We need to raise the debt ceiling. But we need to do so as part and parcel of addressing the reasons for why we need to raise the debt ceiling: we spend more than we can afford. And right now there is no real plan to ever pay back our debt. Borrowing money without ever intending to pay it back isn't debt, it is theft.

That needs to change. But the only way we will be able have meaningful discussions about how to fix things is to do so without fear mongering, scare tactics, or political demagoguery, on either side.

Source