U.S. Treasury Secretary Janet Yellen claimed on Sunday, 7 May that America will face “an economic and financial catastrophe” if the latest debt ceiling impasse is not resolved by early June, or a “constitutional crisis” if President Joe Biden orders her to continue accumulating debt above the ceiling.
Left unstated is a third option, to cut federal government expenditures. (RELATED: PETER ROFF: Washington, Stop The Public Posturing And Get This Debt Deal Done)
The U.S. government does not need to borrow new funds in order to function, or to service its existing debt. Interest paid on the U.S. national debt for 2022 was about $400 billion, or about 8% of net government revenue. It might be convenient to borrow to smooth out revenues and expenditures over time, but officials should have thought of that before maxing out the country’s proverbial credit card.
Clearly, taxes are sufficient to service the national debt.
Due to the short duration of the debt, about 20% of the principal falls due each year, but nothing prevents Treasury from rolling over existing debt. In other words, it can still borrow to repay a note, bill or bond coming due because that action would not breach the ceiling, though it would lead to a larger debt service if the principal must be borrowed at a higher rate of interest.
In short, a debt ceiling impasse alone cannot cause a default. Instead, the impasse should force the federal government to run a balanced budget, meaning that its expenditures could no longer exceed its revenues. How could a balanced budget create a financial catastrophe?
Likewise, how could a constitutional crisis occur unless something unconstitutional were done? Section Four of the Fourteenth Amendment states that “the validity of the public debt of the United States, authorized by law … shall not be questioned.”
That should dissuade Treasury from issuing any debt not authorized by Congress, as seems to be contemplated, or from attempting the trillion dollar platinum coin idea put forth in certain quarters, which is also clearly illegal. Yellen needs to take a page from Nancy Reagan and just say “no” to such proposals, which stem from brains addicted to borrowing instead of drugs.
How could the federal government run a balanced budget? Social Security and Medicare need not be touched, and indeed should not be as they are separately funded through the payroll tax.
Instead, non-essential federal workers need to be furloughed. There were about 2.9 million non-military federal government employees as of April. Past government shutdowns have proven that many federal government employees are indeed non-essential. Assuming 1 million of them are non-essential, at an average salary and benefits of $100,000 per year, that’s a $100 billion annual savings.
Uncle Sam could also sell off or lease (but not pawn, as that would be new debt) assets, just like poor folk have to when times get hard. It’s demeaning, but credit positive, especially if it entails jettisoning costly and unnecessary vestiges like the Post Office and Amtrak.
In short, don’t be fooled by rhetoric or accounting shell games. The U.S. government need not default on the debt or cause a constitutional crisis due to the debt ceiling impasse. Policymakers just need to face reality.
Robert E. Wright is a Senior Research Fellow at the American Institute for Economic Research.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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