The NY Times front-pages a story on the consequences of a government "default" so poorly researched and misleading that both sides will be unhappy. Bipartisan appeal!
Their lazy, hazy, crazy lead:
Many in G.O.P. Offer Theory: Default Wouldn’t Be That Bad
WASHINGTON — Senator Richard Burr, Republican of North Carolina, a reliable friend of business on Capitol Hill and no one’s idea of a bomb thrower, isn’t buying the apocalyptic warnings that a default on United States government debt would lead to a global economic cataclysm.
“We always have enough money to pay our debt service,” said Mr. Burr, who pointed to a stream of tax revenue flowing into the Treasury as he shrugged off fears of a cascading financial crisis. “You’ve had the federal government out of work for close to two weeks; that’s about $24 billion a month. Every month, you have enough saved in salaries alone that you’re covering three-fifths, four-fifths of the total debt service, about $35 billion a month. That’s manageable for some time.”
Now, it is crystal clear to anyone who has followed this that Sen. Burr is talking about the ability of the Treasury to *avoid* a default on US Government debt securities (i.e., the sort of debt covered by the debt ceiling) by using available cash to make interest payments. Is he saying, as per the headline, that "Default Wouldn't Be That Bad"? No. He is saying that a default on our publicly issued debt would not be necessary. That is a big difference, but it totally eludes the Times reporter. Let's help the Times out by quoting Reuters, a normally sympathetic left-wing source; they are using a Q&A format:
- The United States defaults when the money runs out, right?
It depends how you define default. Historically, default is when a country misses a payment to a creditor. The Obama administration says default would include any missed payment, such as payments for public health insurance. The first really big bill due after hitting the debt ceiling is a $12 billion Social Security payment on October 23.
- When would financial markets melt down?
Markets would be alarmed if it looked like bondholders would go unpaid for an extended period, and might even panic if any government checks were delayed. Many analysts think the administration would at least try to prioritize payments on the national debt, but Treasury officials say picking and choosing which bills to pay would be impossible.
That didn't look so hard, but it was too much for the Times editors. One might argue, as Obama supporters currently do, that any missed payment, whether it be to a state for Medicaid, a defense contractor for a satellite, or a bondholder for interest due, represents a '"default". But the breathless reporting describing the resulting financial apocalypse is based on the possible consequences of a default on a debt security, not a late payment to General Electric. That confusion benefits the fearmongerers, but I don't know why the Times is playing along on a front page story. Yes I do.
Of course, the Fearmongerer-in-Chief already told us the sky would fall with the sequester; the Times does manage to capture that point:
But the voices of denial are loud and persistent, with some Republicans saying that the fallout from the continuing shutdown and the automatic, across-the-board budget cuts known as sequestration has been less severe than predicted.
However, the gist of the Times story is that Republicans simply don't believe the many experts predicting global warming, oops, financial meltdown. No attempt is made to explain why the prioritization of payments (the Mad Hatter Sequester) may or may not be practical or legal. A snippet:
Both men were counting on the prospect of a global economic meltdown to help pull restive Republicans into line. On Wall Street, among business leaders and in a vast majority of university economics departments, the threat of significant instability resulting from a debt default is not in question. But a lot of Republicans simply do not believe it.
A surprisingly broad section of the Republican Party is convinced that a threat once taken as economic fact may not exist — or at least may not be so serious. Some question the Treasury’s drop-dead deadline of Oct. 17. Some government services might have to be curtailed, they concede. “But I think the real date, candidly, the date that’s highly problematic for our nation, is Nov. 1,” said Senator Bob Corker, Republican of Tennessee.
Others say there is no deadline at all — that daily tax receipts would be more than enough to pay off Treasury bonds as they come due.
I should unchain my Inner Pedant and note that no one claims that incoming tax receipts are enough to "pay off" bonds as they come due. Tax receipts will be enough to pay off the interest on the bonds; the principal amount can be re-issued under the current debt ceiling. Gee, its almost like the reporter doesn't understand this.
But to be fair and balanced, the Times also recycles nonsense from Rand Paul without criticism or comment:
“It really is irresponsible of the president to try to scare the markets,” said Senator Rand Paul, Republican of Kentucky. “If you don’t raise your debt ceiling, all you’re saying is, ‘We’re going to be balancing our budget.’ So if you put it in those terms, all these scary terms of, ‘Oh my goodness, the world’s going to end’ — if we balance the budget, the world’s going to end? Why don’t we spend what comes in?”
“If you propose it that way,” he said of not raising the debt limit, “the American public will say that sounds like a pretty reasonable idea.”
Well, yes and no. The budget will be in balance going forward, and the resulting fiscal drag will probably crush the economy. But set that nightmare aside - how, under the Paul cash-basis plan, do vendors get paid for their past work? My guess is that we have quite a few bills outstanding; unless Paul proposes to run a cash-basis surplus, there will never be funds to pay, e.g., GE for their hypothetical satellite.
Interestingly, and dare I say encouragingly, Obama seems to be aware of the difference himself, even if he is trying to confuse the rest of us:
“When I hear people trying to downplay the consequences of that, I think that’s really irresponsible, and I’m happy to talk to any of them individually and walk them through exactly why it’s irresponsible,” he said. “And it’s particularly funny coming from Republicans who claim to be champions of business. There’s no business person out here who thinks this wouldn’t be a big deal, not one. You go to anywhere from Wall Street to Main Street, and you ask a C.E.O. of a company or ask a small-business person whether it’d be a big deal if the United States government isn’t paying its bills on time. They’ll tell you it’s a big deal. It would hurt.”
"Paying its bills" is much broader than paying its publicly held debt. I have no doubt that if Obama asked Jeff Immelt whether it was important that GE got paid on time Mr. Immelt would say yes. But that doesn't mean GE lacks the cash management resources to handle a late payment from a customer. Now, if the payment is going to be late forever, as implied by the Paul approach, yes, that is a different matter.
I am strangely confident that the Times has reporters and editors who understand these nuances. They should have moved this effort from the front page to the op-ed section. Or they should offer their readers a subscription to the Washington Post and the fine work done by Brad Plumer, which includes a link to this CRS piece on Treasury cash management.
EXCELLENT SUCCINCTTITUDE: Kyle Hauptman of the AEI:
Today’s NY Times article on debt “default” is point-blank incorrect in headline and substance
PLAYING ALONG: Imagine my non-surprise to see this 'analysis' at FireDoglake, which quotes the Times story and adds:
It’s all a hoax, you know, like global warming.
And in an interesting blend which misses the point while keeping hope alive we get this:
One point that seems to be getting left out of the mainstream/corporate media coverage is that an economic crisis that results from defaulting on US debt obligations will first and foremost wreck the 1%. The US treasury bond is the lynchpin to the global financial system, a default would first cause a panic attack in financial markets and the top 1% own almost 50% of all financial assets. And given that the Federal Reserve has already run out of tricks and is down to money printing it is unlikely they would be at all effective in stopping a financial crisis caused by default. In other words, default would be the end of the upper class as we know it.
I think we all agree - the Republicans cited in the Times do - that defaulting on Treasury bonds, notes and bills would be a dreadful experiment.