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The Real Debt Ceiling
What will happen in a decade or so, when default becomes inevitable?


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Kevin D. Williamson

The fight over the federal shutdown, in which Barack Obama pronounces himself ready to negotiate with atomic ayatollahs in Tehran but not Republicans in the House of Representatives — the body constitutionally empowered to manage budgetary concerns — is a prelude to the coming fight over the statutory debt ceiling. How either of those will play out politically is anybody’s guess, though one should never underestimate the Republicans’ ability to screw up being on the right side of an issue.

While there is panicky talk of default in Washington, the financial markets give no indication that they are expecting a default on Treasury bonds, which is only sensible: Even without extending the debt ceiling, current revenues are more than enough to cover debt payments, several times over. There are technical concerns within the federal government that complicate the issue, but debt ceiling or no debt ceiling, the money is there to make interest payments. Surely an administration that came into office on the heels of a financial crisis and claims the unilateral power to assassinate American citizens is not waiting on Congress to tell the Treasury Department how to perform its most elementary function? Surely the American people, in their wisdom, would not elect such irresponsible amateurs to high office? (Twice?)

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Refusal to raise the debt ceiling will never necessitate default — unless the interest payments we owe exceed the revenue we have. That is not even close to being the case — net interest payments have been running around 7 percent of revenue lately. But if current trends continue, that number will change. In 2010 Moody’s, working from Congressional Budget Office projections described by one analyst as “wildly optimistic,” calculated that policies being pushed by the Obama administration could drive interest payments as high as 20 percent of federal revenue by 2020. The CBO’s polite-nod-to-reality “alternative fiscal scenario” projects that sustained deficits will mean that interest payments will cost us an additional 1 percent of GDP in ten short years. And those are far from worst-case, Chicken Little scenarios. A return to the interest rates that prevailed as recently as the 1980s would turn our federal budget upside-down practically overnight, with interest expenses far outpacing tax revenue. When debt-service costs exceed revenue, default is a practical inevitability.

Sure, that’s probably a remote risk — but it is the purpose of government to help us mitigate such risks, not to court them on our behalf. The entire theory of liberal government is that we band together to provide certain public goods, risk mitigation being paramount among them. We don’t maintain an army because we’re expecting to be invaded, or a police force because we expect to be murdered, but because the world is full of unexpected and unpleasant possibilities.

A responsible fiscal policy is like a missile-defense system or a nuclear arsenal: It may prove its worth during an emergency, but it proves its worth just as much, if not more, in the absence of such emergencies. If you are very fortunate, and you live a long life free from illness and accident, will you feel that you wasted all the money you spent on health insurance? One of the differences between responsible people and irresponsible people, between responsible institutions and irresponsible institutions, is a proactive and intelligent approach to managing risk.

Interest payments are the only truly mandatory spending our federal government does, even though it treats a rather large category of outlays — from such minor expenditures as the presidential salary to big-ticket items such as Social Security and Medicare — as “mandatory.” Assuming that the CBO’s less-optimistic debt-service projections are somewhat accurate, then by 2023 those outlays will be quite close to projected revenues — and that’s absent any sort of economic crisis or interest-rate spike. Put another way, if we assume that Social Security checks and other entitlement liabilities are just as sacrosanct as interest on Treasury bonds, then we are already locked in on a course in which the cost of past promises will likely match or exceed present revenues, not at some far-off point in the future, but around the time today’s elementary-school students head off to college.



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