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The Truth About the Debt Ceiling and Default

The Truth About the Debt Ceiling and Default

By Sen. Pat Toomey - April 22, 2011

As we have been approaching the $14.3 trillion statutory limit to federal borrowing, I and many of my colleagues have insisted on real spending reforms now as part of any agreement to allow still more government borrowing. Unfortunately, the administration has insisted instead that we should simply raise the debt limit unconditionally.

Most disturbingly, this administration has resorted to repeatedly mischaracterizing and exaggerating the consequences of a delay in raising the debt limit. Apparently, they hope to intimidate Republicans into capitulating to their wishes to continue unconstrained deficit spending. This is a dangerously irresponsible tactic. It needs to end.

On last Sunday morning's talk shows, Treasury Secretary Timothy Geithner once again implied that, if the debt limit is not promptly raised, the United States will default on its debt and the resulting catastrophe will be the fault of congressional Republicans.

But Secretary Geithner knows that congressional delay in raising the debt limit will in no way cause a default on our national debt. If Congress refuses to raise the debt ceiling, the federal government will still have more than enough money to fully service our debt. Next year, about 7 percent of all projected federal government expenditures will go to interest on our debt. Tax revenue is projected to cover at least 70 percent of all government expenditures. So, under any circumstances, there will be plenty of money to pay our creditors.

Moreover, as the Congressional Research Service has noted, the Treasury secretary himself has the discretion to decide which bills to pay first in the event that a cash flow shortage occurs. Thus, it is he who would have to consciously, and needlessly, choose to default on our debt if the debt ceiling is not promptly raised upon reaching it. It takes a lot of chutzpah to preemptively blame congressional Republicans for a default only he could cause.

To be sure, absent an increase in the debt limit, the resulting sudden, drastic spending cuts would be very disruptive and undesirable. That is why I have always argued that we should raise the debt limit once we have adopted the needed spending cuts and budgeting reforms. But disruptive and undesirable spending cuts are not the same thing as a catastrophic default on our debt.

In fact, Secretary Geithner implicitly acknowledges that failure to increase the debt limit need not lead to a default on our debt. But he dismisses this fact by arguing that failure to make any obligated federal payments would be seen by the markets as though it were a debt default. Thus, he equates furloughing federal workers; postponing welfare payments; and delaying implementations of federal contracts, for instance, with failing to make interest payments on our national debt. This assertion is absurd, and the market demonstrated as much last week when it ignored the federal government's near shutdown, which would have resulted in a host of delayed payments.

The markets do not equate failure to make any and all federal payments with default, nor do they believe - at least for now - that the Treasury secretary will willingly choose default. I don't believe he will either. But Secretary Geithner is implicitly threatening to do just that with his doomsday predictions that could only materialize at his own hand. These threats are dangerous, and they should stop.

This rhetoric is particularly unwise in the current fiscal and monetary environment. The bond market has plenty of reasons to be nervous and skittish due to the irresponsible policies of this administration: runaway spending; record deficits; mounting debt; a budget proposal that refuses to take on our challenges in a serious way; the Federal Reserve monetizing nearly half of this year's deficit; record commodity prices; and a recent warning by Standard & Poor's that the outlook for America's maintaining a AAA credit rating has turned negative. These are plenty of reasons for investors to be nervous; it is unwise for Secretary Geithner to give them another.

If the secretary truly wanted to eliminate any specter of default, then he would have supported my legislation, the Full Faith and Credit Act. This bill would require the Treasury to prioritize payments on our debt in the event the debt ceiling is not raised, thus ensuring the U.S. government does not default.

Instead, the administration has ratcheted up its demands for an unconditional increase in the debt limit, while offering to consider spending cuts and reforms detached from the debt limit vote. In a nod to public pressure, they have called for "parallel tracks" in which we would raise the debt limit now, and continue negotiating spending and deficit reductions in the future.

But, it is clear from the administration's record over the past two years that it has no interest in cutting spending and instituting structural spending reforms. In fact, the president has expanded the size and cost of government at every turn. This administration is largely populated with people who believe that massive deficit spending cures economic ills. Why would they want to curb spending now?

This is the same administration that gave us an $800 billion stimulus and said that wasn't enough; the same administration that rammed a massive $1.445 trillion health care bill through Congress; the same administration that recently unveiled a 2012 budget that continues to add $9.47 trillion to our national debt; and the same administration that fought bitterly against very modest spending cuts in the continuing resolution spending bill for this year.

There is simply no reason to believe this administration will agree to any meaningful spending cuts or budget reforms except under pressure. But America desperately needs these reforms, as S&P recently reminded us. Congress must ignore the administration's scare tactics and refuse to raise the debt limit until the administration agrees to put the federal government on a sustainable fiscal path.

Pat Toomey is a Republican senator from Pennsylvania.

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