Drilling Down on the Debt Ceiling Crisis

I’ve been trying (unsuccessfully) to ignore the steady stream of reports and commentary on the debt ceiling crisis. And I’d no intention of writing about it until I noted a disturbing shift in the conversation.

I’m not talking here about the statements welcoming a default from a couple of the House Tea Party types — Congressman Ted Yoho (R-FL), for example, who claims “it would bring stability to world markets.”

My concern is rather that some are saying the crisis isn’t all that bad because the government could still pay bondholders — and thus, there’d be no default.

Moody’s Investor Services gave this narrow definition credibility with a widely-reported memo that implicitly defined “default” as only failure to pay interest and principal on publicly-held debt.

This is something, it said, the Treasury Department could clearly do, even after it had exhausted the time it’s been buying through extraordinary measures.

Needless to say, right-wing sources seized on the memo to debunk Treasury’s warnings about the macroeconomic impacts of even a prospective default, e.g., a jittery stock market, higher borrowing costs.

It’s all a not-to-worry, said the Heritage Foundation, among others, because Treasury will take in enough revenues to satisfy its bond obligations and most of the government’s “non-debt obligations” over the course of the year.

In the meantime, it can “prioritize payments,” i.e., defer paying those “non-debt obligations” in order to keep current with bond interest and repayment of principal on dates due.

Some Republicans in Congress have been making this argument for awhile now. Others of various political persuasions have said it’s not that simple.

Treasury may not have the legal authority to pick and choose which bills to pay. Besides, its payment systems aren’t set up to prioritize, as its Inspector General reported to the top Republican on the Senate Finance Committee during the run-up to the last debt ceiling crisis.

Now we’re hearing more about what would happen if Treasury did prioritize — virtually all of it that I’ve seen on a macroeconomic scale.

Goldman Sachs economists estimated the impacts of the required pullback in spending at 4.2% less economic growth over the course of a year — enough to send us back into a recession.

New York Times columnist Paul Krugman argues that we could be looking at a 10% decline — and a 5% rise in the unemployment rate — because the government would have to make more spending cuts to offset the loss of tax revenues and rise in safety net spending that always occur during a downturn.

Still, we’re told, Treasury could perhaps postpone some payments — not interest on the debt, of course, but other big-ticket obligations, e.g., reimbursements to Medicare and Medicaid providers, Social Security and food stamp benefits, veterans benefits and military pay.

Wonkblogger Ezra Klein borrows a table from the Bipartisan Policy Center to show what that could look like over the short-term.

We see that the last round of Social Security payments for October would be two days late. The next round nearly two weeks late. And then …?

I single these out because a post by Dean Baker at the Center for Economic and Policy Research evoked a down-to-earth, personal response of the kind we haven’t heard enough of.

Baker was essentially pooh-poohing the alarm bells about higher interest rates. “Hitting the debt ceiling would undoubtedly be bad news, ” he said, “but an earth-shaking disaster is pretty unlikely. Everyone will get their money, with interest, even if it is a big late.”

Which prompted the following: “I don’t know about you, but I pretty much live from Social Security check to the next Social Security check, and toward the end of the month I go to cheaper brands of cat food (not from steak to chicken like those plutocrats advocating the Great Betrayal). To me, ‘a little bit late’ means ‘a little big hungry.'”

I suppose food stamp recipients, whose benefits could also be put into the pipeline to conserve cash for bond interest, would say the same. Likewise some veterans and families of active military servicemembers.

And what would happen to people who need health care from Medicare and Medicaid providers who’ve been told their reimbursements are on hold is anybody’s guess. We have a tiny window into the prospects here in the District of Columbia, where Medicaid payments are on hold until Congress approves our budget.

Sure, all these de-prioritized payments could have large-scale economic impacts — and these would surely have personal consequences. But let’s not forget the hardships that would set in swiftly for those who rely on social insurance and safety net benefits.

I understand that these concerns may seem irrelevant now, what with the deal the Senate leaders are reportedly putting the final touches on. But even if House Speaker John Boehner lets it pass without a majority of his caucus in favor (big if), we’ll be right back in the same place in February.

Everyday ordinary people pawns in political brinkmanship games — and under the radar of most economic prognosticators too.


One Response to Drilling Down on the Debt Ceiling Crisis

  1. zoom314 says:

    Just what the USA doesn’t need more of, Sabotage of the Economy by Repubs/baggers in Congress, who as Rep King(R-NY) said Republicans are responsible for the Shutdown and had ignored 18 attempts by the US Senate to send people to the Conference Committee to hammer out the differences in the two budget bills.


    I can’t wait for Nov 4th, 2014, that is Election Day in 2014, I’m voting for Democrats Only, Voting Democrats out only allows more Republicans to enter or keep their hold on office, We the people of the USA need less Repubs/baggers in office as their insane ideas will only lead the USA into another Great Depression.

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