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If Congress fails to raise the debt ceiling, the result would surely be an immediate financial Armageddon the likes of which the U.S. has never seen, right?
Not so, says Virginia Congressman J. Randy Forbes, R-4th.
With the nation expected to reach its $14.294 trillion debt cap as early as today, a decision on the debt ceiling looms large. Unlike previous votes, this one won’t be a formality. Republicans say they won’t approve a hike without a sweeping plan to reduce the debt.
Recognizing that consensus will not be reached by today, Forbes has co-sponsored the "Full Faith and Credit Act," which would require the U.S. Treasury to prioritize payments on the public debt over any other payments when we reach the ceiling.
In a blog post on his website, Forbes touts his legislation as a safeguard, saying warnings of impending fiscal calamity have been greatly exaggerated.
"The most inflammatory rhetoric we’re hearing is the threat that failure to raise the debt limit would automatically cause the U.S. to default on our national debt. This claim, thankfully, is baseless," he said.
Is it? We decided to take a look.
Although Forbes did not identify who he thinks is guilty of spreading "inflammatory rhetoric," a growing number of House Republicans are accusing U.S. Treasury Secretary Timothy F. Geithner of overstating the risk of default if the debt limit is not raised by this summer.
Forbes, in his blog post, rolled out the identical argument being used by Geithner’s critics.
"Whether or not the debt ceiling is raised, the federal government collects significantly more revenue than it needs to fulfill U.S. debt obligations," Forbes wrote. "If the debt ceiling is reached, the government will still have ten times as much revenue as it needs to make debt payments. The only way the U.S. will immediately default upon reaching the debt ceiling is if the government actively chooses to do so by not making debt payments."
Well, if we’re talking about today, Forbes is absolutely right.
As it has become clear that consensus will not be reached by today, the U.S. Treasury has said that through various fiscal maneuvers, it can extend until Aug. 2 the deadline before default is even a possibility.
OK, but the larger question is, if Congress remains deadlocked in early August, do we default "automatically" then?
Well, no. But it wouldn’t be pretty.
"What will happen is that we’d have to stop making payments to our seniors — Medicare, Medicaid, Social Security," Geithner recently said in an ABC interview. "We’d have to stop paying veterans’ benefits. We’d have to stop paying all the other payments on all the other things the government does.
"And then we would risk default on our interest payments," he added.
A Congressional Research Service report backed that up Geithner’s assessment. It said the federal government needs to borrow $738 billion beyond the current statutory limit to finance obligations for the remainder of this fiscal year, which ends Sept. 30.
"To put this into context," the report said, "the federal government would have to eliminate all spending on discretionary programs, cut nearly 70 percent of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 in order to avoid increasing the debt limit. Additional spending cuts and/or revenue increases would be required, under current policy, in FY2012 and beyond to avoid increasing the debt limit."
Jim Horney, an analyst with the left-leaning Center on Budget and Policy Priorities, said taking dire steps to keep up with debt payments would not avert U.S. credit problems. He said the federal government would still likely default on payments for goods and services and benefits to Social Security and Medicare beneficiaries.
"There are really serious consequences from us defaulting on any of our legal obligations even if we make interest payments but default on other things," he said. "It would do serious damage to the credibility and credit worthiness of the U.S. government."
Horney said reneging on any payments would cause creditors to lose faith in the U.S. to meet all of its obligations and lead to higher interest rates.
On the other hand, some conservatives argue that it would simply force the U.S. to start living within its means.
"It would be a disaster if we defaulted on our debt. It would be a disaster if we were hit by an asteroid. I think being hit by an asteroid is a more likely scenario," said J.D. Foster, an expert on fiscal policy with the conservative Heritage Foundation. He suggests that Congress look for dramatic spending cuts or offer guidance through legislation on which debts should be paid first to reassure creditors.
So let’s look back.
Forbes’ claim is that failure to raise the debt ceiling would not "automatically" cause the U.S. to default on its debt.
We checked it against two deadlines: first, the May 16 date when we are expected to reach the current debt cap, and then the ominous Aug. 2 date issued by the Treasury.
On both, Forbes is right. The Treasury has already said we can reach the max and be OK for a couple months. Beyond Aug. 2, debt payments could continue at the expense of maiming popular government programs.
That’s an option. So we rate Forbes’ claim True.
Email interview with Joe Hack, press secretary for Rep. J. Randy Forbes, R-4th, May 9, 2011.
Rep. J. Randy Forbes, Full Faith and Credit, May 5, 2011.
U.S. Department of Treasury, Secretary Geithner Sends Debt Limit Letter to Congress, Jan. 6, 2011
U.S. Department of Treasury, February 2011 Quarterly Refunding Statement, Feb. 2, 2011
U.S. Department of Treasury, Secretary Geithner Sends Debt Limit Letter to Congress, April 4, 2011
Market News International, Letter from Secretary Geithner to Sen. Pat Toomey, Feb. 3, 2011
The Tax Policy Center, Handicapping the Debt Ceiling Debate, Jan. 14, 2011
Associated Press, "Geithner gives Congress more time on debt limit," May 2, 2011
"This Week," Geithner interview transcript, April 17, 2011
"Meet the Press," Geithner interview, April 17, 2011
Interview with J.D. Foster of the Heritage Foundation
Interview with James Horney of the Center on Budget and Policy Priorities
Congressional Research Service, "Reaching the Debt Limit: Background andPotential Effects on Government Operations," April 27, 2011
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