Neither Default Nor Chaos

Even if Washington hits the debt ceiling, there is no default

Treasury Secretary Janet Yellen listens during an open session of a Financial Stability Oversight Council meeting at the Department of the Treasury in Washington on April 21, 2023. Alex Wong/Getty Images

Commentary

Treasury Secretary Janet Yellen has warned again (and again and then again) about the dire approach to Washington’s debt ceiling. She has told the nation that the prospect is near and that it could cause the country to default on its debt, an event, she adds, that would bring financial and economic chaos.

Media outlets and others in the political establishment have echoed her comments and fanned the flames of fear. Default would, of course, bring financial and economic chaos, but it’s far from an inevitable result of a debt ceiling constraint. Washington has confronted debt ceiling problems many times in the past and has never come near default. The good secretary might explain that fact.

To see why this matter isn’t nearly as terrifying as it seems in the secretary’s rhetoric and so many media outlets is to recognize that Washington will continue to have a revenue flow even if it hits the debt ceiling. The government may rely too much on debt, but it doesn’t rely exclusively on debt.

According to the latest White House budget, taxes and fees support almost 80 percent of the government’s annual spending. This revenue flow would then presumably allow the government to carry on with some 80 percent of its activities even if it couldn’t issue a penny in new debt. That flow from taxes and fees amounts to $4.9 trillion annually, ample financial resources to continue most government activities.

If past experience is any guide, Washington, confronted with a debt ceiling and needing to carry on with only the cash flow from taxes and fees, would set spending priorities. One would include the payment of principal and interest on government debt. According to the recently released White House budget, that need will take some $665 billion this year, or 14 percent of the total tax and fee revenue flow. The remaining $4.2 trillion would go to other essential government services, such as Social Security and Medicare, law enforcement, including federal courts, the armed forces, and the like. National parks and monuments might close until Congress gets its act together. Some government employees might face temporary furloughs. But there would be no need for default or to face the ensuing disaster that seems to occupy so many imaginations, including that of Treasury Secretary Yellen.

To be sure, the cost of debt service only accounts for the interest on the outstanding debt. Bonds will also mature and need refinancing. Even in this case, the debt ceiling would not interfere. Consider that every maturing bond would reduce the government’s outstanding debt, bringing the number below the ceiling and allowing Washington room to issue new debt to pay off the holders of that maturing bond, which incidentally is Washington’s usual practice. The ceiling would only constrain adding to the existing level of debt.

This simple arithmetic explains why the United States has never defaulted despite hitting the debt ceiling several times in the past—21 times, in fact, during the past 50 years. The time between hitting the debt ceiling and legislation to relieve the constraint varies from incident to incident. Sometimes, it is only a few hours, as in 1982 and 1984 under the Reagan administration. Sometimes, the time to resolve matters lasts longer—18 days, for example, in 1978 under Jimmy Carter and 16 days under Barack Obama in 2013. The longest stretch was 34 days between December 2019 and January 2020 during the Trump administration. But the nation never came near default.

In a pinch, though it would be a first, the government could tap the Federal Reserve’s $5.2 trillion portfolio of Treasury debt. That’s almost a full year of federal spending. The Fed could simply forgive all or some of this debt, a drastic move to be sure, but since, for practical purposes, the Fed is part of the federal government, such an act would amount to little more than moving money from one pocket to another. Ultimately, such a use of funds could have inflationary effects, but that matter is separate from default.

Considering that the House of Representatives has already approved a compromise proposal to allow a rise in the debt ceiling and President Joe Biden has at last shown a willingness to negotiate, the duration of the incident this time will likely be shorter than much of this historical experience.

As in the past, the standoff will end when one side or the other realizes that it will get the political blame for the interruption in some government services. Then Congress will rush to a compromise. Even if that takes a while, the dreaded default will not occur.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.