Make-Believe Debt Limit Hysteria from the Political Establishment

Daniel J. Mitchell
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Posted: Oct 07, 2013 12:01 AM
Make-Believe Debt Limit Hysteria from the Political Establishment

It appears that the government shutdown, which technically is a battle over annual appropriations legislation for so-called discretionary spending, is going to drag on for a while.

The Obama Administration has shown zero willingness to negotiate, even though Republicans have made a series of offers to resolve the conflict.

And the longer this fight lasts, the more likely that the shutdown battle will get wrapped up in a bigger fight over the debt limit.

The White House apparently thinks this is a good development because of the assumption that GOPers can be stampeded into a bad deal to keep the government from supposedly defaulting.

Indeed, the Administration already is fanning the flames of economic anxiety. Here’s some of what the Treasury Department recently wrote as part of this world-is-ending hysteria.

A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.

I’m surprised they didn’t warn about the four horsemen of the apocalypse and also say that default would mean cancer, tooth decay, and the heartbreak of psoriasis.

On a more serious note, there are three things about the Treasury report that are worth noting.

1. The Obama Administration is deliberately trying to blur the difference between defaulting on the debt, which would have real consequences, and “defaulting on obligations,” which is a catch-all phrase that includes mundane and uneventful matters such as postponing a Medicare payment to a hospital or delaying a grant disbursement to a state government.

2. The Treasury report repeatedly says bad things “could” happen and “might” happen, but never that they “will” happen. Well, I “could” be the clean-up batter next year for the New York Yankees, and I “might” date a couple of supermodels from Victoria’s Secret. But I wouldn’t want to bet my life on either of those things happening. Likewise, don’t hold your breath waiting for the sky to fall if the debt limit isn’t immediately increased.

3. The White House wants people to believe genuine default is likely even though tax receipts this fiscal year are expected to be more than $3 trillion and interest on the debt is projected to be only $237 billion. In other words, the Treasury will collect more than 12 times as much revenue as needed to pay interest on the debt. Even someone like me, with my well-known views on the incompetence of the federal government, thinks that the Treasury Department will have no problem figuring out how to avoid default.

To be sure, there would be some real problems if the debt limit wasn’t raised. The Treasury Department would have to override its own system to stop payments from automatically occurring. The bureaucrats would have to figure out how to prioritize payments.

Interest unquestionably would be paid on the debt, so there’s no real possibility of default. One also assumes the Administration would figure out how to make politically sensitive payments such as Social Security checks. But this would be uncharted territory, so things probably would be messy.

All that being said, I want to reiterate that a default only would happen if the White House wanted it to happen. And while the Obama Administration has shown a willingness to inflict pain on innocent third parties – as illustrated by the attempts to inconvenience Americans when the sequester imposed a tiny bit of fiscal restraint, it is inconceivable that the White House would decide to engineer an actual default.

By the way, it’s not just partisan political operatives in the Obama Administration who are making hysterical assertions.

Here are some blurbs from a Wall Street Journal report showing that the CEO of Goldman Sachs seems to be on the same page as the White House.

“There’s precedent for a government shutdown. There’s no precedent for default,”Goldman Sachs Group Inc. CEO Lloyd Blankfein said after emerging from an hour-long meeting between Mr. Obama and top financial executives. The executives, in town for a series of meetings arranged by the Financial Services Forum trade group, told Mr. Obama that even the possibility of the U.S. defaulting on its debt, should policy makers fail to raise the ceiling on the nation’s borrowing, would derail the nascent recovery and cause economic harm. Mr. Blankfein said they told Mr. Obama “exactly how bad it would be.”

And here are parts of a story from the UK-based Guardian about the views of the IMF’s head bureaucrat.

Christine Lagarde, the IMF’s managing director, urged America’s politicians to settle their differences before the dispute harmed the entire global economy. Speaking ahead of the fund’s annual meeting in Washington next week, Lagarde said it was “mission critical” that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy… “In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.”

So what’s going on? Why are they making these hyperbolic statements?

Beats me, but here are my three theories.

1. They don’t know what they’re talking about, either because of stupidity of laziness. Since neither Blankfein nor Lagarde are stupid, perhaps they are simply too lazy to learn how the federal government operates and they don’t understand that the Treasury Department will have far more money than is needed to pay interest on the debt.

2. They understand the issues, but they’re willing to make dishonest and misleading statements because they want to please the White House. This could be because they sympathize with the President’s agenda. Or perhaps this is a typical case of DC-style horsetrading, with Blankfein supporting the White House in exchange for some sort of regulatory favor and Lagarde providing help to Obama in exchange for more subsidies from American taxpayers for the IMF.

3. They understand the issues, but are genuinely afraid that the President is so petty and ideological that he might deliberately force a default, so they are warning about the risks of that approach. Seems totally improbable, but keep in minds that the White House is so petty and spiteful that it has been spending money in a shutdown to keep elderly WWII vets from visiting an open-air memorial!

I’m guessing the second option is most accurate, but there’s no way to know for sure.

In closing, let’s take a step back and look at the big picture. What’s America’s biggest long-run economic challenge? Almost surely, the answer is that poorly designed entitlement programs will lead to a much more onerous burden of government spending.

The President made this problem worse with Obamacare (just as Bush made it worse with the prescription drug entitlement).

Advocates of fiscal responsibility want to address this problem now, before we get close to the point of a Greek-style fiscal collapse.

I’m not sure they can win, given the structure of America’s political system, but I’m damn sure glad that at least some people are trying to do what’s best for the country.