Debt Ceiling? Default? These Aren’t Big Issues

I’m seeing a lot of press right now on negotiations to attempt to raise the federal government’s debt ceiling to prevent a default, which supposedly would occur on August 2. The story is getting much more ink than is warranted by its importance.

First, I fully expect the debt limit to be raised so that we “dodge the bullet” on this one. Despite their differences, one thing President Obama and the Republicans in Congress have in common is that they don’t want the federal government to “default.”

Second, what if I’m wrong on that first point and there is no agreement in early August? I can’t foresee exactly how this would be handled. Maybe a bit more creative accounting (technically, we already hit the debt ceiling on May 16, and were able to avoid default by creative accounting that’s supposed to carry us into August), or maybe even a postponement of some payments. Technically, that would be a default, but after some short-run disruption things will return to normal after the president and Congress find themselves on the same page. Nobody will lose any money because of a US default.

Third, note that there is a big difference between the looming “default” in the US case and in the Greek case. With Greece, they don’t have the money or borrowing power to make good on their outstanding debt. The US government does, and it’s just a technicality that could possibly lead to a “default.” But the US has the resources to pay its debts, unlike Greece, so unlike the Greek case, where I fully expect that Greek bondholders won’t get 100% of their money back unless it comes from the Germans, even if there is a short-term disruption, everyone knows the US debts will be paid.

While I think the default story is getting more press than it deserves, I’m not upset about the Republicans attempting to get spending concessions as a part of the debt ceiling negotiations. The larger issue is that while the US is not in the same situation as Greece right now, unless the federal government enacts substantial spending cuts — and essentially, that means reform of our entitlement programs — Greece’s fate will loom in our future. And unlike Greece, Germany won’t be there to bail us out.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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