Friday, July 15, 2011

No Debt Ceiling Increase =/= Default

Writes Michael D. Tanner for The Cato Institute:

The clock is slowly ticking toward Aug. 2, the date on which the U.S. faces "fiscal Armageddon" — according to the Obama administration — unless Congress agrees to raise the debt ceiling. But would we?

The Obama administration, as well as much of the media and many economists, tend to equate failure to raise the debt limit with default. That's not precisely true.

The Treasury Department estimates that the federal government will collect a bit more than $203 billion in taxes during August — roughly $36 billion just in the first three days. But, during August, the federal government is expected to spend $307 billion. That is why we have a problem.

If the government is not able to borrow more money after Aug. 2, spending will have to be reduced to the amount of revenue that the government has. That would require roughly a 44 percent cut in federal spending.

This will almost certainly hurt. But it's not the same as default. During August, interest payments on the federal debt will total roughly $29 billion, meaning that there will be sufficient revenue to meet our obligations to creditors. If the Obama administration is truly worried that we might not do so, they could always support legislation by Sen. Pat Toomey (R-Penn.) that would require the Treasury Department to pay our creditors first.

So stop calling a failure to raise the debt ceiling (which is in fact a success at not giving more credit cards to someone with a spending problem) "a default." Every journalist and pundit who does that is ignorant or lying.


Wes Messamore,
Editor in Chief, THL
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