Let me outsource this topic to some others who’ve said it better than I could.
Alan Blinder, professor of economics at Princeton University:
At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays– which includes everything from Social Security benefits to soldiers’ pay to interest on the national debt– will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided.
How in the world could the government cut so much spending so quickly? No one really knows. That is why you hear about dark scenarios wherein the U.S. defaults on the national debt, stops paying tax refunds, delays Social Security checks, leaves soldiers unpaid, and so on. Bad things will surely happen, one of which will be a swift descent into recession. Another will almost certainly be a second ratings downgrade and higher borrowing costs for years, maybe decades, to come.
Who knows what else? Use your imagination. Suppose we pay the bills for Social Security, Medicare, Medicaid, defense, and interest on the national debt in full. Then all other federal spending would have to fall by about three-quarters.
Keith Hennessey, who was Director of the White House National Economic Council under President George W. Bush:
Some conservatives argue for the passive variant of payment prioritization. Let’s vote against raising the debt limit, they argue. Let’s block any bill that increases the debt limit, they say. Treasury will soon run short of cash and have to make choices about where to spend.
Today President Obama signaled what he would do in this situation. He will start warning politically powerful constituencies: seniors, veterans, and troops, that they are at risk of not being paid on time, and their Republican Congressman is responsible for it, and his or her phone number is 225-XXXX. I have no idea why some conservatives think it’s smart strategy to hand the President this kind of political club.
Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.
The real purpose of the debt ceiling is political– it gives the minority party an opportunity to grandstand as if they’re somehow holding the line on the deficits that are the necessary mathematical result of previous spending and tax legislation. The political game is to force the majority party to push through the debt-ceiling increase and then try to embarrass them for their votes, relying on the stupidity of voters not to see the posturing for what it really is. But when different parties control the two houses of Congress, the only chumps in this game are the legislators who still try to play the same hand.
Nobody has a plan on the table to cut spending by 26%, so nobody has any legitimacy pretending they’re against an increase in borrowing. Congress needs to propose specific plans for spending and taxes and simultaneously authorize the borrowing that would be necessary to implement that legislation.