Hitting the debt ceiling doesn’t mean default

Justin Paulette Fellow, Ashbrook Center for Public Affairs
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The debt ceiling needn’t be feared as a doomsday gateway to default. The Republicans’ greatest failure over the past weeks has been their almost complete inability to convey this simple truth to American citizens and global markets.

Let’s start with a short recap. The debt limit is a product of congressional acts in 1917 and 1939 which relieved Congress of the burdensome responsibility of authorizing every individual case of federal borrowing. Instead, these laws established an aggregate limit on total federal borrowing. The limit is continuously raised as the U.S. accrues ever-increasing debt. And the opposition party often extracts concessions (sometimes of a completely non-fiscal nature) in exchange for higher spending limit. When then-Senator Obama opposed George W. Bush’s request to raise the debt ceiling as “a failure of leadership,” national debt stood at $8.1 trillion. The debt ceiling to be reached on October 17th has doubled to $17 trillion.

Spurred by Tea Party demands for fiscal responsibility, Republicans are refusing to allow another debt increase without concurrent budget reforms. President Obama has responded by rebuking “hostage-taking” Republican “extortion” and warning of a “catastrophic” default on America’s national debt.

Yet fears of a default are unfounded. There is no reason for America to miss payments on a single bill. If Republicans refuse to raise the debt limit when the government has reached its borrowing limit, Congress will simply be forced to live within its means by rerouting current spending to previously accrued debt. The situation is analogous to an individual spending in excess of his income and putting the difference on a credit card. When the card’s limit is reached (and requests to increase the limit are finally denied), he must either 1) reduce present spending to pay past debts or 2) continue spending and default on his bills. The latter option leads to the lights being turned off, the car being repossessed and, eventually, bankruptcy. The reasonably responsible person will, therefore, choose to reduce spending.

If Republicans continue to push to keep the debt ceiling where it is, they could force responsible decision-making on the federal government. The Fourteenth Amendment requires that the government honor its public debts and House Republicans have passed the Full Faith and Credit Act to mandate government spending priorities to avoid default if the debt ceiling is reached. Put simply, if America cannot borrow and accrue further debt, the nation will have insufficient funds to cover both interest payments on debts and all the other day-to-day expenses of the government. But a default on American debt will only occur if the government prioritizes routine spending above debt spending.

The interest payments on America’s debt total approximately $20 billion per month, while monthly tax revenue is about $240 billion per month. America presently spends about $290 billion monthly. Hence, the federal government borrowed 31 cents of every dollar spent in 2012. Nevertheless, the federal government’s $240 billion monthly income is far more than is required to pay $20 billion worth of monthly debt interest. The government will not, however, receive enough to pay for its anticipated discretionary spending projects (totaling about $100 billion monthly). Default is only a threat, then, if Obama’s Treasury Department makes the incomprehensible decision to fully fund America’s $100 billion in discretionary projects at the expense of the nation’s $20 billion in debt interest.

Some of those agencies that are currently shut down would need to remain so. But does anyone in America believe that the nation should default on its loans so that the 93 percent of the EPA workforce currently furloughed as “non-essential” can return to performing non-essential tasks?

In effect, refusing to raise the debt ceiling would be a de facto balanced budget amendment. Or, put another way, it would force the government to spend only what it makes and stay within its budget. While this scenario represents an unprecedented, broadsword approach to spending cuts, it completely negates the possibility of default. But for such a gambit to be executed in a responsible manner, Republicans must immediately convey three ideas.

First, Republicans must calm the markets and ensure investors that they will be paid. China recently requested that the U.S. “resolve in a timely way the political issues around the debt ceiling and prevent a US debt default to ensure the safety of Chinese investments in the United States.” Republicans should immediately respond that the House has already proposed legislation – which merely awaits Democratic apparoval – to ensure fiscal obligations to foreign and domestic investors are guaranteed. The greatest danger in this scenario is a market downturn. Republicans must inspire confidence that a decision not to increase the debt ceiling is a fiscally responsible measure to control deficit spending that in no way threatens default.

Second, Republicans must establish a plan for reasonable spending cuts in a restrained budget that targets non-essential spending in the federal bureaucracy. A balanced budget which reduces spending such that the government’s income is sufficient to pay past debts and present expenses without further borrowing would be ideal. The GOP must offer sensible, popular cuts and be prepared to hold Democrats responsible for any unnecessarily punitive shenanigans (à la cordoning the WWII monument).

Third, Republicans must convince the public that uncontrolled deficit spending is a critical danger, far more dangerous than the momentary pain associated with spending cuts. They must remind the nation that forecasts of an impending apocalypse accompanying the sequester proved false and that the reduction of America’s credit rating was tied to the unrestrained accumulation of debt. The necessity of fiscal responsibility must be their ceaseless message.

These goals may require kicking the can down the road for another month or two, decoupling the debt ceiling debate from the government shutdown debate and allowing public discontent with the GOP over the shutdown to subside. The government shutdown – a seemingly disastrous campaign on the part of the GOP – must be wrapped up swiftly and attention turned to the country’s long-term deficit and debt problems.

The debt ceiling is a legal apparatus intended to force the government to control spending and live within its means. This is a rare instance in which the purpose of a law is easily understood and agreed upon by nearly all Americans. Republicans should use it to require the government to balance its checkbook. If Republicans are committed to fiscal responsibility through spending restraint, they can achieve their goal by teaching the public not to view the debt ceiling as a potential default, but rather as a mandatory spending cut.