"Default By Another Name:" 5 Economists Who Burst Right-Wing Media's Default Denial
Research ››› ››› ALBERT KLEINE
Right-wing media figures have repeatedly criticized Obama administration officials for claiming that the U.S. will default if the debt ceiling is not raised by October 17, instead claiming the U.S. could prioritize payments to bondholders as a way to avoid default. But economists note that the threat of default is real and that the prioritization alternative proposed by Republicans is not a long-term solution.
Treasury Secretary Warns Of Default If Debt Ceiling Not Raised
Treasury Secretary Jack Lew: If Debt Ceiling Not Raised, "We Will Be In Default." During an interview on the October 6 edition of CNN's State of the Union, Lew told host Candy Crowley that "[i]f the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default." [Salon, 10/6/13]
Lew Reiterates Warnings Of Default, Which Would "Pose Serious Risks To Our Global Standing." In a congressional hearing held on October 10, Lew reiterated his stance that if the debt ceiling is not raised, the United States will enter default. From the Financial Times:
Mr Lew, the US Treasury secretary, told Congress on Thursday that a US debt default would "pose serious risks to our global standing" and said there were no good alternatives to raising the country's borrowing limit by the end of next week. [Financial Times, 10/10/13]
Right-Wing Media Attack Administration For Claiming U.S. Will Default
Fox's Bill Hemmer: Fear Of Default Is A "Myth." On the October 10 edition of Fox News' America's News HQ, co-host Bill Hemmer asked Wall Street Journal editorial board member Stephen Moore if it was true that the U.S. would enter default if the debt ceiling is not raised. Moore responded by claiming that a default "will not happen, the chances of that happening are .0001 percent, and the reason for that is even if we don't reach a debt ceiling agreement, Bill, the Treasury Department still has the money to make those debt payments." Hemmer responded to Moore's assessment by claiming that fears of default are a "myth."
[Fox News, America's News HQ, 10/10/13]
Fox's Neil Cavuto: Claim That U.S. Will Default "Isn't The Case. Period." On the October 8 edition of Fox News' Your World, host Neil Cavuto claimed that Obama administration warnings about default are misleading, explaining that default would only occur if U.S. bondholders are not paid. Cavuto claimed that the U.S. could prioritize payments to bondholders over other obligations, which would avoid default. [Fox News, Your World, 10/8/13]
Wall Street Journal Provides Platform For Republican Talking Point That U.S. Won't Default. In an October 9 editorial, The Wall Street Journal provided a platform for the right-wing idea that the U.S. would not technically enter default if the debt ceiling is not raised by October 17. The Journal did not provide any factual basis for these claims, instead uncritically pushing Republican ideas of prioritizing payments to bondholders to potentially avoid default. [The Wall Street Journal, 10/9/13, via Media Matters]
But Economists Claim Threat Of Default Is Real, And Economy Could Enter Recession If Debt Ceiling Is Not Raised
Moody's Mark Zandi: Failure To Pay Any Obligations Is "Default In Anything Perhaps But Name." In an interview on the October 10 edition of CNN Newsroom, Moody's Analytics Chief Economist Mark Zandi explained to host Wolf Blitzer that if the U.S. missed payments on obligations other than interest, "that would be default in anything perhaps but name. It would be almost semantic. Clearly either way, it would be very hard on the economy and it would be the prescription for a very deep recession."
[CNN, CNN Newsroom, 10/10/13]
Economist Jared Bernstein: If Treasury Pays Creditors Over Other Obligations, "That Is Default By Another Name." On the October 9 edition of MSNBC's PoliticsNation, Center on Budget and Policy Priorities Senior Fellow Jared Bernstein explained to host Al Sharpton that the Republican position that the debt ceiling "is no big deal" is "horrific":
SHARPTON: Jared, I want to get right to it. What is your response to Republicans saying that this is no big deal?
BERNSTEIN: To hear that series of misstatements in normal times when we didn`t have already a fragile underlying economy and we weren`t literally days away from what I view and most economists view as a possibly cataclysmic mistake, it`s horrific. I just don`t know the words for it.
Look, here`s the very simple economics. What they are trying to say is that the Treasury can pay off our creditors based on daily cash flow. Revenues come in even after the debt ceiling is not raised.
But what they cannot say is the following -- can the Treasury pay all of its bills? Of course not. So if the Treasury decides to pay one creditor but not a Social Security beneficiary, not a soldier, not a defense contractor. That is default by another name. So they are, they couldn`t be more wrong.
[MSNBC, PoliticsNation, 10/9/13]
Paul Krugman: Even If U.S. Could Prioritize Debt Payments, Economy Could Enter Recession. In a New York Times blog post, Nobel Prize-winning economist Paul Krugman argued that the right-wing idea that default could be averted if payments to bondholders were prioritized is flawed, claiming that even if the U.S. paid out interest payments, other obligations would go unpaid:
Well, Goldman Sachs has a short paper (not online) arguing that the government probably could prioritize payments on Treasury bills, avoiding the breakdown of markets that would come from putting the world's key safe asset into default. They don't sound too confident. But even if they're right, the government would still go into arrears on many other payments, from contractor bills to medical bills. And it would be forced into savage spending cuts, around 4 percent of GDP, that wouldn't just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time. [The New York Times, 10/6/13]
Former Labor Secretary Robert Reich: Claim That U.S. Won't Default Is "Crazy Talk." Reacting to claims made by Sen. Tom Coburn (R-OK) about how failing to raise the debt ceiling won't lead to default, former Secretary of Labor Robert Reich explained that even if the Treasury Department could prioritize payments to bondholders, "this would buy a few days at most:"
"I would dispel the rumor that is going around that you hear on every newscast, that if we don't raise the debt ceiling, we will default on our debt," says Sen. Tom Coburn, R-Okla. "We won't. We'll continue to pay our interest."
This is crazy talk. While the Treasury Department could prioritize interest payments after October 17 - the day the Treasury Department says it no longer has legal authority to pay the nation's debts - and not pay Social Security and Medicare, this would buy a few days at most. [RobertReich.org, 10/8/13]
Center On Budget And Policy Priorities: Debt Prioritization Is Just "Default By Another Name." In a post titled "'Debt Prioritization = Default by Another Name," CBPP fellow Kathy Ruffing explained that Republican plans to pay bondholders over other obligations would not avert economic catastrophe:
Lawmakers shouldn't fool themselves: simply putting bondholders at the front of the queue won't avert financial chaos or soothe creditors. One rating agency explicitly warned in January that honoring interest and principal payments but delaying payment on other obligations would trigger a review and hence a possible downgrade. [Center on Budget and Policy Priorities, 5/9/13]
For more on right-wing media's default denial and faulty prioritization methods, click here.