Seldom has more nonsense found its way into print and pixels than in today’s discussion of the debt ceiling. Treasury Secretary Janet Yellen has intimated that the constraints of the debt ceiling will lead to a default on Washington’s financial obligations, which will, in turn, unleash financial and economic chaos. Default would indeed create lots of financial and economic problems, but Yellen takes quite a leap to get from the debt ceiling to default. She knows better than to make such assertions, which is why she has dealt in intimations instead of reasoning. The United States has never defaulted on either the interest or the principal of its debt—not in the almost 235 years since the first Treasury secretary, Alexander Hamilton, put the nation’s finances in order. Yet it has hit the debt ceiling several times. Even if Washington faces a debt-ceiling constraint, it will easily avoid default and, accordingly, the chaos so glibly forecast in so many places.

The primary consideration in this matter is also the most obvious. Washington may rely too much on borrowing, but that is not its only source of revenue. Taxes and fees, in fact, remain a more important source than debt. They support about 80 percent of all government spending. This revenue flow would remain at Washington’s disposal even facing a debt. Presumably, that flow of funds would allow the government to carry on with some 80 percent of its activities even if it could not issue a penny in new debt. Using the latest White House budget estimates, cash flow would amount to some $4.9 trillion, a tidy sum.

If past debt-ceiling experience is any guide, Washington at the limit could reasonably continue with only this money flow. It would have to set spending priorities. One such priority would include the service of its financial obligations. Indeed, the Fourteenth Amendment’s insistence that the debt “shall not be questioned” would place such payments at the top of that priority list. That need should require some $665 billion of this cash according to the most recent White House estimates, leaving $4.2 trillion of the tax and fee revenue for other essential government services, such as Social Security and Medicare, law enforcement (including federal courts), paying the armed forces, and the like. National parks and monuments might close until Congress gets its act together and some government employees might face temporary furloughs, but there would be no default, nor the ensuing disaster that Yellen and others have conjured.

True, the cost of debt service accounts only for the interest on the outstanding debt. Bonds will also mature and need refinancing. But even in this case, the debt ceiling would not present a problem. After all, every maturing bond would reduce the government’s outstanding debt, bringing the number below the ceiling and giving 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 constrain only 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, over the last 50 years. The time between hitting the debt ceiling and enacting the 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 resolution time takes longer—18 days, for instance, in 1978 under Jimmy Carter, and 16 days under Barack Obama in 2013. The longest stretch was 34 days, between December 2018 and January 2019, during the Trump administration. But the nation never came near default.

If the dispute on the debt ceiling dragged on too long, the Federal Reserve could ride to the rescue. Though it has never before had to do so, the Fed could simply forgive its $5.2 trillion portfolio of Treasury debt, almost a full year of federal spending. This would constitute a drastic move that would ultimately have inflationary effects, but it would stave off default in the interim.

Considering that the House of Representatives has already passed a compromise proposal to allow a rise in the debt ceiling, and President Biden has at last shown a willingness to negotiate, the duration of the incident this time will likely be shorter than in many earlier experiences. The standoff will end, as in the past, when one side or the other realizes that it will take 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.

Photo by Mostafa Bassim/Anadolu Agency via Getty Images


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