Several Republicans, as the August 2 deadline for raising the nation’s debt ceiling has crept closer and closer, have said that having the U.S. default on some of its obligations for a few days or weeks would not necessarily be a bad thing for the economy. Sen. Pat Toomey (R-PA), for instance, said, “I don’t think it’s going to have an adverse impact on the economy for the days or weeks or perhaps even months that this would continue.” House Budget Committee Chairman Paul Ryan (R-WI) added that, “If a bondholder misses a payment for a day or two or three or four — what is more important is you are putting the government in a materially better position to better pay its bills going forward.”
In a speech yesterday, Federal Reserve Chairman Ben Bernanke threw cold water on the idea of a short-term default, saying that it would mean cuts to vital programs like Social Security and would shake confidence in the U.S.’s creditworthiness:
Some have suggested that payments by the Treasury could be prioritized to meet principal and interest payments on debt outstanding, thus avoiding a technical default on federal debt. However, even if that were the case, given the current size of the deficit and the uneven time pattern of government receipts and payments, the Treasury would soon find it necessary to prioritize among and withhold critical disbursements, such as Social Security and Medicare payments and funds for the military. Moreover, while debt-related payments might be met in this scenario, the fact that many other government payments would be delayed could still create serious concerns about the safety of Treasury securities among financial market participants. The Hippocratic oath holds that, first, we should do no harm. In debating critical fiscal issues, we should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and willingness of the U.S. government to pay its bills.
As CAP’s Michael Ettlinger and Michael Linden found, failing to raise the debt ceiling for even a limited amount of time can have significant negative consequences for the nation’s GDP. A U.S. default could also do severe harm to the already fragile housing market, even as prices plunge further than they did during the Great Depression.