Analysis/Comment Dr. Peter Morici: No US default, no shutdown inevitable if debt ceiling talks fail
By Professor Peter Morici
Jul 1, 2011 - 6:38 AM
Chairman of the Joint Chiefs of Staff Admiral Mike Mullen, President Barack Obama, and Secretary of Defense Robert M. Gates salute as troops parade past the reviewing stand during the Armed Forces Farewell Tribute in honour of Secretary Gates at the Pentagon in Arlington, Virginia, June 30, 2011.
Dr. Peter Morici: The United States does not have to default on its
debt, and the social security and Medicare checks can go out even if Republicans
and President Obama cannot strike a deal to raise the debt ceiling by August 2.
Even though the government cannot borrow additional
money, it still has tax revenues equal to about 55% of expenses - - $2.2trn
against expenses equal to about $3.8trn for a $1.6trn deficit. With those tax
revenues, Washington can fund interest on the national debt, social security,
Medicaid, and crucial national defense responsibilities. With the interest on
the debt honored, the government can sell new bonds to replace bonds that come
due without piercing the statutory debt limit.
Interest, benefits to seniors and
defense would absorb virtually all tax revenues. It would appear the other
functions of government would have to shut down, but the Administration has
Often overlooked, the Treasury can
print money to pay its bills. Before you gasp that Washington would be flooding
the world with greenbacks—it doesn’t have to be.
The Federal Reserve holds on its
balance sheet about $2.6trn in securities, mostly Treasury bonds, which it could
sell to absorb the money the Treasury prints to pay its bills. At $1.6trn a
year, that could keep the government running past the next election.
Also, since 2007, government spending
has jumped $1.1trn but only $200bn was needed to cover inflation—the $900bn
additional was new programs and benefits and higher pay. That has increased
federal spending’s share of GDP from 19.6% to more than 25%.
Temporarily, slicing that additional
government spending by $450bn, by executive order, would likely stand up in
court as an emergency measure. Especially if President Obama and Secretary
Boehner sat down and did a deal, alone and with no help from their partisan
friends but if necessary.
It would be good politics for both
sides—either the President is right and Americans would see how painful it is to
cut government that much, or Republican would be able to point that we are
The Treasury would have to print about
$1.2trn a year in new money, and the Fed would sell an equal amount of
securities from its balance sheet; however that maneuver would take us until a
new Congress is seated and a reelected President Obama or his successor has a
Before you say this is kicking the can
again, consider that in 2012, both the President and his opponent would have to
table specific alternatives for slashing the deficit and restoring normal
operations, and the winner would emerge with a mandate for his plan.
Right now, neither side is tabling
credible plans. The president’s taxes on the rich and other schemes would only
slash at best $150bn annually from the $1.6trn deficit, and the Republicans
about a similar amount in spending cuts they have managed to propose.
Neither side is talking about
harnessing the rapidly rising prices the government pays for health care—both
sides just talk about trimming benefits a bit or the pain of it.
The United States pays double, or
more, than European governments for drugs, and suffers from large disadvantages
in insurance administration, hospital efficiency and tort costs. Regulating
those prices is tar baby no one in Congress or the White House wants to put his
arms around - - but we are not getting out of this mess without doing so.
Ditto for retirement ages for social
security and the vast array of federal pensions, and state pensions the federal
government indirectly helps finance.
The absence of frank discussion of
financing options beyond August 2 is the fault of two men. Though Treasury
Secretary Geithner serves at the pleasure of the President, and Fed Chairman
Bernanke must answer frequently to Congress, both men have a responsibility to
articulate the genuine budget and economic challenges before the nation, and
both men can easily find other satisfying and better paying jobs in a pinch.
In similar crises, past cabinet
members have stepped up—consider the conduct of senior Justice Officials in the
last days of the Nixon Administration, and Alan Greenspan was not afraid to talk
frankly about federal policies.
Secretary Geithner needs to draft
plans to keep the government going and be quietly frank with political leaders
about those plans. And, Chairman Bernanke would then concur with how the Fed can
Sadly Geithner and Bernanke are
shirking responsibilities. Geithner’s substantive shortcomings are widely
speculated; however, Mr. Bernanke is a bright man and has no alibis to offer.
Professor, Robert H. Smith School of Business, University of Maryland,
Goolsbee Talks Economic Recovery: Austan Goolsbee, Council of Economic Advisers chairman, assesses whether the economy will improve and whether a tax hike is the answer for solving America's debt ceiling debate: