Blog ››› ››› MARCUS FELDMAN
CNN's State of the Union downplayed the economic consequences of not raising the debt ceiling, claiming "there is a way" for the federal government "to pay the bills." Economists, however, have warned that a default would have catastrophic effects. Moreover, even if the federal government could stave off default by prioritizing interest payments, the decline of government spending would create "a massive demand shock to the economy."
On State of the Union, during a discussion of the consequences of failing to raise the debt ceiling, Wall Street Journal editorial board member Stephen Moore downplayed the impact of a default, arguing: "There's no default. The Treasury bills get paid before anything else does." Host Candy Crowley responded by saying, "There is a way to pay the bills, but it is unsettling, you would agree."
But in fact, economists have warned that not raising the debt ceiling would be economically calamitous for the United States. Following Republican threats not to raise the debt ceiling in 2011, Moody's analytics chief economist Mark Zandi warned of the economic ramifications of a possible default, writing that "financial markets would unravel and the U.S. and global economy would enter another severe recession." A June 2011 letter to congressional leaders, signed by 235 prominent economists, warned of the deleterious impact to the U.S. economy if the debt ceiling was not raised:
Failure to increase the debt limit sufficiently to accommodate existing U.S. laws and obligations also could undermine trust in the full faith and credit of the United States government, with potentially grave long-term consequences. This loss of trust could translate into higher interest rates not only for the federal government, but also for U.S. businesses and consumers, causing all to pay higher prices for credit. Economic growth and jobs would suffer as a result.
The Economic Policy Institute noted that even if the federal government were able to prevent default by prioritizing interest payments on the debt, the resultant ceasing of government spending would create "a massive demand shock to the economy." EPI explained:
Even if the Treasury were able to avoid officially defaulting on the debt by prioritizing interest payments, the government would have to immediately cut expenditures by roughly 10 percent of that month's GDP, and more than that as time went on. This means Social Security checks would be cut, doctors would not be reimbursed in full for seeing Medicare and Medicaid patients, and private contractors doing business with the federal government would not be paid. All of this would constitute a massive demand shock to the economy.
A Treasury Department report, titled "Debt Limit: Myth v. Fact," stated that efforts to prioritize payments on the national debt above other legal obligations "would not prevent default, since it would seek to protect only principal and interest payments and not other legal obligations of the United States from non-payment":
Suggestions that Congress could somehow evade responsibility for raising the debt limit by passing legislation to "prioritize" payments on the national debt above other legal obligations of the United States are simply not true. This would not prevent default, since it would seek to protect only principal and interest payments and not other legal obligations of the United States from non-payment. Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the United States to stand behind its commitments. It would therefore bring about the same catastrophic economic consequences.