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Cochrane on the Debt Ceiling

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The best primer on the debt-ceiling fracas du jour is this post by John Cochrane [2].  A slice:

Just yesterday, driving in to teach my Saturday morning MBA class, Scott Simon’s soothing voice on NPR [3] introduced a trillion-dollar coin piece with the statement

“… it will certainly be no laughing matter if the U. S. Congress refuses to raise the borrowing limit and the U. S. government defaults on its debt. …”

No Scott, (or NPR writers). If a $100 bond comes due, the Treasury can sell a new $100 bond to pay off the principal without increasing the total amount of debt.  And there’s still $2.5 trillion of tax revenue coming in. That’s plenty to cover interest payments. If anything, the law is pretty clear that interest payments on the debt are the last thing the government can stop paying, not the first.

This is simply a red herring. Social security checks might stop, farm price support payments might stop, they might have to send the TSA home from airports and let the NRA take care of security (joke here, please don’t go nuts). All this might cause a lot of hardship, but there is nothing forcing the government to default. Default would be a choice.

OK, NPR can be forgiven for passing along this trope. But what’s Paul Krugman [4] doing with this obvious… I’m having a hard time finding a polite word…piece of misinformation? Writing in the actual Times, which is supposed to be fact-checked:

“Finally, just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world.”

Parse that carefully for Clintonian veracity. “Defaulting on its obligations” could mean not paying promised farm price supports, or delaying payments (as the State of Illinois does) to vendors, not actual default on Federal debt. So it’s just a nanometer this side of factually incorrect. But you’d have to be very knowledgeable not to infer from the following sentence “disastrous effect on financial markets” that Krugman is not talking about actual “default” (a term meaning “not paying back bonds”) from this more metaphorical sort of “default” (meaning breaking an implicit promise).