Must Default Be Avoided at All Costs?
By David Henderson
Default must be avoided at all costs and should not be an option on the table.
This is from Jason J. Fichtner and Veronique de Rugy, “The Debt Ceiling: Assets Available to Prevent Default,” January 25, 2013.
What’s their reasoning? Here is the full extent of it:
Raising the debt ceiling without a commitment to improve our long-term debt problem has adverse consequences as well. Recently, the rating agency Fitch warned the US government that while it wants the debt ceiling to be raised, it also wants the government to come up with a credible medium-term deficit-reduction plan. Without it, the agency could downgrade the US credit rating by the end of this year. Other rating agencies have also warned the United States of the negative consequence of not dealing with the country’s long-term debt.
The rest of the article is about how to avoid default, not whether it’s a good or bad idea.
I’m unconvinced. The U.S. government has dug itself a deep hole. Commitments that it has made to various people must be broken. There is no plausible way, for example, that the U.S. government will be able, 20 years from now, to pay for all the Medicare, Medicaid, and Social Security benefits that it has committed to pay. One such commitment to consider breaking is the commitment to pay the debt.
Bruce Bartlett, in The Benefit and the Burden, his book about taxes, writes that default “would constitute a grossly immoral theft of trillions of dollars from those who loaned money to the federal government in good faith.” In my review of his book, I commented, “Really? It’s worse to default on creditors who took a risk than to forcibly take money from taxpayers who have no choice?”
Now you could argue that the commitment to pay the debt deserves a priority because of part 4 of the 14th Amendment to the U.S. Constitution, which says:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
I take the U.S. Constitution seriously. But note that Fichtner and de Rugy don’t make an argument based on the Constitution. Their argument is based on the economics–and, as I noted, I don’t think it’s that persuasive. To lay out why default might be a good idea takes too much space here. If you want to see a sustained case for default, see Jeffrey R. Hummel, “Some Possible Consequences of a U.S. Government Default,” Econ Journal Watch, January 12, 2012.
Fichtner and de Rugy write that it is “irresponsible to signal to the international community that a default on the debt obligations owed by the US government is possible while Washington works through whether it will raise the debt limit before or after it formulates a plan to reduce government spending.”
But I think it’s irresponsible to tell people that there is unlikely be a default. I’m planning my financial future on the idea that there’s a substantial probability that the U.S. government will go right up to the big financial cliff and then default and limit Medicare, Medicaid, and Social Security. The earlier we prepare, the better.
HT to Warren Gibson.
Postscript: Here’s Jeff Hummel in a podcast on the same issue.