In an interview last Wednesday on CNBC, President Obama said, “When you have a situation in which a faction is willing to default on U.S. obligations, then we are in trouble.”
While he is speaking of House Republicans, the only faction that actually fits that description is the administration itself.
In a speech in Maryland later that day, Obama pressed the default issue again: “As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse.”
Default means the inability of the U.S. government to service its debt, to make principal and interest payments on outstanding bills, notes, and bonds (the difference among those being their time to maturity). This is not to be confused with payments due to others, whether contractors, vendors, or recipients of entitlement programs, each of whom would have a serious issue were cash flow to cease but none of which is the same as a true national default.
Treasury Secretary Jack Lew released a report on Thursday raising the scare-mongering to a new level. The first paragraph of the report is worth quoting in its entirety:
The United States has never defaulted on its obligations, and the U. S. dollar and Treasury securities are at the center of the international financial system. 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.
In a Fox Business interview on Thursday, Lew discussed the 2011 government shutdown and debt limit debate: “Last time we saw market reaction to the threat of default — we never actually crossed the line. No one knows with certainty how bad the consequences are if we cross the line.”
Anything Lew says should be taken with several hundred grains of salt. Although he is essentially a “career government bureaucrat,” his most recent job prior to joining the Obama team was with Citigroup; he was recommended by former Treasury Secretary Robert Rubin so Lew could get some business experience — of which he had none.
Lew was described to me by a former senior Citigroup employee as “a guy with a no-show job as COO of a failed hedge fund at Citigroup, and who was allergic to hard work.” But then what would you expect from someone whose entire prior work experience was in government? More important is that Jack Lew is, as the Daily Beast put it, “a lifelong partisan political creature.”
Like his boss in the White House, Lew is an undistinguished hyper-partisan with little real-world experience; his utterances about government funding must be viewed through that filter.
If the debt ceiling is not raised, it does not mean the government has defaulted, but rather than it must immediately balance its budget — a Herculean task given that the government borrows nearly 40 cents of every dollar it currently spends. But default should not even be on the radar.
Monthly interest expense on Treasury debt is typically about $25 billion, with larger sums due (about $95 billion in 2012) in both June and December.
Although revenue inflows are “lumpy,” with larger tax receipts in some months than others, the Treasury should take in roughly $175 billion in October, slightly less in November, and about $250 billion in December based on current trends.
In other words, the government takes in about seven times as much in revenue as it pays out in interest on the national debt. So how is it that we are discussing default?
The vast majority of principal due on maturing federal debt is rolled into new debt and therefore not impacted by the debt limit. If a large number of holders of maturing U.S. debt demanded cash instead of rolling into new debt, this would be a substantially bigger problem.
But until and unless that happens, default is essentially impossible. Indeed, even if — per their usual modus operandi — this administration wanted to maximize national pain and political pressure by intentionally defaulting, Section 4 of the 14th Amendment would likely prevent them from taking such a step. (Some on the left argue that the 14th Amendment would allow the president to raise the debt ceiling without congressional action but so far the administration has not wanted to go down that road.)
The federal government has other important obligations, whether funding the military, paying Social Security and Medicare and veterans’ benefits, along with the myriad other (mostly unconstitutional) functions currently taken on by Leviathan. If the debt ceiling were not raised, there would be real pain for many, but also substantial long-term benefit to the country if it caused a dramatic shrinking of everything from the EPA to food stamps to thousands of destructive regulatory bodies whose primary purpose is to justify their own existence.
Jack Lew and other Obama henchmen may argue that the Treasury does not have the authority to determine which government bills must be paid first. This is not the case, and such a position would likely lose quickly and decisively in federal court.
Part of the administration’s consternation is the liberal view that a dollar owed to a bondholder is deserving of no greater priority than a dollar “owed” to a food-stamp recipient. Their view represents both a moral and legal confusion, but one which is highly resistant to logic and law.
The House has passed the Full Faith and Credit Act (H.R. 807), which would require the Treasury “in the event the debt ceiling is reached, to pay principal and interest due on debt held by the public before making any other payments.”
Harry Reid, in his desire, indeed the Democrats’ political necessity, to keep Americans as afraid as possible, has refused to bring up the measure in the Senate despite its simply making clear, as explained above, what the Constitution, common sense, and good government already require.
Congressman Jeb Hensarling (T-TX) pointed out on Friday that President Obama also opposes H.R. 807: “Regrettably, the president’s veto threat against this bill only raises the specter of default instead of taking it off the table.” Again, the specter of default is the Democrats’ best lever in the non-ongoing non-negotiations.
But despite default being a near impossibility regardless of what happens with the government shutdown or the debt limit, Republicans are not adequately pushing back against the Democrats’ effective lie.
Republican congressmen leaked to the media that Speaker of the House John Boehner (R-OH) will not let the U.S. default, but the statement was given in the context of Boehner’s perhaps allowing a debt ceiling vote to take place without following the “Hastert Rule,” by which the Speaker only brings up for a vote a measure that has the support of a majority of the Republican House members.
While Boehner did not deny the story, he insisted on Friday that he intends to force negotiations to include spending cuts and other Republican policy aims. (Of course, the media, which breathlessly reported a potential Boehner “surrender” was all but silent about the clarification.)
But even with John Boehner’s modest rebuttal, the implication that a House vote to raise the debt ceiling is necessary to prevent default is absolutely false. Allowing this error/lie to be repeated and to frighten the public does great damage to the GOP’s leverage in this debate.
A senior House staffer, commenting on background for this article, said “the Administration wants to scare Republicans, but more so Americans, in the run up to the [debt ceiling deadline of October] 17th. I’ve never seen public figures fear-monger like this.”
Indeed, it is already working to some degree: Gallup reported on Friday that more Americans view the current government shutdown as a major problem (49 percent) than had the same opinion of any of the 1995 series of shutdowns. Gallup also said that their Economic Confidence Index plunged to its lowest level since December 2011 during the survey period of October 1-3.
Interestingly, and what may yet push the Democrats toward slightly softening their intransigence, is that the same polling shows Barack Obama being viewed far more negatively as a consequence of this shutdown than Bill Clinton was nearly two decades ago.
The public also views the Republican leadership more negatively because of the shutdown, but not more so than they did in 1995. Since the 1995 shutdowns had no obvious negative impact on congressional elections in 1996 — the GOP lost a few seats but maintained its majority in the House and gained two seats in the Senate in a year when Bill Clinton won reelection — these poll numbers should scare Democrats more than they scare Republicans.
As Brian Wesbury puts it, notwithstanding the administration’s horror stories “there will not be a default on U.S. Treasury securities. Not even a temporary or technical default. No matter what happens, there is more than enough money coming from tax receipts to pay interest on the debt.… Regardless of what the Obama Administration says in public, Treasury would use incoming revenue to pay interest on the federal debt before it made other payments. Saying they would do anything else is just a bluff.”
Now John Boehner, Mitch McConnell, and a few courageous reporters must start countering the Obama fear-mongering with a strong dose of economic reality. Unless the GOP starts aggressively debunking the Democrats’ default dramatics, the debate will be lost before it begins.