Whiteman Carries 100-Trillion Dollar Bill to Illustrate the Consequences of Default
There is no mystery in the positions most political leaders have taken in the stalemate over the federal debt limit. Both Republicans and Democrats see this as an opportunity to score points with their political bases, and both sides are loath to be seen as backing down. The mystery is what's in the coffee of those who insist there is no need to raise the debt limit, now or ever.
U.S. Rep. Steve King, R-Ia., is part of this movement in the House. Even after the federal government hits the limit on borrowing, King believes it can get along just fine on the revenue it collects. King even drafted legislation that would set priorities for which payments are made first, with interest on the national debt and pay for members of the U.S. military at the top of the list.
That means, of course, that almost no other obligations of the federal government could be fully paid for, from the federal prisons to the Department of Veterans Affairs. Not to mention salaries for members of Congress. And, it is not fear-mongering to say there would be no money to pay employees to process Social Security and Medicare checks, even if a stream of revenue could be protected for those entitlements.
Nor is it clear under the King scenario how long this could go on. Weeks? Months? Forever?
These questions have not been satisfactorily answered by those who say the Obama administration is lying or at least exaggerating the crisis that would be caused by failing to raise the debt limit.
There may be room for disagreement about when exactly the problem begins, but it is no lie, nor is it an exaggeration, to say that once the federal government hits the statutory debt limit, the government has a serious problem: At that point it can no longer borrow money, and when the government is borrowing roughly 40 cents of every dollar it spends, that will force some very draconian spending cuts immediately. That is just fine for those who believe the government spends too much money, but the prospect of a 40 percent budget cut would have profound implications for the nation.
Obviously the government must continue to make the interest payments on debt it has already racked up. Nations that default on debt can experience catastrophic economic problems as a result. Charles Whiteman, associate dean of the University of Iowa Tippie College of Business, carries a 100-trillion-dollar bill from Zimbabwe in his wallet to show his economics students when discussing the default consequences of a hyperinflation. (Tippie Editor's Note: a correction has been made in this last sentence.)
Whiteman said even failing to raise the borrowing cap could be "enormously disruptive" to the U.S. economy. And he points out that the debt-limit debate in Washington right now is unnecessary, because Congress has already agreed to the current level of spending. "The legislation has already been passed that put us into this situation," he said. "They already said yes once" to spend the money, "they shouldn't have to say yes twice" by voting to raise the borrowing limit to pay for it.
There appears to be broad agreement in Washington that failing to raise the debt limit would be a disaster, but the politicians haven't figured out how to get the job done. The first step is to stop listening to the Steve Kings of the world who believe the disaster scenario is a lie.