Eric Posner on Debt Ceiling and Government Shutdown
President Obama shouldn’t let the United States default on the debt, even if this means defying Congress and disregarding the debt limit. However, he shouldn’t, and can’t, stop the government shutdown.
Barring a compromise with House Republicans, the government closes Tuesday. The showdown over the debt ceiling will come in mid-October. The implications of the threats, as well as the timing, are different. If the debt ceiling is not raised, and the executive branch stops borrowing, the government will need to cut spending by about 15 to 20 percent—or almost 40 percent of spending on everything (yes, Medicare and defense) other than the interest on the debt. The decision about what to cut appears to be largely, but not entirely, up to President Obama.
Whatever he does, the impact will be large and immediate. If he pays the debt interest while cutting expenditures, hundreds of billions of dollars will vanish from the American economy, sending thousands out of work and depriving many others of pension checks, medical insurance, and basic services. If he stops interest payments, the United States will default. This will not only raise interest payments—costing taxpayers hundreds of billions of dollars—but could spark a financial panic like the meltdown of 2008. Treasuries (as well as other government securities) are used in the repo market, which funds the major financial institutions. If that $5 trillion-to-$10 trillion market collapsed, it would take the banking system with it.