The idea that we will still have money coming in and can pay our creditors — it will just be government unpaid — is simply ridiculous. First, there is no legal, much less palatable, way to put the Chinese and other bondholders at the front of the line ahead of our other obligations, such as paying our troops or our Social Security recipients or our Medicare beneficiaries or our contractors. Shame on former Minnesota Gov. Tim Pawlenty (R), among others, for perpetrating this fallacy, now echoed by a slew of lawmakers.
Second, even if we can pay some creditors post-default, and even if all will eventually be made whole, there is undoubtedly a heavy price to pay over a long time in the event of a default, and quite possibly in the event of a resolution of the issue that includes a long and dysfunctionally farcical process to get there. Every holder of Treasury paper will quite rationally demand a significant risk premium to hold our dollars under these circumstances — which means higher interest rates, larger federal payments to service the debt and more deficits. If that doesn’t meet the definition of insanity — holding the full faith in the credit of the United States hostage in the name of fiscal discipline so that interest costs can go up — I don’t know what does.
I fear that, despite the fact that leaders like Ohio’s Boehner (R) know better, we may not be able to avoid at least one bout of technical default. I fear almost as much that we will go through a long and painful process of multiple endgame negotiations that may in the end avoid a technical default, but will convince our creditors that you just can’t trust America to deal with its issues.
Then comes my third big fear — we will reach a bipartisan accord on the debt ceiling, by including absolutely foolish and destructive ideas like a spending cap at a ridiculously low and unsustainable level (that will also channel much social policy into tax credits and deductions to avoid the spending cap limits) and a constitutional amendment to balance the budget. This terrible idea is being amplified by West Virginia Sen. Joe Manchin (D), among others. Some lawmakers who know how awful the amendment would be for the country say that it would be no big deal if it passed in Congress, because it would never get through the states. Wrong — I can easily envision a massive mobilization led by conservative activists around the country that could sweep state legislatures. God help us.
Norman Ornstein is a resident scholar at the American Enterprise Institute.