Two points are overlooked in the current debate over the debt ceiling. First, the US won’t default if the debt ceiling is not raised. Second, the federal government needs the debt ceiling vote to force spending cuts that never happen except under threat. 

The US Constitution requires the government to pay the principal and interest on its borrowing.  After the Civil War, a question arose about whether the federal government would pay the veterans what it had promised. The federal government had sold bonds to provide those funds. Giving assurances that these veterans would not be short-changed was so important the newly adopted 14th Amendment to the Constitution, approved in 1868, specified

 “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

 Not paying our bonds would also violate the 5th Amendment to the Constitution, which prohibits the federal government from depriving any person of property without due process of law. (Due process, for instance, would be met when the government takes property through taxation.) 

So, the talk about the US becoming a third-world economic force with its bonds assuming junk status is hyperbole. What will result, however, is a constraint on federal government spending.

There are specific dates for when US debt comes due: the maturities printed on US government bonds. As those payments are made, if the debt ceiling is not raised, the federal government will have to do without that amount going forward, since new debt cannot be issued. The result will be a slow-rolling squeeze of available funds for federal expenditures.

 In the last fiscal year, the federal government spent 6.27 trillion, paid for with 4.90 trillion of taxes and 1.38 trillion of borrowing, through long and short term treasury bonds. The average maturity of those bonds is 5 years. Thus, about 20% of the government’s funds from borrowing won’t be available if the government can’t roll over the debt that is currently coming due. That totals 276 billion dollars. Constitutionally, the government can’t avoid paying off the bonds that mature plus the 384 billion dollars of interest on all of its bonds.  So, of this year’s expenditures, 5.61 trillion will have to sustain a drop of 276 billion, or a cut of just under 5%.  

In 1985, Congress enacted Gramm-Rudman-Hollings; a system triggering across-the-board cuts in spending if certain deficit reduction targets were not met. In 1990, the system was amended, but the threat of across-the-board funding cuts was kept in place. The threat worked. Deficits started to come down in 1992 and in 1998, the US actually balanced its budget—the last time it ever did (the 1990 act expired in 2002).

 The debt ceiling is all the threat that remains. It works essentially the same way the 1985 and 1990 systems did: a real cut in spending would happen automatically if Congress and the President did not agree on reducing the deficit. Congress won’t cut spending unless there is a realistic, automatic consequence if they don’t; but if there is such a threat, the lesson from the 1990’s is that agreement will be reached.  The debt ceiling is essential to driving the President and Congress to do what neither would otherwise do.

But what if they don’t? If agreement on raising the debt ceiling is not reached, a 5% cut in spending would result. Would the Republican House tolerate a 5% cut in defense spending? Would either house accept a 5% cut in social security, medicare, and medicaid?  Defense and entitlements are not protected by the Constitution; only debt payments are. Entitlements constitute 46% of the entire federal budget. Making them untouchable would compel a 10% cut in everything else: including defense. Agreement on the debt ceiling or not, federal spending will have been cut—an almost impossible result otherwise.