Politicians hold the truth dear. So dear, in fact, that they believe that the truth should be used in only the rarest and most extreme circumstances; and then to the minimum extent possible. To a politician, language is a finely nuanced tool that is to be manipulated so that the public may, in turn, be manipulated.
Over the years I have watched politicians twist the English language in ways that only the makers of Silly Putty would envy. But, I have never seen more lies, half-truths, and distortions than during the current debate over raising the debt ceiling,
The biggest lie of all is the statement from the Obama administration that the government will default on its obligations if the debt limit is not increased by Aug. 2nd. An increase in the ceiling of at least $2.4 trillion would be needed to push this issue past next year’s presidential election and that, of course, is what the White House is demanding.
Default is a very specific financial term. It occurs when a borrower fails to make a scheduled payment (of principal or interest) on a debt obligation.
If the U.S. were to fail to make interest payments on its outstanding debt, borrowers would immediately demand much higher interest rates to compensate them for the untrustworthiness of the federal government. In that case, the interest payments on the $14.3 trillion in national debt could increase overnight from about $250 billion a year to more than $1 trillion (roughly half of all tax revenue would be needed just for interest).
The increased interest rates would flow through the economy affecting mortgages, car loans, consumer credit, and the costs of capital investment. What many people feel is the never-ending recession would become the never-ending depression.
The threat is scary. No sane nation would ever allow this to happen if there were any way to avoid it. The consequences are devastating. That is why it is so tempting to use this threat as a negotiating tool. But, it is a very dangerous negotiating tactic that rests upon misleading the American public.
Each month, the federal government receives about $175 billion in tax revenue and spends about $300 billion. (The difference is made up with borrowed money.) Interest on the debt is a bit more than $20 billion each month. The Secretary of the Treasury, as directed by the President, has complete flexibility in deciding which obligations will be met from the tax revenue on hand, and which must be paid from increased borrowing.
There is language in the 14th Amendment to the Constitution (Section 4) and supporting Supreme Court decisions that many legal scholars believe require the government to pay its debt obligations before any other. But, even if that were not the case, there are adequate funds available for the government to meet its debt payments and avoid a default even if the debt ceiling is never raised.
Three simple words from the President to the Secretary of the Treasury would reassure financial markets and guarantee that the United States would never default on its debt obligations. Those words are: “Pay interest first.”
But, saying those words would take away negotiating leverage for the real issue at stake: continuing to spend money that the government doesn’t have.
If the American public understood that default was not going to happen, and the only issue was the government spending less, much of the urgency to raise the debt ceiling would be lessened.
If the government were not allowed to borrow new funds, it would have to cut back on planned spending by about 40 percent, starting in August. Spending would have to be cut back by $125 billion for August alone. Spending in September, October, and coming months would also be reduced by a like amount.
With only enough revenue to pay 60 percent of the bills, choosing which bills would be paid and which would not be paid would be difficult, controversial, and highly revealing of the government’s priorities; situations politicians dread.
Slamming on the spending brakes while the train is going full speed would cause many issues and problems. But, none of them would be related to financial default.
The politicians want to link the two issues. They want us to believe that financial catastrophe is imminent unless we raise the debt ceiling so that we can keep spending money. And they want the limit raised sufficiently so that they can continue to borrow beyond next year’s elections. But, in reality, the issues are not linked.
Is this leadership? Or, is it mis-leadership?
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