As we hurtle toward the entirely House-GOP-created debt ceiling crisis, I wanted to address some issues which are technical but also really important to understanding how this story can play out and what’s involved.
What exactly happens when the debt limit is hit?
Good question. Indeed, that’s the question. The U.S. government brings in a ton of money every month. Just not enough to pay all the obligations that it is bound to pay by statute law. So really there’s no reason that the U.S. government can’t continue to cover the principal and interest on its debt obligations from now until the end of time without ever having to borrow more money. There’s plenty of money. But other things will have to go unpaid.
This has led to various ideas of prioritizing some obligations over others. So for instance you’ll have a lot of Republicans saying pay the military and the VA and just cut all social spending and it’s all good. Or there’s the more limited plan which seemed to be the contingency plan at the Treasury Department back in 2011 which was to pay all the debt obligations, keep enough money on hand to manage cash flow and just pay what you could of the rest.
These are all interesting theories and contingency plans and bargaining positions out past a debt ceiling cliff. But there’s a problem. This isn’t a small business. It’s not even the biggest big business. It’s the U.S. government. It makes up almost a quarter of the entire economy. The Treasury simply has no system to prioritize spending in this way, to hold back some payments, prioritize others, pay this next week if there’s money available but hold it back if there’s not. From a distance it might not seem clear why there wouldn’t be or why it would be so hard. But there’s not and it is hard. Indeed, it’s such a big system it wasn’t and isn’t clear to those who run it what it might be able to do or might not.
This is something that became increasingly clear to people as the clock clicked down to the wire in 2011. Nor should it surprise us terribly that this capacity doesn’t exist or that the robustness of such a capacity if it does exist isn’t entirely known. No one building the system figured that something so stupid would be happening.
I had an exchange yesterday with someone about what technically constituted default. Default has a technical meaning, either for debt obligations or in another sense for non-debt obligations. But most understandings of default presuppose that the defaulting entity defaults because it lacks the resources to make good on its obligations. It changes the equation at least a bit when you have the more absurd circumstance of a debtor which defaults for no reason at all.
Anyway, when you start hearing about different strategies for prioritizing payments, keep this point in mind. It’s a significant unknown the extent to which the U.S. Treasury has the ability to carry this out or carry it out in a reliably and predictable fashion.