WASHINGTON — Senator Richard Burr, Republican of North Carolina, a reliable friend of business on Capitol Hill and no one’s idea of a bomb thrower, isn’t buying the apocalyptic warnings that a default on United States government debt would lead to a global economic cataclysm.Read the rest here.
“We always have enough money to pay our debt service,” said Mr. Burr, who pointed to a stream of tax revenue flowing into the Treasury as he shrugged off fears of a cascading financial crisis. “You’ve had the federal government out of work for close to two weeks; that’s about $24 billion a month. Every month, you have enough saved in salaries alone that you’re covering three-fifths, four-fifths of the total debt service, about $35 billion a month. That’s manageable for some time.”
Strictly speaking, they are correct. The danger of an actual default on US Treasury debt is pretty low in the near term. But the good news definitely stops there. While there will be enough money in the near term coming in from ordinary tax receipts to cover the interest on US bonds, there is no where near enough to run even minimal essential services beyond that.
When considering what we need to spend money on, Government expenditures can be ranked into three tiers by priority. The top tier is the national debt. This is covered by language in the 14th Amendment which IMHO means the debt gets serviced before anything and everything else. Period. After that we have so called non-discretionary spending. These are programs that are required by law to spend certain amounts of money. Think Medicare. And then we have discretionary spending which pretty much covers everything else, like law enforcement, air traffic controllers and national defense. We probably have enough to cover the first two tiers of priorities without more borrowing. After that though, there will be damned little left over.
So we are talking about the immediate imposition of a level of austerity the likes of which would almost certainly be devastating economically and create serious risks to public safety and national security. And while our bonds are safe, contractors and vendors who are owed money by the US Government would be in the bottom tier of spending priorities for our suddenly balanced budget. They may be waiting a while until they get paid.
The ripple effects of this will be like an economic bomb going off. And it will get worse quickly. As the economy plunges into another recession, possibly including another panic on Wall Street, tax receipts are going to start dropping rapidly. This is going to mean that we are going to have to rebalance our budget on an almost month by month basis with ever deeper cuts in non-discretionary spending. Which in turn will have worse and worse effects on the economy causing further drops in tax revenue... repeat until sanity returns.