President Obama wants everyone to know that unless he gets authority to borrow a few extra trillion dollars by Oct. 17, the sky will fall. The consequences for everyone will be “dramatically worse” than a government shutdown. If you think the National Park Service rangers are tough, so the message goes, wait until the Chinese bankers arrive. The president says “every economist” agrees that failure to extend the debt ceiling — the credit limit — would mean a default of the United States government, and that would trigger collapse, calamity, catastrophe and maybe even inconvenience. We urge the president to take an aspirin and lie down until he feels better.
By insisting on the impossibility of disagreement, the president cheapens his position. He seeks political advantage by spooking the financial markets with hyperbole. The reality is that the $16 trillion private economy is far more resilient than the arbitrary government deadline suggests. If Congress and the White House remain in a standoff next week, and the president doesn’t get his way, Gramps and Granny will continue to get their Social Security check — if the administration chooses to send it. The Treasury has ample reserves to cover it.
The math is simple. The federal government expects to collect $2.8 trillion this year from taxes. Debt service for fiscal 2013, according to the Treasury Department, amounts to just over $415 billion. The October interest payment is a relatively modest $13 billion, a consequence of the current near-zero interest rate set by the Federal Reserve. As long as these interest payments are made, the loans are in good standing. The nation is not in default. If the administration does nothing, the earliest the federal government could miss an interest payment would be Nov. 15. The soonest Social Security payments could be disrupted is Nov. 1.
That only happens if the Obama administration deliberately chooses to make it happen. The federal government has the legal discretion to arrange the order of its payments. The Social Security Trust Fund can be used to make sure the checks are in the mail. The government even has the last resort, available to every family: the garage sale. Putting $2 trillion in assets on the auction block is extreme, but the government has accumulated far too much real estate, anyway, particularly in the West. It would be a good thing, for one example, for the federal government to sell the 80 percent of Nevada it owns to private buyers.
The debt-ceiling debate, or what would be a debate if Mr. Obama gets over his pout and begins to talk to the Republicans, is kabuki theater meant to distract from the real problem, Washington’s spending addiction. Raising the debt ceiling through a “clean” continuing resolution would be as irresponsible as laying in a steady supply of clean needles and smack for a dope addict.
What federal borrowing does is enable the current generation of politicians to rob our children and grandchildren. Over the next decade, the federal government will spend more than $6.3 trillion, borrowed from future generations, and even that is estimated from the rosiest economic assumptions. This will double the debt service burden, and the impoverishment of the United States is inevitable.
“Federal borrowing reduces national savings,” the Congressional Budget Office explains, which means that “over time, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced.” Small-business firms will find it harder to borrow money. High school and college graduates will get lower wages, if they can find a job. Taxes will soar to meet the cost of servicing the debt. This is the actual fate worse than default.
Congress will probably blink next week, and the president will get a short-term fix. Unless the House insists on real entitlement-spending reform as a part of any deal, avoiding default might actually turn out to be the worst outcome in the long run.