Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised. Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for other essential programs as well. However, there will be some serious cutting that has to happen because spending clearly exceeds revenues.
Yes, quite. In fact, some specific numbers are provided in this column: federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise.
I’ve made this point before, but for numbers that large, anyone who wants to pretend to have some understanding about the economy has to think about macroeconomic effects. In particular, spending cuts of that size would reduce the US’s 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates wold probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%.
So when you read someone blithely writing that the federal government will not default in the absence of a debt ceiling deal, and instead will merely have to trim excess spending, remember that what they’re really advocating is a new and deliberately caused Great Depression. And not just in economists like me.
Can it really be that bad? Well, yes. This is what Marketwatch allows to be given their imprimatur, as one Kurt Brouwer presents “in a Q&A format…what I believe you need to know at a basic level”:
If we do not raise the debt ceiling by August 2nd, we will not default on Treasury obligations. Nor, will we have trouble making Social Security payments. However, there would be a big drop — roughly 44% — in government spending because that percentage represents the difference between government revenues which would be about $200 billion for the full month of August and [sic] $172 billion for August if we start counting after the first week when the deadline hits. Spending is slated to be over $300 billion that month.
Kash is right; that’s about $100B a month. So how does Brouwer solve that $100B+ shortfall?
The [Bipartisan Policy Center] study projects there will be $172 billion in federal revenues in August and $307 billion in authorized expenditures. That means there’s enough money to pay for, say, interest on the debt ($29 billion), Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), active duty troop pay ($2.9 billion), veterans affairs programs ($2.9 billion).
That leaves you with about $39 billion to fund (or not fund) the following:
Defense vendors ($31.7 billion) IRS refunds ($3.9 billion) Food stamps and welfare ($9.3 billion) Unemployment insurance benefits ($12.8 billion) Department of Education ($20.2 billion) Housing and Urban Development ($6.7 billion) Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion) [formatted for style]
Oh, he doesn’t.
Now, does Brouwer prioritize payments by “bang for the buck” (multiplier effect)? No. Paying interest on debt supersedes even the Social Services. If you’re looking to do as little damage as possible to your domestic economy (this is our government, not China’s), you don’t prioritize paying the interest on the debt (multiplier well 1; those people are liquidity-constrained in a way that coupon-clippers never will be).
And if you want to be a viable long-term investment, you don’t cut your current investment in long-term human capital (DoE, EPA).*
So what do you do, pay bond interest, or pay for parts and repairs on that military equipment that keeps active-duty military active? If you’re sane, you put troops on the line in priority over investors whose interest payment won’t be the source of their next meal or the protection from that next IED.
What does Brouwer say about these choices?
No doubt picking and choosing who gets paid and who doesn’t would be chaotic. And, lots of programs would not get their funding and that would lead to plenty of screaming. Nonetheless, it should be clear from this exactly how much we are spending in excess of government revenues. And, that could and should lead to a sober assessment of what government can and cannot do.
Ayup. Government can, if they ignore Brouwer’s advice, keep Brad DeLong calling this “The Little Depression,” keep people employed, and set up future growth with trained workforces and people who are not starved into unhealthiness.
Or it can do what Brouwer wants, and pay bond market investors who don’t need the cash while soldiers die and people starve.
Mark Thoma should be ashamed to share pageviews with this guy.
*As Beverly’s post notes, Texas notes that “beginning 25 years ago, the state began significantly increasing its education funding and therefore the quality of its workforce.” Conservatives used to see the value of human capital development in creating an environment for jobs, and I still hold to that one.**
**Rick Perry has, of course, reversed this, so anyone looking to start a business in the mid-2030s might do well to avoid the Lone Star State. Unless, of course, everyone else follows suit.