Major media outlets are pushing the narrative that the United States Department of the Treasury could prioritize payments to bond holders and select groups of recipients in lieu of an increase of the federal borrowing limit, also known as the debt ceiling, beyond October 17. This ignores Treasury Department officials and other experts who explain such prioritization is unworkable and legally dubious, and that default would still happen.
Treasury Will Reach The Full Extent Of Its Borrowing Authority On October 17
Treasury Secretary Jack Lew: Treasury Will Exceed The Extent of “Extraordinary Measures” On October 17. On September 25, Treasury Secretary Jack Lew notified Congress that it will have exceeded the limits of “extraordinary measures” to avoid breaching the debt ceiling on October 17. The Treasury Department estimated that it would have just $30 billion remaining “cash on hand,” which would leave it short of money to pay all obligations. From Lew's letter to Congress:
Treasury now estimates that extraordinary measures will be exhausted no later than October 17. We estimate that, at that point, Treasury would have only approximately $30 billion to meet our country's commitments. This amount would be far short of net expenditures on certain days, which can be a high as $60 billion. If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history. [Department of the Treasury, Secretary of the Treasury, 9/25/13]
Media Push Republican Argument That Prioritizing Payments Would Avert Default On Debt
Republicans Argue U.S. Could Avert Default By Forcing Treasury Department To Prioritize Interest Payments To U.S. Creditors Using Tax Revenue. An October 6 National Journal article reported that Republicans are trying to force the Treasury Department to prioritize payments on the nation's debt, delaying payments to other agencies, and that Republicans say this would avert default unless President Obama chose to default by not making debt payments:
The White House is sounding alarms about the fast-approaching Oct. 17 deadline for raising the nation's borrowing limit. Failure to do so, President Obama and Treasury Secretary Jacob Lew have warned, could result in a first-ever default on America's debt and trigger global economic calamity.
But some Republicans in Congress aren't buying it.
Not only do some conservatives say Oct. 17 is an artificial deadline-- “Nobody thinks we're going to default on Oct. 17th,” said Rep. Tim Huelskamp, R-Kan.--but they also are attempting to narrowly define what would constitute default.
In interviews with more than a dozen GOP lawmakers, the Republicans rejected the notion that Washington could default on its debt unless a borrowing increase is approved before Oct. 17. For the United States to actually default, these Republicans argue, the Treasury Department would have to stop paying interest on its debts--something GOP lawmakers claim is inconceivable.
“There's always revenue coming into the Treasury, certainly enough revenue to pay interest,” said Rep. Justin Amash, R-Mich. “Democrats have a different definition of 'default' than what we understand it to be. What I hear from them is, 'If you're not paying everything on time that's a default.' And that's not the traditionally understood definition.”
If this sounds familiar, it's because it has been Republicans' line of attack since their debt-ceiling battle with Obama in the summer of 2011.
Then, as now, the GOP argues it's not the debt limit that would cause default, it's Obama. The country would have the funds to pay its creditors if the administration would just delay payments to certain agencies.
Hoping to turn that argument into law, Republicans have touted legislation that would force Treasury to prioritize which bills it pays, pushing interest payments to the country's creditors, as well as to senior citizens and veterans, to the front of the line and putting everything else second. [National Journal, 10/6/13]
CNN's Candy Crowley Asks If Treasury Can “Just Pay The Interest” To Create “Wiggle Room,” Avoid Default. During an interview with Treasury Secretary Jack Lew, CNN host Candy Crowley played comments from Republican Congressman Steve King (R-IA) “about the possibility of servicing the debt” past October 17. She repeatedly pushed Republican claims that prioritizing debt payments could avert default, amidst repeated protests from Lew:
CROWLEY: The question is, is it technically possible for you to keep up with your debts? Can you not just pay the interest rate on these debts while this is worked out?
CROWLEY: Could you keep up on servicing the debt, that is, paying the interest on the U.S. debt? Therefore, not defaulting.
