Don't Be Fooled: Default Will Be Painful

Conservatives, whether they are think tank fellows or radio hosts, share the same talking point: paying off America’s debt’s without default will be a painless process. Veronique de Rugy made this case in National Review, arguing that there is more than enough coming in through tax revenue to both pay off debts and run the government:

There is absolutely no reason for the U.S. to default on its debt unless it would like to. The U.S. owns roughly $2 trillion in assets that it can use, in addition to $2.2 trillion in tax revenue.

While de Rugy's point about selling off US assets is actually a fair one, there is no way selling off assets in a crisis moment makes sense, especially in the next few weeks or months.

She then links to a Mercatus Institute paper she co-authored which claims there is more than enough money to keep the system working:

According to the Congressional Budget Office, the federal government is estimated to collect $2.2 trillion in tax revenue over FY11.

That alone would be enough to cover interest on the debt ($214 billion), thereby avoiding any technical default of the U.S. government; Social Security ($727 billion); Medicare ($572 billion); and Medicaid ($274 billion) and would leave approximately $400 billion for other priorities.

On his radio show on Wednesday May 18th, Sean Hannity gave a much less policy-savy version of this response to a caller who phoned in (near the end of the first third of the broadcast):

Roy [the caller on the show]: We have plenty of income to service our debt to pay our creditors but I think the [debt] ceiling is going to have to be raised because if we don’t raise the ceiling we can no longer deficit spend, and if we can’t deficit spent we have to cut the budget $1.6 trillion which is a cut of 44%. Try to find those cuts.

Hannity: Tim Geithner and the Administration is out there saying ‘the sky is about to fall. the markets are about to crash’ ... The fact is, the debt ceiling has already been violated ... It’s time to control Geithner (the tax chief) Obama, and their party...

Roy: But it can’t all be done at once.

Hannity: Sure it can.

Roy: If you try and cut 44% of the budget I don’t see how you can do that. You’re looking to ask Social Security recipients to take a 44% decrease to their…

Hannity: It’s not going to come to that. That’s not what I’m talking about there. All of this is hyperbole and fear-mongering...

Hannity and de Rugy are arguing this won’t be painless, but will it?

The Mercatus paper that de Rugy authored states that after paying off the debt, Social Security, Medicare, and Medicaid, that there would be only $400 billion left over for “other priorities”

So how much does that leave for say, the Department of Defense? (A part of the government that maybe a libertarian like de Rugy has no special love for but which Hannity certainly does.) Well the Defense budget for FY 2010 was more than $660 billion, and the Heritage Foundation would like to see Congress provide the minimum of $548 billion to the defense budget in FY 2011. So $400 billion is certainly not going to cover that.

And that’s just the defense budget. We still have the rest of the government to pay for. Nearly $500 billion in non-defense discretionary spending was spent in FY 2010. There simply will not be enough tax revenue to keep funding all services.

So how do we put this square in the circle? Do we preserve entitlements but make radical cuts to the defense and non-defense budgets? Do we decide to completely cut Medicaid since that program’s recipients are not a powerful voting constituency? (Even though such a measure would certainly fail the Senate and not reach the White House.) Do we try and achieve across the board cuts and make deep dents into Medicare this year? (Instead of protecting people currently on Medicare with a firewall as Ryan and the GOP wants to do to keep older voters on their side.)

In any scenario, it's absurd for Hannity to assert that Social Security and other entitlement payments won’t be affected, and disingenuous for de Rugy to act as if there really is enough money to keep the system working without any real consequences. At AEI, Pat Toomey argued “a disruptive series of events are not a catastrophe” but cuts on this scale and with this level of suddenness (in the middle of three wars) could be very catastrophic.

Follow Noah on Twitter: @noahkgreen

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