I freely admit to not knowing the gory details of how federal government appropriations and spending go, but the claim that not increasing the debt ceiling will mean “default” seems to me to be pure demagoguery. The argument being made most often is that without being able to borrow more we won’t be able to have the resources we need to pay interest and principal on existing debt. But is that really true?
Not being able to borrow any more does not mean that the income (or wealth) isn’t there to pay interest on existing debt. Think about a typical household for a moment. Suppose you have several credit cards, all but one of which are at their maximums. Now you max out the last one and none of the card providers is willing to increase your credit limit. What does this mean for you? One thing and one thing only: you can’t borrow any additional money. It does not, by itself, mean that you will default on that or the other credit cards.
What it does mean is that if you can’t borrow more and you have debt and interest payments you must make, then you must either a) find additional income; b) liquidate some assets; and/or c) reduce expenditures elsewhere to ensure you can make those payments. Those are the options facing you. The only way to argue that you will be in “default” and unable to pay your debts is you refuse to make a choice among those options.
The situation facing the federal government is analogous. If the debt limit isn’t raised, Congress must pick one of those three options. I want to focus on spending reductions because those are the one they can most easily control. It’s true that there’s a federal budget they must live within, but why can’t funds that are allocated for specific expenditures be re-allocated toward principal and interest payments on the debt? If our imagined household suddenly can’t borrow more, it could just take some money that it was planning to use to buy that LCD TV and use it to pay the credit card minimums.
There’s no non-political reason that the government can’t do the same by taking funds from budget allocations and re-route them to pay interest and principal. As far as I know there’s no legal reason Congress couldn’t say “we don’t need those new bombers we were going to buy, so let’s shift those funds to interest payments?”
Doing so may not be politically easy, but to say that not raising the debt limit will lead to default is just another way of saying that politicians refuse to make the difficult choices that households make all the time. And turning that into claims of financial apocalypse is indeed pure demagoguery.
Author:
Steven Horwitz
Charles A. Dana Professor of Economics
St. Lawrence University
