How Should the U.S. Break Its Promises?

Pat Toomey is apparently introducing plans to give US debt payments first priority in the event that the debt ceiling is not raised.  Matt Yglesias calls this "default by another name":

Now of course this is nonetheless a kind of default. A person whose creditworthiness is above question meets all his financial obligations. Another kind of person might manage to stay current on his mortgage and make minimum credit card payments while leaving utility bills unpaid and welching on sundry promises to friends and business associates. That's not grounds for foreclosure, but obviously it's going to hurt your standing as a borrower.

Well, sort of.  The first thing to point out is that legally, changing social security benefits would not be default, because (as the Supreme Court has already ruled), beneficiaries have no legal, contractual right to their benefits.  They enjoy them at the sufferance of Congress, and Congress has the perfect right to change them.  Doing so will not affect our status as a borrower adversely in the eyes of people we actually borrow money from.  Indeed, it might enhance it.  The first thing a lender wants to know is not whether you are a good person, but whether you are likely to repay the money they lend you; they are interested in the former only insofar as it implicates the latter.

The second thing to point out is that Toomey has the right of it; we should prioritize debt payments over other spending.  I know--you'd expect me to say that!  But hear me out.

In the first place, our debt payments do not simply go to enrich feckless corporations.  They go into things like insurance pools, 401(k)s, and pension funds.  If the government stops payments, yes, some rich people would take a bath. But so would a lot of ordinary people.

Even more importantly, if the government misses a debt payment, that's it for borrowing more money in the near future--and I, for one, am skeptical that the IMF would be able to mount a bailout, which is what we do when developing nations have this sort of trouble.  The United States currently runs a $1.5 trillion budget deficit.  If we miss a debt payment, that means we immediately have to balance that budget, and keep it balanced.  You have probably seen a lot of blog posts lamenting the terrible plight of the states, who cannot run budget deficits during recessions and are therefore forced to make draconian cuts to services unless they are bailed out by the Feds.  Well, if we can't borrow money, no one's going to bail us out--or the states.  And you can expect a default to be followed by a pretty ugly recession in an economy as credit-driven as ours.

That said, obviously the best thing to do is raise the debt ceiling, and not put the US government at risk of default.  But second best is to buy time while preserving our credit rating. Over the long run, if the credit taps get cut off, the social service cuts will be deeper, uglier, and permanent.