Who cares about default?
from Peter Radford
In this fast moving and ridiculously puerile crisis of ours we are being treated to an equally fast paced run-through of right wing fantasy. As each layer of their beliefs is peeled away and revealed as absurd, another is quickly located to defend, often for only a few hours, the destructive and profoundly anti-American path the Republicans are leading us down.
But: when is a fantasy not a fantasy, but a goal?
I am trying to think of an appropriate way to describe GOP policy at the moment, it clearly isn’t “policy” in any respectable sense of that word. I am not sure what to call the stream of ad hoc tactical adjustments spewing out from Republicans currently, but whatever they are they reveal basic truths we ought to consider carefully.
Today’s hot topic is that the default crisis is not a crisis at all. Apparently it is all made up to scare voters. It is, in other words, yet another in a long line of conspiracies cooked up by the Democrats to divert the honest folk of America from the imminent socialist/Islamist takeover being masterminded in the White House. The extremists are, naturally, our last line of defense against that ghastly prospect.
Well, no, but it sounds that way if you watch Fox News.
But there are now emerging a sizable number of more extreme Republicans arguing that potential US debt default is no big deal. Indeed some are arguing it will be healthy, not just here but worldwide. And, from what I can tell, they actually mean it. I call it the Republican “non-default” strategy.
Their thinking goes this way:
After the US hits the debt ceiling the only change is that it can no longer issue new debt. There will still be a steady stream of income flowing in from taxpayers, so the Federal government simply will have to trim its expenditure down to fit within that income stream. Plus, the Treasury Department can prioritize its payments, thus ensuring that its pays our creditors first. Thus, hey presto, there will be no default. The current debt gets paid on time, and the financial markets world wide can breath a sigh of relief.
This is all true. That could happen.
But, last we all looked, the stream of taxpayer income is insufficient to pay for all the things Congress has told the government to buy. Ummm. That’s why we have a deficit.
Now, if we prioritize paying creditors on the debt and we have to force federal expenditures to within the current revenues – i.e. we cannot issue more debt – the implication is that we have to cut a lot of government spending. Since this has been to goal of the extremists all along, you can see why many of them think hitting the debt ceiling is a good thing.
Let’s play with the numbers, using the 2013 budget as our yardstick.
- Federal revenues are $3,003 billion
- Federal spending is $3,771 billion
- That’s a deficit of $768 billion
- Our goal is to fit everything under that $3,003 revenue cap so we don’t issue more debt, but we have to avoid default. That implies paying the interest on the current debt, which is $321 billion
- Thus, to avoid default, our budget for everything else is $3,003 – $321 = $2,682 billion
- So, what can we afford? Well, the current spending is this: Defense, $676 billion; Social programs and unemployment, $2,502 billion; Energy/Environment/Transport, $169 billion; Other stuff (including Justice/Foreign Aid/Agriculture) $207 billion
- I doubt the Republicans are thinking of defense cuts, so that has to be paid next. This leaves $2,682 – $676 = $2,006 billion for everything else
- Let’s assume that the Republicans want to keep Social Security payments flowing, so they are paid next and amount to $808 billion. So, here we go: $2,006 – $808 = $1,198 billion. That’s not much left!
- Let’s assume that the Republicans also want to keep Medicare and pay Veterans benefits, they add up to $670 billion. So let’s pay them too: $1,198 – $670 = $528 billion
- Let’s also assume that they want to keep the Justice department running, pay Congressional wages, and keep the government buildings heated etc. That costs $86 billion. Let’s also say they keep transportation so they can build roads in their own states and bridges to nowhere (as in Alaska). That’s another $110 billion we need to spend. Oh, and we can get rid of all foreign aid (only $57 billion) except the $8 billion to Israel since they are our best friends ever anywhere. Do the math: $528 – $110 – $8 = $410 billion.
- So after all this prioritization we still have $410 billion to spend! That sounds like a lot. But Medicaid alone costs $386 billion; education costs $102 billion; unemployment aid costs $538 billion; the energy department costs $15 billion; we spend $39 billion on the environment; not to mention the $33 billion we spend on science research and space … oh dear
Basically to follow through on this “there is no default if we cut spending” strategy we have to eliminate whole swathes of government immediately. $768 billion’s worth. It is fanciful at best to imagine we could do that. It is laughable to imagine Congress could come up with a plan to accomplish such a set of cuts. They cannot even negotiate the current budget with far fewer cuts. Who is going to agree to these even greater cuts? There would simply be a new crisis as the extremists tried to force draconian cuts down everyone’s throats. No one would agree.
It’s a pipe dream. It is Republican fantasy as they try to avoid the consequences of their extreme talk.
Besides, if we managed to cut $768 billion immediately the economy would plunge into recession. That’s a 5% reduction in GDP overnight. Plus that doesn’t take into account to knock-on effect as all that money stops flowing through the pockets of the thousands of businesses that sell to the government. Those businesses will be forced to close or shrink. That will add to unemployment. The recession the cuts will cause will spiral downwards. This will reduce the economy’s total incomes, and hence reduce tax revenues to the government. Guess what? That reduction in revenues will force further cuts to government spending – don’t forget we are trying not to raise new debt – and so another round of GDP shrinkage will begin. The post “non-default” recession will be deep, long, and very nasty because the federal government will not be paying unemployment, and will be furiously cutting jobs to keep within its ever shrinking budget. The private sector will be slammed by the sudden cut-off in revenues. A depression will loom.
So. The “non-default” strategy is ridiculous. The outcome is scarcely better, if at all, than a default would be.
But, for today at least, it is keeping some Republicans focused away from the ludicrous nature of the path they have thrown us all down.
What fantasy they will come up with tomorrow?
One good thing emerges from pulling on the strands of GOP fantasy: it reveals their goal. They were never, ever, concerned about the budget deficit. They have always been focused on a total defunding of government, especially the roll-back of social programs. The exercise above is thus one they would actually like to set in motion for real. This is why some of them look at the “non-default” strategy with misty eyes. It’s what they want to happen. And they are so close to arriving at their preferred destination.
Which is why they have dug in and are driving the timid Republican leadership over the cliff.
Here’s a link to some quotes from Republicans who believe in the “non-default” strategy. It’s pretty clear from some of them that they have no idea of the enormity of the impact of the cuts needed to make “non-default” viable.