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Debt Ceiling and Shutdown

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"Debt Ceiling and Shutdown"

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Incidentally, I think the dynamics of a debt ceiling faceoff and the dynamics of an appropriations faceoff are quite different. That’s because a lapsing of appropriations triggers a very specific set of occurrences. When appropriations lapse, it becomes illegal for the federal government to do anything not related to the “essential functions” of human and population security. The key issue here isn’t that the government doesn’t have money. If you’re willing to work without pay temporarily, you’re not allowed to work if you’re deemed non-essential.

This is hugely disruptive and it’s obviously very burdensome to people who rely on government services.

The debt limit is a different kind of thing. When the Treasury lacks authority to engage in new borrowing, all that means is that the Treasury lacks the authority to engage in new borrowing. Nothing else has to happen. Some money will still be flowing in, which means some money can continue to flow out. And the administration has some flexibility in how it handles this. What’s more, the government can ask people to continue to do things in exchange for IOUs. Large defense contractors, for example, don’t live on a paycheck to pacycheck basis. And if Robert Gates calls up an airplane manufacturer and says “look, we can’t pay you this month but keep building the planes and we’ll pay what we owe once the debt ceiling fight is resolved” the guys who build the planes are going to keep on building planes. There’s no dramatic “hostage” moment, there’s just a small-but-growing inconvenience for a large number of people who rely in part on government checks to make a living. That all happens well before the federal government would be forced into a default scenario where it can’t pay off bondholders.

How that plays out in practice seems to me difficult to predict, but it’s not the same as shutdown dynamics.

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