Big “showdowns” in Washington are always hype, with both sides distorting the facts so that the hapless citizen–whether he watches Fox or CNN–focuses on irrelevant details and misses the big picture. When it comes to the recurring conflict over raising the debt ceiling, here are two obvious facts that explode just about everything that the Republicans and Democrats are saying:
OBVIOUS FACT #1: Refusing to raise the debt ceiling is equivalent to insisting on a balanced budget. Any Republican politician who has (a) championed a balanced budget amendment but lamented the difficult road ahead while (b) voted to raise the debt ceiling, is obviously insincere (or doesn’t understand accounting). Either way, genuine fiscal conservatives cannot take such a person seriously anymore.
OBVIOUS FACT #2: If the debt ceiling is not raised, the government by no means needs to default on its outstanding bonds. There is an enormous amount of revenue flowing in, with which the government could pay existing creditors, as well as people owed money through Social Security, pensions to retired government workers, etc. Thus when President Obama and other Democrats say that if they don’t get their credit limit raised, they will crash the Treasury market, they are (using their rhetoric) holding the global credit markets hostage to their spending goals.
To see just how absurd it is to link the debt ceiling to a Treasury default, consider the following charts which are based on the 2014 Fiscal Year (which runs from October 1, 2013 through September 30, 2014) as estimated by the CBO in May:
As the above charts indicate, back in May the CBO projected a budget deficit of $560 billion for Fiscal Year 2014 (which just started on October 1). So if the debt ceiling isn’t raised, it basically means the government needs to trim $560 billion from its total spending of $3.6 trillion, a reduction of about 15.6% of total spending.
Is such a statement the same thing as saying the Treasury needs to default on its outstanding debt? Of course not. Of the major categories listed above, “Net interest” on existing federal debt is the smallest, representing only $237 billion / $3.6 trillion = 6.6% of total spending. There is no reason the government has to place “Net Interest” on the chopping block first, ahead of Defense and Nondefense Discretionary spending. I separated out all “Mandatory” outlays to show that those don’t need to be touched, either, in order to balance the budget.
It would take about a 48% reduction in Defense and Nondefense discretionary spending, in order to balance the budget and incur no further debt. The government could maintain its payments to Social Security, Medicare, Medicaid, and all other “Mandatory” programs, as well as interest to existing bondholders. The situation would change, moving forward, as Social Security and Medicare requirements grew larger, but the point is that even with no increase in the debt ceiling, there is nothing in the arithmetic forcing the Treasury to default on bondholders anytime soon, unless it chooses to do so.