What exactly will happen if Congress and the Obama administration don’t reach an agreement to raise the debt ceiling by late February, when the Treasury Department will run out of money to pay federal bills? Nobody knows—and that’s exactly what’s so terrifying about it.
Some Republicans, led by Sen. John Cornyn of Texas, have tried to characterize the running up against the debt ceiling as a form of government shutdown similar to what happened during the Bill Clinton-Newt Gingrich appropriations disputes of the mid-‘90s. In the Cornyn view, the only difference is that the shutdowns of the ‘90s only affected discretionary spending (not Social Security payments, or “essential” government services). Hitting the debt ceiling would impair all government spending, including forcing us to default on payments to bondholders. Hence there’s some Republican support for an idea from Sen. Pat Toomey (R-PA) to pass a bill specifically giving bond payments prioritization in the queue.
But most Democrats believe that, legally, a debt ceiling crash would actually be the opposite of the government shutdown scenario induced by a lapse in appropriations. What happened in the ’90s (and would happen again later in March if we resolve the debt ceiling issue) is that the annual appropriations bills that fund the government’s discretionary programs expired. With no appropriation bill for, say, the National Park Service, U.S. landmarks such as Yosemite and the Grand Canyon would have to shut down. Nobody can do work, and nobody can get paid. Other government functions—debt service, Social Security, Medicare, Medicaid—are legally different and continue on autopilot. Such an appropriations lapse has nothing to do with the amount of money available. An appropriations lapse could occur in a time of budget surplus, and if it continued tax revenue would just keep piling up as money flowed in much faster than it flowed out.
The debt ceiling problem is the opposite. Congress has enacted laws mandating that the government spend money and collect only a certain amount in taxes, with borrowing making up the difference. And we’re about to reach the limit of the Treasury Department’s authority to borrow money to fill the gap between the statutorily mandated revenues and the statutorily mandated expenditures. Silly as it sounds, I continue to think the most sensible solution to this dilemma would be for the Treasury Department to mint large denomination coins in order to meet its obligations. But the Obama administration and the Federal Reserve have taken that option off the table. This means that if Congress doesn’t act to raise the debt ceiling, we face not a shutdown of government operations, but a constitutional crisis in which the executive branch has no legal way to move forward. Eric Posner has argued in Slate that the president should simply brush the debt ceiling aside, a course the White House has also ruled out.
The economic problem here, however, is that neither the coin nor the brush-aside option would necessarily prevent a financial market meltdown. A great deal of the global financial system is based on the idea that U.S. government debt is not only safe, but unquestionably safe. Anything that raised substantial legal questions about the status of various payments would ruin that. At first blush it seems logical that the government could perhaps respond by simply choosing which bills to pay and which not to pay, but there’s no legal authority to do this either, and Treasury’s computers aren’t set up to do it. On an average day about 2 million separate invoices come in.
Treasury’s official line is that instead of trying to prioritize they’ll simply delay. When not enough money comes in from daily tax revenue, nobody will get paid. Then, when tax revenue leaves the Treasury flush, they’ll pay some old bills. That means the global economy won’t necessarily turn into a pumpkin the minute the clock strikes midnight, but it does mean that with each passing week the government will be further and further behind on all its bills. The money taken directly out of the economy would amount to a hit of about 7 percent of GDP.
That’d be almost as bad as the worst quarter of the Great Recession. But the real cost would be the risk of broader chaos in the financial system. If the government can’t pay its bills on time, then some of the people to whom it owes money—whether that’s a construction company, a grandma on Social Security, a doctor treating Medicare patients, a public school expecting Title I funding, a student awarded a Pell Grant, whatever—won’t be able to pay their bills on time. That’s going to mean a rise in missed payments on mortgages, car loans, and credit cards. That means bank failures and sharply reduced credit availability even for people who aren’t specifically counting on a check from Uncle Sam. Debt financed investment—construction projects, vehicle purchases, small business expansions—will likely grind to a halt as nobody wants to lend out new money until they’re sure they’re getting paid what they’re already owed. That will create a secondary collapse in incomes, and an additional wave of business and citizens unable to pay their bills.
A total disaster, in other words. And a very avoidable one. Congressional Republicans want to cut spending. And just a few weeks after we hit the debt ceiling, existing appropriation bills will expire, which will give them a golden opportunity to appropriate less money that Obama wants. Or to agree to match Obama’s discretionary spending requests if he’ll agree to cuts in entitlement programs. Or whatever it is they want to do. A shutdown over appropriations bills would be annoying and problematic in many ways, but survivable. What they’re talking about doing now—forcing the government into non-payment of bills it’s already accrued—would be a catastrophe. Corny as it sounds, they really ought to consider the option of just doing the right thing, raising the debt ceiling, and moving on to fighting about appropriations.