THE BLOG
10/25/2013 09:15 am ET Updated Dec 25, 2013

Debt Limit Follies Need to Stop Now

Would the U.S. have defaulted on its debt payments if Congress had refused to raise the debt limit? Probably not right away. But the risks were real and presented a level of danger we should never again inflict upon ourselves.

Conservatives like to say a debt-limit freeze could be manageable. They point out that the government takes in more than enough tax money each month to more than cover the interest on the debt. So, in theory, the government could make "hard choices" to pay bond holders before it pays for other things. It also, theoretically, could have borrowed more money as old debt was retired.

That sounds logical, but it ignores some pesky realities. Those involve serious technical problems, as well as economic and political complications.

Technical problem number one: It is not clear that the U.S. Treasury or the president have the legal authority to prioritize payments in order to put bond holders at the front of the line. So, in order to do that, somebody might have to break the law.

Technical problem number two is that, even if Congress and the courts were willing to look the other way, it's not clear that prioritizing payments would be physically possible.

Making tens of millions of federal payments per month is not like sitting at the kitchen table to balance your checkbook. It's a largely automated process set up to pay bills as they come in. Changing the payment process would not be easy and might not work anyway. Some observers have said that, even if the system was tweaked, cash-flow troubles could arise because of the uneven pace of revenue inflows.

For the sake of argument, let's suppose those technical challenges could be overcome. Then, we get into the economic and political realities of suddenly slashing more than 30 percent from the federal budget. The consequences would have been severe. A Goldman Sachs report issued Oct. 5 put it this way: "If the debt limit is not raised before the Treasury depletes its cash balance, it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized)."

The result almost certainly would be sharply higher unemployment and a disintegration of the fragile economic recovery we have seen since 2009.

In in addition, politicians would have to deal with the "optics" of dutifully paying interest to the Chinese government and the Harvard University endowment while other priorities go wanting. The competition for those diminished federal dollars would be fierce. Lawsuits would ensue. Lawyers and lobbyists would get rich. People would freak out.

How long could the government realistically go on making the "hard choices" -- like deciding whether Social Security and Medicare recipients are a higher priority in a given month than, say, military equipment, food stamps or road funding? Nobody knows.

Wall Street is not stupid. Bond traders know that a debt-prioritization scheme would be unsustainable over the long term. So, under a debt-prioritization scenario, any new federal debt issued to replace old debt would have higher -- probably sharply higher -- interest rates than we see now. That alone, would cost taxpayers billions of dollars.

So, sure it's possible that the government could have bumped along for weeks or months without an increase in the debt limit. However, even without an immediate default on federal debt, the situation would have been ugly and damaging.

That's why what we saw this month in the U.S. House must not happen again.