”Failure to raise the debt limit would force the United States to default,” Treasury Secretary Timothy F. Geithner panted in a May 13 letter to Sen. Michael F. Bennet, Colorado Democrat. “A default would inflict catastrophic, far reaching damage on our nation’s economy, significantly reducing growth, and increasing unemployment.”
Mr. Geithner’s hyperventilation ignores the experiences of millions of Americans who have refused Visa’s and MasterCard’s offers to boost their credit ceilings. Ignoring one’s bills can trigger default; leaving one’s borrowing threshold intact does not. Keeping credit lines unchanged is a first step toward spurning further debt. Responsible cardholders will eat at home more often and, perhaps, shop at Joseph A. Bank rather than Hugo Boss. The resulting savings then go straight to debt reduction.
“It’s not accurate at all to equate a failure to raise the debt limit with a default on our Treasury obligations,” Sen. Patrick J. Toomey, Pennsylvania Republican, tells me. “That’s totally false. Tax revenues will be nearly 10 times the amount of money needed to avoid defaulting on our debt.”
Indeed, the Congressional Budget Office (CBO) forecasts $2.23 trillion in federal tax revenues for fiscal 2011 and net interest expenses of $213 billion. Mr. Geithner will have plenty to pay bondholders.
U.S. Code Title 31, Section 3123, says, “As the [Treasury] Secretary considers expedient, the Secretary may pay in advance interest on the public debt by a period of not more than one year.” So, Mr. Geithner can pay bondholders first and, thus, avoid default - unless he wants it.
“The administration should send an unambiguous message that under no circumstances would they permit a default on our debt,” Mr. Toomey adds. “The administration should reassure markets rather than scare markets.”
President Obama could send this signal by endorsing and ultimately signing Mr. Toomey’s Full Faith and Credit Act. If the debt cap remains untouched, Mr. Toomey’s proposal would prioritize Treasury disbursements to Social Security recipients and bondholders. If the latter receive their interest and principal, by definition, there would be no default.
Alas, Mr. Geithner prefers to mount his backhoe and claw America even further down the debt hole - with predictable results.
“Nations that run up high debt-to-[gross domestic product] levels through deficit spending now may be compromising their ability to survive the next recession,” warns Dr. Polina Vlasenko of the American Institute for Economic Research. She found that between 2007 and 2009, deeper debt and deeper downturns went hand in hand.
For instance, in late 2007, Canada’s household, business and government debt totaled 233 percent of GDP; its economy slipped a comparatively mild 3.4 percent during the Great Recession. America’s debt equaled 329 percent of GDP; the economy slumped 4.1 percent. The 16-nation eurozone (388 percent) shrank 5.4 percent. Japan (572 percent) shriveled 10 percent.
Such sobering facts are lost on Washington’s spendaholic Democrats.
Medicare is careening toward bankruptcy in 2024 - not in 2029, as its trustees predicted just last year. Meanwhile, Standard & Poor’s has placed Treasurys on “negative watch,” foreshadowing a downgrade from triple-A status. Nonetheless, Democrats seem uninterested in reducing spending or limiting government. Last month, they had to be dragged - stomping and hollering - to accept a $38.5 billion spending cut to avoid a government shutdown. Now, CBO calculates, that bipartisan deal actually increases spending by $3.2 billion this fiscal year. Once again, Republicans were bamboozled and Democrats keep spend, spend, spending along.
Washington should leave its credit line in place, stop borrowing and spend only the revenue it generates - just as do about 310 million Americans who neither borrow from Beijing nor print their own cash. If Democrats want more money to spend, they should rejuvenate this listless economy - through lower tax rates, deregulation and free trade. Commercial vitality will yield higher tax proceeds.
Failing to raise the debt ceiling is not synonymous with default. It means finally denying Democrats that “one last, little round of drinks” they crave and, instead, driving them to Trembling Hills to dry out.
Deroy Murdock is a syndicated columnist and media fellow with Stanford University’s Hoover Institution.