Stalemate on the Debt Ceiling?
The news is full of speculation about the result if there's a stalemate on the debt ceiling, but I know what would really happen. I live in Illinois.
You see, Illinois has been in much the same situation for years now. The legislature has appropriated more in spending than they raise in taxes, but there are sharp restrictions on how much money the state can borrow. (See also: Borrowers, Lenders, and Others — Beware Trusting the Government)
So what happened? Well, interest on our debt got paid. State employees' salaries got paid. State pensions got paid. Tax refunds got paid. Unemployment checks got paid. Direct benefits like food stamps got paid.
Who didn't get paid? Anyone who did business with the state. The state quit paying its bills. Business and contractors who provided services for the state got stiffed for months, and the state is by no means caught up on paying its bills (even though it recently raised taxes).
I'm confident that, if there's no increase in the debt limit for the federal government, the result would be much the same. There are a number of temporary measures the Treasury would take first — redeeming some debt owed to states, cities, and federal retirement funds — but once it exhausted those maneuvers, it would have to stop making some budgeted payments. But the Treasury would be deciding which payments to make and which to delay. The effect would be to give Treasury Secretary Geithner complete control over who gets paid when.
As I read it, there is only one constitutional requirement for federal payments — judges have to get paid. After that, if there's not enough money, the Treasury can pretty much pick and choose.
I'm sure the Treasury would pay the interest on the debt, because the public debt of the United States is what it cares about most. It'd also go ahead and roll over maturing debt (staying under the ceiling). It would go on paying military personnel and government employees. It would go on paying social security, railroad pensions, and other direct payments to individuals.
What the Treasury would quit doing, just like in Illinois, is paying contractors. It wouldn't refuse to pay them, it just wouldn't cut a check until the money came in. (It would rack up late-payment charges, but neither those nor the unpaid bills themselves count against the debt ceiling.)
In Illinois, where this went on for years, the government didn't just pay the bills in order. They gave priority to businesses that might fail if they didn't get paid. (Lots of businesses that contracted with the government to provide services to the poor had no non-government business. If they didn't get paid, they would be out of businesses in a matter of a weeks.) There was a whole procedure in place for businesses to make urgent claims for relief. If the situation went on at the Federal level for any length of time, I'm sure the same sort of thing would happen.
Think of the power this gives the Treasury! I'm sure they wouldn't do anything so crass as to pay companies that were donors to their party before paying companies that donated to the other party, but I wouldn't be surprised to see the power brought to bear only a little more subtly than that. For example, employers in a state where a senator was blocking a bill to raise the debt ceiling might have particular trouble getting their bills paid.
Personally, I don't think that situation would go on for very long. When the many large companies that do business with the United States quit getting paid, they'd have a quick chat with the Senators from every state where they have an office. When the many, many small businesses that have contracts with the federal government quit getting paid, they'd call up their Representatives and make it clear that they wanted the problem fixed. Most especially, once members of Congress realized that what they'd done was to hand the power of the purse over to the Treasury — give Timothy Geithner the power to decide who gets paid and who doesn't — they'd raise the debt ceiling and grab that power right back.
These insights brought to you thanks to my long experience living in Illinois.