Imagine that sometime next month, the unimaginable comes to pass: the U.S. Treasury runs out of funds with which to pay the nation’s bills — including the interest due on our bonds and obligations including government salaries and Social Security checks — and consequently fails to make expected payments. The only way this could happen is if Congress fails to raise the nation’s debt ceiling in a timely manner.
If this situation persisted for any substantial period, it would call into question the soundness of Treasury bonds, which are treated as risk-free collateral throughout the global financial system. The consequences would be all but apocalyptic.
Financial apocalypse brought on by political incompetence is a compelling narrative — and one that a great many journalists and citizens would be primed to embrace, given our current political context. So there would be a strong temptation to frame any missed payment as the beginning of the end for our country and the global economy. (That’s probably why lawmakers are trying to raise the debt limit as part of a bill to fund the federal government’s operations.)
But we should all resist that framing. Odds are, any crisis would be short, and payments would quickly resume. The best thing to do if the country does miss payments because of a debt ceiling kerfuffle would be to treat the incident as a minor annoyance and go on with business as usual. The surest way to turn what could just be a temporary, if unfortunate, situation into a full-blown disaster would be to treat it like one.
For either party, consciously choosing to starve the nation of needed funds to make some point (even a broadly popular one such as the undesirability of enormous government debt) would incur huge political costs, much greater than any government shutdown. Members of Congress would have to be politically suicidal to keep up a standoff in which President Trump and his administration insist on the urgency (indeed, the national security imperative) of raising the debt ceiling quickly and without strings attached, so there would be every reason to expect a quick defusing of the crisis. Given Treasury Secretary Steven Mnuchin’s assertion that the president would like to see the debt ceiling replaced entirely, and the administration’s desire to head off a developing crisis, this would be the most likely scenario.
Purchasers of U.S. government bonds could figure that out, too. So while short-term interest rates would inevitably rise, they wouldn’t necessarily go up sharply enough to wreck the economy. With the debt ceiling raised quickly, the Treasury could make all payments accompanied by a small late fee that reflects prevailing interest rates.
Getting the word out that a late debt payment would not necessarily be catastrophic should be viewed, in part, as a matter of patriotic loyalty that transcends partisan politics. We should make it very clear to the world that when we make a promise, we are good for it, political rituals around raising the debt ceiling notwithstanding.
How bad would it be for our country’s reputation if we failed to make a payment, though? It all depends on the framing. “Late, probably by a day or so” sounds very different from “delinquent with no plan in place to pay” (like Venezuela, currently, or Argentina a decade ago). Both could simultaneously be accurate. But the more the issue is treated as a decisive break with the United States’ past record as a solid credit risk, the more people might start to think of it that way. We should try to avoid self-fulfilling prophecies of doom whenever possible.
Professional commentators and armchair pundits alike should also consider a far more practical point as they consider how to characterize any missed payments: Declaring that there will necessarily be a catastrophe is likely to be proved wrong within days. Those who shriek that the sky is falling do risk fueling a crisis, and certainly they might help drive up the interest rate penalty a missed payment might cause. But most probably, panic will be ephemeral and those who promoted the darkest visions will come to look very foolish before long. Because there is no upside for any of America’s political leaders in dragging out a debt ceiling impasse, there is every reason to think they will get it resolved quickly.
But wait: Doesn’t that logic also suggest that we would never actually reach a debt ceiling impasse in the first place? Yes, it does, and that remains the best bet. But we can nevertheless play out the trembling-hand perfect equilibrium scenarios in which some miscalculation or malfunction leads to a missed payment.
In fact, that has happened before. As Donald Marron explained back in 2011, the United States experienced a short default in 1979. Protracted debt ceiling negotiations (notably, between a Democratic Congress and president of the same party, Jimmy Carter) were followed by “an unanticipated failure of word processing equipment used to prepare check schedules.” Weekly payments due to T-bill holders were missed on April 26, May 3 and May 10. Amazingly, the government did not voluntarily agree to pay extra interest to compensate for its lateness, but had to be forced to do so through various legal machinations. That episode did have real costs, as T-bill rates rose markedly in its wake, but — even though it lasted for weeks! — it is remembered only by debt ceiling aficionados today. There was no grand constitutional or financial crisis.
As I have argued, we ought to seek to treat these impasses as hiccups rather than unmanageable implosions. Nothing stands in the way of the United States honoring its debts except for our historically bizarre law limiting how much we can borrow for payments we’ve already legally obligated ourselves to make. So we should absolutely expect our debts to be honored.
That assuredly does not mean that our current debt ceiling system is harmless or costless. The debt ceiling creates real risks without any compensating benefits. The most sensible thing we could do would be to make permissible debt a strict function of Congress’s spending and taxing decisions, which are already the real choices that determine our nation’s indebtedness. But as long as we do have the debt ceiling in its current form, we should expect to be able to find ways to muddle through without allowing it to bring on true disaster.
PHILIP WALLACH is a senior fellow of governance at the R Street Institute.