WHAT, EXACTLY, IS A “DEFAULT?”
Negotiations over the debt limit are still ongoing, and we are starting to hear a lot about the imminent prospect of a “default.” The term gets thrown around a lot in the press, usually attached to words like “unprecedented” and “catastrophic.” But the term creates confusion wherever it lands. Some of this reflects garden-variety misunderstanding. But I worry that some of it reflects a kind of intentional slipperiness by motivated actors who want to frame debt-limit issues a certain way.
There are at least two senses in which the term “default” gets used. The first, and probably the more intuitive usage, refers to a failure to make payments on the public debt securities of the United States, like bonds and Treasury bills. On this point I am not Pollyanna: If that kind of default happens it is likely to be a really bad thing. But as I’ll explain more below, I don’t think that outcome is particularly likely. (Though it’s not impossible.)
The second sense in which the word “default” gets used is something like: “Any failure by the United States to make any payment in full and on time.” I confess I find this usage of the term spectacularly unintuitive. But, putting intuitions aside for the moment, this second usage also covers a huge potential breadth of potential outcomes. What payments, exactly? And for how long? There is a big difference between a subset of federal salaries getting paid a day late (perhaps against the backdrop of a deal that has been struck but is still grinding its way through bicameralism and presentment), and large swathes of the federal budget going unfunded for many weeks as Congress and the President continue to flounder.
These distinctions are important. But the difference between usage one and usage two—and the important differences of degree within usage two—are sometimes obscured.
Well, that confusion is not at all by accident, of course. And honestly, given the political system’s utter inability to reduce spending in a rational way, “large swathes of the federal budget going unfunded” may be the best we can do:
Authorized and even appropriated spending isn’t “the public debt.” For constitutional purposes, promised benefits from Social Security, Medicare and other entitlements aren’t even property, as the Supreme Court held in Flemming v. Nestor (1960), and Congress has as much authority to reduce them as to increase them. When lawmakers were drafting the 14th Amendment, they revised Section 4’s language to replace the term “obligations” with “debts.” If the Treasury ran out of money, the constitutional obligation to pay bondholders would trump all statutory obligations to spend. . . .
Ms. Yellen also said that “Treasury’s systems have all been built to pay all of our bills when they’re due and on time, and not to prioritize one form of spending over another.” But as the Journal has reported, department officials conceded in 2011 that the government’s fiscal machinery certainly could prioritize payments to bondholders, and the Federal Reserve prepared for such a contingency. There’s no question enough money would be available: The government collects roughly $450 billion a month in tax revenue, more than enough to cover the $55 billion or so in monthly debt service.
Reducing spending in a rational way would be better, of course, but that’s not on the table.
UPDATE: From the comments: “This conversation is what the debt ceiling is supposed to invoke.”
