The possibility that the federal government will soon be unable to finance its normal operations has become very real. As I wrote in my last column, this won’t be because investors view U.S. debt as excessive; America in 2023 isn’t Greece in 2009. If it happens, it will be because Republicans in the House are trying to use the debt ceiling to extort policy concessions they would have no chance of enacting through the normal legislative process.—Paul Krugman, In defense of debt gimmicks
If the government fails to raise the debt limit before the X-date, the Treasury Department will have to default on at least some bills. Officials might try to pay some debts and not others, but it is not clear whether such prioritization would be politically palatable or practical.–“We Hit the Debt Limit. What Happens Now?” Jeanna Smialek and Ashley Wu “The New York Times,” May 8, 2023
If the government fails to raise the debt limit in time, the Treasury Department will need to take action.
- The Treasury could pay only interest and principal on its bonds.
- The Treasury could arbitrarily pay some bills and not others.
- The Treasury could pay bills as they come due until the money runs out.
None of these are desirable. Bills not paid when due could include Social Security benefits and military salaries.
Other possible expediencies include:
- Congress could temporarily raise the debt limit or suspend it.
- The Administration could ignore the debt ceiling law as unconstitutional under The Fourteenth Amendment.
- The Treasury could adopt a gimmick as suggested by Paul Krugman.
- Congress could repeal the debt limit, resolving today’s crisis and future crises.
Any of the above would be better than default on government bonds, which economists predict would be catastrophic. Of all the problems we face, this should be the easiest to solve: just do it.
Reporters Smialek and Wu conclude:
At the end of the day, all paths lead to the same place: The United States will need to find a way to pay the bills it has incurred. The question is how much damage happens along the way.
