Kentucky Senator Rand Paul (R) is recommending a new approach toward the debt ceiling standoff.Unlike some of his fellow Republicans, Paul understands that forcing the country to default by refusing to raise the debt ceiling would make the Republicans look reckless and irresponsible (and, more importantly, would hurt the country).
Instead, Paul recommends the following:
“We could actually direct the President to pay our interest, make Social Security payments, pay soldier salaries, the basic functions that could keep government going. That way we take default off the table.”
In other words, pay the bondholders and soldiers and a few other folks. And stiff everyone else.
Senator Paul’s legislation, our Politics Editor Grace Wyler reports, “would ban federal spending on anything but interest payments on the national debt, Social Security checks, and military salaries.”
This new law, Paul explains, would instantly cut at least 30% of government spending and balance the budget overnight–thus alleviating the need to raise the debt ceiling or borrow more money.
Paul certainly deserves credit for recognising what many of his fellow Republicans do not: That forcing the country to default would be outrageously irresponsible and destructive. It would be the first time in history the country had defaulted, and the default would be entirely voluntary: The US is completely capable of paying its bills. Global stock markets would probably crash, global bond markets would probably freak out, the economy might suffer a heart attack, and so forth.
Unfortunately, Paul’s more reasonable plan would also destroy the economy.
The US federal deficit right now is about $1.1 trillion (based on the most recent quarterly numbers, which show $2.7 trillion of tax receipts and $3.8 trillion of expenses).
The US economy, meanwhile, is about $16 trillion.
Cutting $1.1 trillion of spending overnight (balancing the budget) would thus instantly cut the size of the economy by 7%.
In other words, it would instantly cause a severe economic recession.
Also, it would effectively throw hundreds of thousands of government workers and contractors out of work. (Unless Sen. Paul would like these folks to continue to work for free.) It would also hurt every business that is dependent on some of that government spending for revenue. And those businesses would likely have to lay off workers to reduce their costs. And so on.
And, ironically, as Greece and other countries that have tried the “austerity” approach have learned the hard way, this move would instantly reduce the government’s tax revenues–because the folks who were fired or furloughed or asked to volunteer would no longer have any income on which to pay taxes (or, for that matter, with which to buy stuff and pay sales taxes). So the deficit would suddenly open up again. And the government would have to cut more spending. And so on.
So, Senator Paul does deserve credit for being more reasonable than some of his fellow Republicans, who just want to force the country to default and the hell with everything else.
But Senator Paul’s alternative plan would also be devastating.
We do indeed have a long-term deficit challenge in this country. We should indeed take steps to fix it. But we should absolutely not fix it right now by defaulting or otherwise suddenly cutting a huge amount of government spending.
That course of action would be disastrous (and idiotic) for this country.
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