Wall Street Journal Op-Ed Downplays The Harmful Effects Of Government Default
Blog ››› ››› REMINGTON SHEPARD
A Wall Street Journal op-ed redefined the meaning of government default and downplayed its consequences to argue that Republicans might want to refuse to raise the debt ceiling in order to drastically cut federal spending.
In a Journal op-ed, David Rivkin and Lee Casey, two former Republican Justice Department officials, argued that the Constitution prevents the government from defaulting on the interest it owes on its debt, so a failure to raise the debt ceiling may actually achieve conservatives' goal of cutting government spending without causing default. In fact, even if the federal government continued to pay its interest payments after hitting the debt ceiling, it would default on other obligations with catastrophic effects for the U.S. economy.
Rivkin and Casey wrote:
Contrary to White House claims, Congress's refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America's outstanding public debt, with calamitous consequences for our credit rating and the world's financial system. Section 4 of the 14th Amendment provides that "the validity of the public debt of the United States, authorized by law . . . shall not be questioned"; this prevents Congress from repudiating the federal government's lawfully incurred debts.
This means that a failure to raise the debt ceiling--to prevent new borrowing--does not and cannot put America's current creditors at risk. So long as this government exists, and barring a further constitutional amendment, those creditors must be paid.
Once these false arguments are cleared away, the real issue in the debt-ceiling debate becomes clear: the proper level of federal spending. Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.
This is tough medicine and not to be administered lightly. If Republicans are serious about winning this debate, they must strive to convince the American people that such spending cuts are necessary.
However, a Treasury Department memo explained that even if the government paid interest on the debt, this "would merely be default by another name" because it would have to stop paying its other obligations. Indeed, the Congressional Research Service (CRS) found in a February 2011 report that if the government hit the debt ceiling, it would have to stop all military spending and cut nearly 70 percent of money paid to Medicaid, Medicare and Social Security and other programs.
Financial markets may well treat such a default exactly as they would treat a default on interest payments. According to a January 4 CRS report, if the government prioritized its debt obligations over its other obligations, "it is not clear whether financial markets would find this distinction to be significant" when deciding on whether or not to buy Treasury securities. CRS also stated: "Even if the government continued paying interest, it is not clear whether creditors would retain or lose faith in the government's willingness to pay its obligations."
Such a default would do significant harm to the U.S. economy. The Treasury Department stated that a default on obligations would cause a massive financial crisis with "catastrophic economic consequences" including the potential loss of "millions of American jobs." Similarly, during the 2011 debt ceiling fight, Moody Analytics chief economist Mark Zandi warned of the economic ramifications of a possible default, writing that "financial markets would unravel and the U.S. and global economy would enter another severe recession."
Deep federal spending cuts such as the ones that would be required from failing to raise the debt ceiling would be incredibly harmful to the economy as well. As Nobel Prize winning economist Paul Krugman explained, deep spending cuts have "a depressing effect on weak economies" and the adverse effect of such cuts "is much stronger than previously believed." Krugman added that Republicans' demands for deep spending cuts as part of the debt ceiling confrontation "would drive us back into recession."