Default Means 44% of Bills Unpaid, 10% Decline in GDP

The Bipartisan Policy Center has found that if there is no agreement to raise the debt limit by August 2, the Treasury Department would fail to pay 44 percent of its obligations. That 44 percent of government spending, over a year, is equivalent to a real decline in GDP of 10 percent.

The number is that high because the Treasury Department has been making fiscal adjustments since March, in order to stave off default. Those adjustment have been pushed as far as possible and cannot continue to push back the deadline, beyond August 2.

Some analysts suggest the Treasury Department’s efforts since March mean the United States government is already, in some sense, in default, and that only with a rapid increase in new borrowing and new tax revenues, can the nation actually avoid that default coming fully to the fore.

The complexity of the budget crisis becomes somewhat simpler, when one looks at the direct impact of default on GDP. Even before we look at the indirect, ripple-effect impact on GDP, we know that a 44% decline in spending will constitute a 10% decline in GDP. That immediate impact on economic growth will plunge the nation into recession.

That new recession will be made far more severe by the financial industry ripple effect, as borrowing costs rapidly escalate, and homeowners, consumers and businesses, even major banks and investment banks, find it more expensive to borrow money to fund their lives and/or operations.

Job creation is sluggish already because banks are still not lending as readily as they did before the financial industry collapse of 2007-2008. And critics warn the banking industry has still not covered the gap between the wealth it claimed to hold—and so the obligations it took on—and the wealth actually available to the marketplace.

That imbalance slows the flow of capital to borrowers, meaning that only record-low interest rates make it possible for banks to keep lending. If interest rates begin to rapidly escalate, due to a combination of government default, a downgraded credit rating, and reduced demand for government bonds, the flow of capital to borrowers will be staunched.

With a dramatic drop in GDP, a dramatic reduction in lending, a dramatic increase in government borrowing costs, and the consequent decline in value-for-dollar spending ROI, the United States would find itself in a far deeper economic “ditch” than the Great Recession, with no clear path for getting out of the ditch.

Tax rates are as low as they have been since Harry Truman was president. Ronald Reagan raised the debt ceiling 17 times in 8 years, and raised taxes in order to offset the deficits created by his historic tax cuts. The cause of long-term debt and deficit reduction requires that the massive costs of default not come due.

For the first time in living memory, a Democratic president is offering major concessions on Medicare, Medicaid and Social Security, in exchange for relatively modest upward adjustments in the tax burden on the wealthiest Americans. A number of Senate Republicans agree this is the more responsible way to actually reduce the debt and annual budget deficits.

There is bipartisan support for the Gang of Six plan, which requires $2 trillion in new revenues. Some now argue that Tea Party Republicans in the House of Representatives should be ignored by Speaker John Boehner, because they continue to vow to oppose any increase in the debt ceiling, no matter the agreement reached.

Two analysts on CNN’s Your Money report today said the debt ceiling negotiations are in fact a “constitutional crisis”—a view supported by the 14th Amendment’s requirement that no public debt be called into question. It is now clear that without some serious plan to actually reduce deficits and the need for borrowing, any debt ceiling—or “cap”—will have to continue to rise, even if Congress and the White House begin to grapple over who has the authority to raise it.

What is certain is that no politician can gain anything by forcing the federal government to fail to make payments on 44% of its entire spectrum of obligations. Just one month of a 10% decline in economic output could thrust the nation almost immediately into a severe recession, causing the costs of default to fall to the shoulders of ordinary Americans, leading to a downward spiral.

This is not alarmism. It is simple arithmetic.

It is time for Congress to find common ground with the president, for both sides to make concessions, and for a serious, constructive, viable, long-term plan to emerge, in connection with a debt-ceiling increase substantial enough to last through the 2012 elections.

The nation cannot afford to face this same crisis three or six or nine months from now, with every member of the House up for re-election, along with one third of the senate and a billion-dollar-plus campaign for the White House.