Conservative expert downplays need for debt limit increase, claims U.S. won’t “default” as long as debt interests are paid

Daniel J. Mitchell, Senior Fellow, Cato Institute, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013. SOURCE: Joint Economic Committee

Unless Congress votes to raise the debt ceiling within the next week, the United States government will run out of cash to pay all of its bills and default for the first time in the nation’s history.

While most respected economists have warned about the dire consequences of default on the U.S. and global economy, Daniel Mitchell, a senior fellow at the conservative Cato Institute, disagrees.

Read more: Moody’s chief economist says Congress must raise debt ceiling in time to avoid “devastating” recession

In fact, Mitchell is even downplaying the need for Congress to increase the debt limit, claiming that the Treasury won’t need to borrow more cash to avoid default.

“When you have annual interest payments $230 billion roughly and annual tax revenues approaching $3 trillion, you don’t need to be a mathematical genius to realize that the Treasury Department should be able to manage that and avoid default, even though…it would be a messy process for other parts of the budget,” said Mitchell during his appearance before the Joint Economic Committee on Sept. 18th. “An increase in the debt ceiling is not needed to avoid default. It’s needed to avoid messy budgeting. It’s needed to avoid some of the complications with payments to providers, state and local governments.”

Treasury Secretary Jack Lew pointed out that prioritizing some payments over others will still result in default if Congress does not raise the debt ceiling.

Read more: Treasury Secretary Jack Lew warns U.S. will default on bills on Oct. 17th unless Congress raises debt ceiling

Mitchell’s reasoning is flawed because he applies the concept of default only to debt interests. That would be akin to someone claiming paying only the minimum dues on his credit cards would avoid defaulting on all of his debts even if he does not have enough cash to pay his monthly mortgage, gas and electric utilities, phone, insurance, and other bills.

Donald Marron, Director of Economic Policy Initiatives at the Urban Institute, underscored the importance that the U.S. government pay all of its bills – not just some – as they come due.

“We ought to be [able to] carry out our obligations to the beneficiaries who are relying on us. We ought to be a good business partner to the businesses that rely on us to pay them for the services they provide to the federal government. And we ought to pay our debt on time so we get the lowest possible interest rates and don’t disrupt financial markets,” said Marron. “We have the capability, it’s in our interest, and it’s the moral thing to do.”

But Mitchell insisted that the fallout from the debt ceiling fight is “worthwhile” if lawmakers can use the threat of default to exact fiscal austerity measures to address the nation’s long-term debts.

“Whatever short-term and fiscal mess…would be a relatively small price to pay if at the end of the day we made reforms that avoided the kind – the truly horrific, catastrophic fiscal problems that you see in European countries that never did have an action-forcing event like a debt limit that enabled them to get control of spending,” said Mitchell.

Again, Mitchell’s reasoning ignores the basic fact that raising the debt ceiling does not increase future government spending; it merely allows the Treasury to borrow the cash it needs to pay the obligations already incurred by Congress.

Sen. Mark Warner (D-Va.) called Mitchell’s pro-default argument “mind boggling”.

“I’ve been in business a lot longer than I’ve been in politics and it is stunning to me that anybody that would claim economic expertise would say that messing with the full faith and credit of the United States of America is a responsible action,” said Warner.

 

Learn More:

One Comment on “Conservative expert downplays need for debt limit increase, claims U.S. won’t “default” as long as debt interests are paid

  1. Pingback: Spotlight: Debt Limit 2013 | What The Folly?!

Leave a Reply

Your email address will not be published.