Richard Wolf for USA Today has a useful look at what kind of immediate program cuts we’ll be looking at if Congress doesn’t agree to raise the debt ceiling in a timely manner. Long story short, the Treasury Department will be facing difficult choices between slashing programs for seniors and trying to run wars without paying the people doing the work of keeping armies in the field:
It shows that in August, the government could not afford to meet 44% of its obligations. Since the $134 billion deficit for that month couldn’t be covered with more borrowing, programs would have to be cut.
If Social Security, Medicare, Medicaid, unemployment benefits, payments to defense contractors and interest payments on Treasury bonds were exempt, that would be all the government could afford for the month. No money for troops or veterans. No tax refunds. No food stamps or welfare. No federal salaries or benefits.
Want to protect the social safety net? That would be possible — but only if Treasury stopped paying defense contractors, jeopardizing national security. Plus virtually every federal agency and employee.
The best way to handle this, in the first instance, is to pay contractors with IOUs. The firms that supply the United States military aren’t cash-constrained and they don’t want to give up the Pentagon as a customer. If we ask them to keep doing the work and just promise to pay them after congress raises the debt ceiling, they’ll almost certainly keep paying the troops. And on a symbolic level, the high-level officials of the Obama Administration can agree to work without pay even though this won’t save very much money. Failing to pay out tax refunds, Social Security benefits, food stamps, and other cash and cash-like transfers would, by contrast, be catastrophic leading to the kind of historic collapse in nominal economic activity that Michael Ettlinger and Michael Linden have warned against. The better option is to stop paying doctors and hospitals who treat Medicare and Medicaid patients, and hope that most health care providers are willing to keep doing work and accept delayed payments. The hope would have to be that after a week or two of this, the various government contractors and health care providers who are losing money would twist Congress’ arm enough to get the debt ceiling increased. But if that doesn’t work, then you need to start looking at only partially paying troop salaries, Social Security benefits, and civilian federal employee salaries. At that point, the consequences for the macroeconomy start going from “uncomfortable” to “potentially catastrophic” because people who aren’t getting paid aren’t going to be able to buy goods and services from others, kneecapping private sector employment.