‘Failure to raise the debt limit would force the United States to default,” Treasury Secretary Timothy Geithner panted in a May 13 letter to Sen. Michael Bennet, D-Colo. “A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth, and increasing unemployment.”
Geithner’s hyperventilation ignores the experiences of millions of Americans who have refused Visa and MasterCard offers to boost their credit ceilings. Ignoring one’s bills can trigger default; leaving one’s borrowing threshold intact does not. Keeping credit lines unchanged is a first step toward spurning further debt. The resulting savings then go straight to debt reduction.
“It’s not accurate at all to equate a failure to raise the debt limit with a default on our Treasury obligations,” Sen. Pat Toomey, R-Pa. tells me. “That’s totally false. Tax revenues will be nearly 10 times the amount of money needed to avoid defaulting on our debt.”
Indeed, the Congressional Budget Office forecasts $2.23 trillion in federal tax revenues for fiscal year 2011 and net interest expenses of $213 billion. Geithner will have plenty to pay bondholders.
Under US Code Title 31, Section 3123, “As the [Treasury] Secretary considers expedient, the Secretary may pay in advance interest on the public debt by a period of not more than one year.” So, Geithner can pay bondholders first and, thus, avoid default — unless he wants it.
“The administration should send an unambiguous message that under no circumstances would they permit a default on our debt,” Toomey adds. “The administration should reassure markets rather than scare markets.”
President Barack Obama could send this signal by endorsing and ultimately signing Toomey’s Full Faith and Credit Act. If the debt cap remains untouched, Toomey’s proposal would prioritize Treasury disbursements to Social Security recipients and bondholders. If the latter receive their interest and principle, by definition, there would be no default.
Washington should leave its credit line in place, stop borrowing, and spend only the revenue it generates — just as do some 310 million Americans who neither borrow from Beijing nor print their own cash. If Democrats want more money to spend, they should rejuvenate this listless economy — through lower tax rates, deregulation, and free trade. Commercial vitality will yield higher tax proceeds.
Failing to raise the debt ceiling is not synonymous with default. It means finally denying spendaholics that “one last, little round of drinks” they crave and, instead, driving them to Trembling Hills to dry out.
Deroy Murdock is a columnist with Scripps Howard News Service and a media fellow with the Hoover Institution at Stanford University.