If you're starting to believe Republicans who say a breach of the debt ceiling would be no big deal, Paul Krugman urges you to think again. In his latest column for the New York Times, the award-winning economist and best-selling author lays out the options for a post-default U.S. while taking care to note that "they're all bad."
Taking on those who say the Treasury could "prioritize" its payments after hitting the debt ceiling, Krugman argues that this route, while feasible, is far from a sure thing. "First, the U.S. government would still be going into default, failing to meet its legal obligations to pay," he writes. Krugman argues further that prioritizing interest payments over other obligations — like Social Security, Medicare, and Medicaid — would continue the "terrible precedent" set in 2008, when financial interests were bailed out while everyone else was left to fend for themselves.
Perhaps most importantly, Krugman notes that prioritization, even if could be done, would mandate massive spending cuts across the government. These cuts would be so grave, Krugman writes, as to have "devastating economic effects," comparable to the bursting of the housing bubble that launched the Great Recession of 2007-2009. "That by itself," Krugman writes, "would surely be enough to push us into recession."
And it wouldn’t end there. As the U.S. economy went into recession, tax receipts would fall sharply, and the government, unable to borrow, would be forced into a second round of spending cuts, worsening the economic downturn, reducing receipts even more, and so on. So even if we avoid a Lehman Brothers-style financial meltdown, we could still be looking at a slump worse than the Great Recession.
So are there any other choices? Many legal experts think there is another option: One way or another, the president could simply choose to defy Congress and ignore the debt ceiling.
Wouldn’t this be breaking the law? Maybe, maybe not — opinions differ. But not making good on federal obligations is also breaking the law. And if House Republicans are pushing the president into a situation where he must break the law no matter what he does, why not choose the version that hurts America least?
There would, of course, be an uproar, and probably many legal challenges — although if I were a Republican, I’d worry about, in effect, filing suit to stop the government from paying seniors’ hospital bills. Still, as I said, there are no good choices here.
So what will happen if and when we hit the debt ceiling? Let’s hope we don’t find out.