COP: Will We Default on Our Debt?

Heritage Foundation

The United States today hit an all-time high debt, passing $14 trillion, according to Associated Press reports. And with $45,300 of debt for every man, woman and child in the United States, it’s clear as day that spending is the problem. Yet Washington has yet to come to an agreement on a way forward, either in the short term or the long term, though the budget plan passed by the House of Representatives would fundamentally alter this debt-ridden path the nation is on.

It’s time to get serious about cutting spending and getting the U.S. government to live within its means. But that’s not the message coming out of the White House.

On the issue of the whether to raise the debt ceiling—allowing the government to borrow and spend even more money—President Barack Obama has resorted to dire predictions about what could happen if Congress does not take action. The Hill reports: If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOUs, it could unravel the entire financial system,” Obama said at a town hall meeting hosted by CBS last week but released Sunday.

“We could have a worse recession than we already had, a worse financial crisis than we already had.”

And, likewise, U.S. Treasury Secretary Timothy Geithner warned that if Congress does not raise the debt limit, the U.S. economy would likely enter a “double-dip recession” and added, “A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth, and increasing unemployment.”

But Heritage Foundation Vice President of Domestic and Economic Policy David S. Addington notes that those dire predictions just aren’t true. In discussing J.D. Foster’s paper “Congress Has Time and Options on Debt Limit,” Addington writes:

As Dr. Foster’s paper demonstrated, there will not be a default on the Federal debt when the Treasury reaches the statutory limit on its borrowing of $14.294 trillion. The Treasury just will not be able to borrow any more money. The Treasury would still pay debts that come due, putting off temporarily payment of less important obligations as necessary to pay the maturing debt.

President Obama’s prophecies about the debt limit obscure an underlying truth: The U.S. government must find a way to get control of spending. Simply raising the debt limit and allowing the United States to borrow more money, unchecked, will not make that happen. To that end, in an interview with The Wall Street Journal, investor Stanley Druckenmiller warns that defaulting on the debt is not the real problem Wall Street should be worried about:

In the future, he says, “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order.”

If the president needs a roadmap to making those cuts and getting the government in order, he ought to take a look at Heritage’s Saving the American Dream—our plan to fix the debt, cut spending, restore prosperity, balance the nation’s budget within a decade, and keep it balanced. On the issue of the debt ceiling, Addington has some advice, as well:

If the Obama Administration is serious about getting spending under control and about maintaining orderly financial markets, Secretary Geithner needs to help guide his colleagues at the Office of the Management and Budget and in the White House toward near-term substantial reductions in Federal spending, including for entitlement programs, and long-term solutions to ensure that the Federal Government never spends itself again so deeply into debt that it cannot effectively manage its way out.