Via Politico, expect to hear a lot of this from The One and his team over the next week to counter Tom Coburn’s and Rand Paul’s message that hitting the debt ceiling will not trigger a default. The Treasury Department takes in roughly 10 times as much revenue each month as it pays out in interest to creditors, note Coburn and Paul; all Congress needs to do is pass a law ordering Treasury to pay creditors with available revenue before anyone else is paid — i.e. “prioritization” — and the threat of default goes poof. Okay, says Obama economic advisor Gene Sperling, but let’s be clear on one thing: Hitting the debt ceiling does amount to a technical default. Creditors may get paid via prioritization, which will mitigate the damage to the full faith and credit of the U.S., but many other people who are owed checks from Treasury won’t be. Former Bush administration econ wonk Keith Hennessey explained the difference between an actual default and a technical default earlier this year, after the big (and inevitable) fiscal cliff cave:
If the third deadlines (cash crunch after no debt limit increase) passes without legislative action, at some point Treasury will not have enough cash on hand to pay all of its obligations on time. The President must then choose whether to miss or delay debt payments to those holding Treasury debt, or instead to delay payments to others owed government funding, including Social Security beneficiaries, veterans, States owed payments for Medicaid and welfare and highways, and defense and other contractors for goods and services they provide to the federal government.
Missing or delaying a debt payment on Treasury debt is called default. Missing or delaying other government payments is sometimes called technical default or defaulting on our obligations. While default sounds like technical default, they’re quite different. The first directly threatens the full faith and credit of the U.S. government as a borrower and is a direct attack on our government’s credit rating and borrowing costs. The second is terribly irresponsible, and the government would be sued by whoever’s payments were delayed, but it’s a full step less egregious than defaulting on Treasuries.
Tony Fratto, another Bush economic advisor, said around the same time earlier this year, “Is the government really going to be in the position of withholding benefits, salaries, rent, contract payments etc., in order to pay off Treasury bondholders? That would be a political catastrophe.” That’s basically Sperling’s point here — technical default, while not quite the meteor strike that actual default would be, will nonetheless wreak some legal and economic havoc by choking off payment of Treasury’s obligations to non-creditors. Uncle Sam won’t be a deadbeat to holders of U.S. securities but he might be to Social Security recipients, which may or may not have some impact on the government’s full faith and credit (and will almost certainly trigger a new downturn in GDP). What you won’t hear Sperling say, of course, is that the extent of the damage from a technical default is a measure of just how heavily the feds depend upon borrowing to keep the country running. That’s the whole point of using the debt ceiling for leverage (or it was, before this became a fight over ObamaCare): The fact that Treasury trembles at the prospect of having to run the country for a few weeks without incurring new debt illustrates, perhaps, that we should cut spending to lighten our debt load. And that, of course, will be the Coburn/Paul countermessage to Sperling’s countermessage. Of course hitting the ceiling will do some damage, they’ll say. But what’s the White House’s plan to avoid hitting the real debt ceiling?
Anyhow. I maintain that Boehner will fold rather than risk even a technical default so all of this is academic. I think. Exit quotation from NRO’s Jonathan Strong:
Some House conservatives talking about a clean short-term debt ceiling so that fight doesn't interfere w shutdown fight
— Jonathan Strong (@j_strong) October 7, 2013
Update: Another conservative, James Pethokoukis of AEI, warns that technical default would be a catastrophic “success”:
How many other GOPers are Yohovians? Hopefully not too many. Because to believe in Yohonomics, you have to believe that no matter how deep and quickly and haphazardly government spending is cut, the private sector would seamlessly and instantaneously pick up the slack. And there would be a lot of slack. Goldman estimates the revenues Treasury will receive in the month following the October 17 deadline would equal only about 65% of spending going out, “implying a far greater fiscal pullback than will occur as a result of the ongoing shutdown.”
Would private investment immediately replace all that lost consumption? Economist Alberto Alesina comes about as close to endorsing the idea of “expansionary austerity” as you find with this cautious statement: “A deficit-reduction program of carefully designed spending cuts can reduce debt without killing growth.”
But what Yoho is talking about isn’t carefully designed at all. And slower growth, don’t forget, also means less tax revenue. It is possible to shrink government without really improving the debt situation. Indeed, the collapse in eurozone nominal GDP is what’s been driving that region’s debt crisis.