Economists: Default Would Create 'Millions More Jobs' - If Constitution Didn't Forbid It

Matt Vespa
By Matt Vespa | October 10, 2013 | 9:49 PM EDT

Columnist George Will aptly noted when we had our last debt ceiling fight back in 2011 that Americans were experiencing "apocalypse fatigue" from being warned of the cataclysmic effects of things like the government defaulting on its debt.

Well, according to one liberal economist, default could lead to economic growth.

Dean Baker of the Center for Economic and Policy Research, in his Sept. 30 piece for the Huffington Post, says default will create "millions more jobs":

"We have been repeatedly warned that the dollar could lose its status as the world's reserve currency in the event of default. While this is a dubious claim (will countries rush to the euro?), it would actually be good news if it were true. ... If the dollar is no longer the pre-eminent reserve currency, then countries will dump much of their dollar holdings, pushing down its value in currency markets. A lower-valued dollar will cause exports to soar and imports to plummet, creating millions of new manufacturing jobs. Millions more jobs would be created in other sectors due to the multiplier effect. This could well bring us back to full employment - a goal we may not otherwise achieve until the next decade."

Well, what would come if we do default?

In 2011, Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University specializing in economics, wrote in Reason:

"Technically, if the debt nears its statutory limit, the Treasury Department cannot issue new debt to manage short-term cash flows or manage the annual deficit-the government may therefore be unable to pay its bills. But in the real world things are different."

"First, if the debt ceiling is not increased it doesn't mean the federal government will have to repay the entire debt at once. The government just won't be able to increase its borrowing. Americans understand the difference between not being able to borrow more money and defaulting on one's mortgage..."

"More importantly, the Treasury Department has other options. For instance, if the debt ceiling is not increased, the Treasury can prioritize interest and debt payment to avoid a default."

And, economist Jeff Dorfman's October 3 Forbes article points out that defaulting on the debt is "forbidden" by the U.S. Constitution:

"Reaching the debt ceiling does not mean that the government will default on the outstanding government debt. In fact, the U.S. Constitution forbids defaulting on the debt (14th Amendment, Section 4), so the government is not allowed to default even if it wanted to.

"In reality, if the debt ceiling is not raised in the next two weeks, the government will actually have to prioritize its expenses and keep its monthly, weekly, and daily spending under the revenue the government collects. In simple terms, the government would have to spend an amount less than or equal to what it earns. Just like ordinary Americans have to do in their everyday lives."

So, Congress would have to act like a typical American family when it comes to its finances.

What a novel concept.