CBS reportsthat President Obama has outlined the possible economic consequences of a “default” resulting from Congress’s refusing to raise the debt ceiling:
The president ran through a list of the economic consequences of default, noting, “Social Security checks and veterans’ benefits will be delayed. We might not be able to pay our troops or honor our contracts with small business owners. Food inspectors, air traffic controllers, specialists who track down loose nuclear materials wouldn’t get their paychecks. Investors around the world will ask if the United States of America is, in fact, a safe bet. Markets could go haywire, interest rates would spike for anybody who borrows money, every homeowner with a mortgage, every student with a college loan. . . . It would be a self-inflicted wound on the economy, it would slow down our growth, might tip us into recession, and ironically, might increase our deficit.”
Either CBS does not know what “default” means, or Barack Obama does not know what “default” means. (Or both.)
Failing to cut Social Security checks does not constitute “default.” Neither does withholding checks intended for bureaucrats, veterans, or contractors. In the context of the federal government, “default” means a failure to make good on your debt-service payments. Our interest payments run about $30 billion a month, easily paid out of the roughly $3 trillion (or $250 billion a month) in revenue the federal government is expected to collect this year. You can do rather a lot with $3 trillion a year, but not as much as you can do with $3 trillion a year and a limitless line of credit. There certainly is no reason to default on $360 billion in interest payments when you have $3 trillion in revenue.
What can you do with $3 trillion a year? You can have Social Security ($880 billion), Medicare/Medicaid/HHS ($940 billion), Department of Defense and additional war spending ($672 billion), Veterans’ Affairs ($140 billion), NASA ($18 billion), Homeland Security ($55 billion), Transportation ($99 billion), Commerce ($9 billion), the Army Corps of Engineers Civil Works ($8 billion), Interior ($13 billion), State and international aid ($59 billion), Justice ($36 billion), the Small Business Administration ($1.4 billion), the EPA ($9 billion), the National Science Foundation ($7.5 billion), the Department of Energy ($33 billion), and the FDA ($4.5 billion) — and still have enough money to triple the budget at the National Park Service, because people love Yogi Bear and Booboo. Yeah, you’d have to close down the Department of Education, which does not one useful thing, and downsize the Treasury Department, perhaps even to the radical extent of shutting down its Healthy Food Financing Initiative (my apologies to the first lady), sell off the housing projects and close down HUD, and a few other things. I know, I know: radical austerity.
Rather, you could do all of that on $3 trillion — if you didn’t have $360 billion in payments on interest from past spending weighing down the budget. But since you do, take away the State Department and international relations, Homeland Security, Energy, Justice, NASA, DOT, Interior, Commerce, Civil Works, EPA, NSF, and SBA, say goodbye to the national parks and the guys who maintain our nuclear arsenal — all to finance past spending excesses.
Put another way, $3 trillion a year in revenue gets you federal spending at 2008 levels plus a small surplus. Not savage austerity, not the Hobbesian state of nature, not Somalia. That is what we are talking about in the debt-ceiling debate. Republicans are being criticized because they are demanding some modest spending cuts in exchange for raising the debt ceiling. But refusing to raise it at all would simply necessitate balancing the budget at pre-Obama levels of spending. Of course, the deficits we have run since then mean that about $100 billion more of that spending will have to go toward debt service in 2013 than in 2008. We are spending on spending.
This isn’t to say that Republicans should refuse to raise the debt ceiling at all. It is necessary that we cut spending, but it is also important that we do so in an orderly way rather than in a disruptive way. The point is that living within our national means not only is possible, but in fact is possible without a radical retrenchment of federal services. Spending was too high in 2008, too, as it was in 2004, 2000, 1996, 1992, 1988, 1972, etc. But if we’d simply held the line in 2008, we’d have a balanced budget today, just like those radical right-wingers in Sweden, Switzerland, and South Korea. Raising the retirement age, as the Swedes did, and controlling government spending on health care, as the Swiss do, would go a long way toward making our finances sustainable. But you cannot finesse debt payments: Once you have borrowed the money and spent it, the cost of that debt is a part of your fiscal life until the debt is paid off.
We didn’t hold the line in 2008. But holding it in 2013 would put us on the path toward fiscal stability. We aren’t going to hold it in 2013, either, not with Barack Obama in the White House and Harry Reid running the Senate. But we will have to do it someday, and someday soon, before the markets do it for us, and we bump up hard against the real debt ceiling.