Are Fears About Breaching the Debt Ceiling Overblown?
According to the latest projections from the Treasury Department, the U.S. is just days away from the first official debt default in its history, which will occur unless Congress votes to raise the nation's debt ceiling. (The U.S. has technically missed debt payments in two other instances: first during the War of 1812 and then in 1979, when a computer glitch temporarily delayed some payments. But unlike today's situation, neither of those instances involved Congress intentionally failing to give the go-ahead to make debt payments.) Treasury officials have said that a U.S. default will cause an economic catastrophe worse than the Great Recession.
Many economists agree with that assessment. "Any investor, including those with 401(k) accounts, is going to get creamed," said Mark Zandi of Moody's Analytics. "Everything is going to be worth less. In the worst-case scenario, think: 2008. That's your case study for this." A group of economists wrote to congressional leaders saying that hitting the debt ceiling, "could translate into higher interest rates not only for the federal government, but also for U.S. businesses and consumers, causing all to pay higher prices for credit. Economic growth and jobs would suffer as a result."
But not everyone agrees. A number of Republican representatives believe that talk of a debt ceiling-induced catastrophe is overblown. "I think it's a lot of hype that gets spun in the media," Florida Republican Rep. Ted Yoho said. And some economists agree. "No, it will not be a catastrophe," Vernon Smith, a professor of economics at Chapman University's Argyros School of Business and a Nobel Prize winner, told Reason Magazine. Economist Lawrence White agrees: "Reaching the debt ceiling does not imply default on 'full faith and credit' Treasury debt, because the Treasury has more than enough income to make the interest payments due on the debt." Treasury has disputed that it can pick and choose which bills to pay so as to avoid a technical default.
So are fears about breaching the debt ceiling overblown? Here is the Debate Club's take: