She was at it again just the other day. Treasury Secretary Janet Yellen was issuing warnings to the American people of the approach of Washington’s debt ceiling. As before when speaking on this subject, she suggested that the constraints imposed by the ceiling could lead the United States to default on its debt and that would in turn bring on financial and economic chaos. Media outlets and others in the political establishment have fanned these fearful flames. Though default would indeed bring financial and economic chaos, it is far from inevitable, even if Washington were to hit the debt ceiling. The government has reached ceilings many times in the past and never come near default. There is no reason it would do so now. The good secretaryknows better. She might do her duty and explain that fact to the public and her fellow Solons in the capital.
To see why this matter is not nearly as terrifying as it appears in so many media outlets and, sadly in Secretary Yellen’s testimony, is to recognize that Washington will continue to have a revenue flow even if it hits the debt ceiling. The government may rely too much on debt, but it does not rely exclusively on debt. Taxes and fees, according to the latest White House budget, support almost 80% of what the government spends a year. This revenue flow would then presumably allow the government to carry on with some 80% of its activities even if it could not issue a penny in new debt. That amounts to a $4.9 trillion cash flow. It would give Washington ample financial resources to continue most government activities.
If past debt ceiling experience is any guide, Washington at the limit could reasonably carry on, at least for a while, with only the cash flow from taxes and fees. It would set spending priorities. One such priority would include the payment of principal and interest on government debt. According to the recently released White House budget, that need will take some $665 billion this year or 14% of the total revenue flow. The remaining $4.2 trillion would go for other essential government services, such as Social Security and Medicare, law enforcement, including federal courts, paying the armed forces, and the like. National parks and monuments might close until Congress gets its act together and some government employees might face temporary furloughs, but there would be no need for default much less to bring on the disaster that seems to occupy so many imaginations, including that of Treasury Secretary Yellen.
To be sure, the cost of debt service only accounts for the interest on the outstanding debt. Bonds will also mature and need refinancing. Even in this case, the debt ceiling would not present a problem. After all, every maturing bond would reduce the outstanding debt of the government, bringing the number below the ceiling and allowing Washington room to issue new debt to pay off the holders of that maturing bond, which incidentally is Washington’s usual practice. The ceiling would only constrain the ability to increase the existing level of debt.
This simple arithmetic explains why the United States has never defaulted despite hitting the debt ceiling several times in the past — 21 times in fact during the last 50 years. The time between hitting the debt ceiling and the legislation to relive the constraint varies from incident to incident. Sometimes, it is only a few hours, as in 1982 and 1984 under the Reagan administration. Sometimes the time to resolve matters lasts longer – 18 days, for instance, in 1978 under Jimmy Carter and 16 days under Barack Obama in 2013. The longest stretch was 34 days between December 2018 and January 2019 during the Trump administration. But the nation never came near default.
In a pinch, though never before used, the government could tap the Federal Reserve’s (Fed’s) $5.2 trillion portfolio of Treasury debt. That is almost a full year of federal spending. The Fed could simply forgive all or some of this debt, a drastic move to be sure, but since for practical purposes the Fed is part of the federal government, such an act would amount to little more than moving money from one pocket to another. Ultimately, such a use of funds could have inflationary effects, but that matter is separate from default.
Considering that the House of Representatives has already passed a compromise proposal to allow a rise in the debt ceiling, and President Biden has at last shown a willingness to negotiate, the duration of the incident this time will likely be shorter than much of this historic experience. The standoff will end, as in the past, when one side or the other realizes that it will get the political blame for the interruption in some government services. Then Congress will rush to a compromise. Even if that takes a while, the dreaded default will not occur.