An opinion column from Friday’s Wall Street Journal painted a sanguine picture of the potential collision of the United States Treasury with its statutory debt ceiling. The column, entitled, “The Myth of Government Default,” by David B. Rivkin, Jr., and Lee A. Casey, can be found here if you have an Internet account with the Journal, but just in case I will offer the following brief excerpt:
Contrary to White House claims, Congress’s refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America’s outstanding public debt, with calamitous consequences for our credit rating and the world’s financial system. Section 4 of the 14th Amendment provides that “the validity of the public debt of the United States, authorized by law . . . shall not be questioned”; this prevents Congress from repudiating the federal government’s lawfully incurred debts… Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.
Allow me to provide a slightly more elaborate and general summary of this argument as it circulates in the Washington ether. Admittedly, this argument is somewhat less measured and nuanced than that presented by Rivkin and Casey.
Some believe that failure to increase the statutory debt ceiling would cause the federal government to default, which those persons contend would entail serious ill effects, this argument goes. However, in fact, even if the debt limit is not increased, the federal government need not default, which is defined accurately as the failure to service or redeem in a timely fashion its outstanding debt instruments. The courts have held that servicing the debt, which is mandated by the Constitution, has rightful precedence over paying other obligations, which are sanctioned by mere laws. So the correct policy choice today is to refuse to increase the debt ceiling, and thereby to win political leverage in the debate over the budget – which can be achieved at no risk of a financial market event.
I see three major problems with this argument.