CROWLEY: Very often, in bills, and correct me if I'm wrong, can you not pay the interest? I'm just trying to figure out wiggle room, because what Republicans are saying is “these guys do this all the time as we run up.” Look at Wall Street, it's kind of looking at it going “eh, this doesn't seem to be that big a deal to us this time around.” No one has been threatening to downgrade the U.S. credit-worthiness. So, the question is -- is it true, as they say, that you could service the debt beyond the 17th? [CNN, State of the Union, 10/6/13]
Fox News' George Will: It Will Be Obama's Choice To Default If White House Doesn't Prioritize Payments. On Fox News Sunday, Fox contributor George Will argued that the Treasury Department could prioritize its payment obligations the same way that a hardware store could, and if it didn't, then it would be President Obama's decision to default:
WILL: [E]verything you need to know about what's wrong with contemporary Washington was in your interview when the secretary said we won't prioritize. A hardware store in Kankakee, Illinois prioritizes between what to do with its first revenues that come in. We have 10 times more revenues than required to service our debt. That can be done, there is no need to default. Therefore, the administration's position of default will be our choice. [Fox Broadcasting Co., Fox News Sunday, 10/6/13]
Fox Business' Stuart Varney: U.S. Has More Than Enough Revenue To Pay Interest, Avert Default. On Fox & Friends, Fox Business host Stuart Varney pushed the claim that prioritizing interest payments with monthly revenue would avert default. Varney said, “We default only if we fail to repay the interest on our debt. We also have an obligation to pay Social Security. We have enough money to pay the interest on the debt and Social Security coming in in tax receipts -- we do not default.” Co-host Steve Doocy summed up Varney's comments: “So what Stuart is here saying today is we have plenty of green to pay the debt.” [Fox News, Fox & Friends, 10/7/13]
Prioritizing Debt Payments May Be Illegal, Technically Impossible
Lew: Legislation To Prioritize Payments Is “Ill-Advised,” Would Not Avert Default. In his September 25 letter to Congress, Secretary Lew outlined that any plans to prioritize payments for certain recipients would be “default by another name.” From the letter:
The House of Representatives recently passed legislation that includes an ill-advised provision to prioritize payments, which would not protect the full faith and credit of the United States. Any plan to prioritize some payments over others is simply default by another name. The United States should never have to choose, for example, whether to pay Social Security to seniors, pay benefits to our veterans, or make payments to state and local jurisdictions and health care providers under Medicare and Medicaid. There is no way of knowing the damage any prioritization plan would have on our economy and financial markets. It would represent an irresponsible retreat from a core American value: We are a nation that honors all of its commitments. [Department of the Treasury, Secretary of the Treasury, 9/25/13]
Inspector General: Treasury Department Has No Procedural Precedent To Prioritize Scheduling Of Payments. In an official report to members of the Senate Finance Committee about the debt ceiling crisis of 2011, Treasury Department Inspector General Eric M. Thorson concluded that the Treasury had no means or capacity to prioritize certain payments over others. The Treasury makes more than 80 million automated payments each month, each of which was previously authorized and appropriated by Congress. From the report:
While Congress enacted these expenditures, it did not prioritize them, nor did it direct the President or the Treasury to pay some expenses and not pay others. As a result, Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day. Furthermore, because Congress has never provided guidance to the contrary, Treasury's systems are designed to make each payment in the order it comes due. [Department of the Treasury, Office of Inspector General, 8/24/12]
Matthew Yglesias: Treasury Department Doesn't Have “Legal Authority To Prioritize Payments.” Slate economics blogger Matthew Yglesias explained that it's not possible for the Treasury Department to prioritize payments:
The problem is that the federal government is literally not set up to do this. Jack Lew doesn't sit around in the evenings logged in to some online bill pay system deciding which checks to send and which not to send. As RBC Capital markets via Cardiff Garcia writes, the system just either runs or it doesn't:
The Treasury's systems do not clearly mark what scheduled payments are for what reasons, so it is impractical to try to prioritize payments. And clearing systems like Fedwire do not allow defaulted securities to flow, so the system would seize. In order for the clearing systems to work, the Treasury would need to notify the market of a default almost a day before the default happened (to give everyone time to modify payments), and that is not going to happen because the Treasury will not want to declare default while Congress still has time to pass a bill.
What's more, they have no more legal authority to prioritize payments than they do to borrow extra money. [Slate, Moneybox, 9/27/13]
Tony Fratto: Prioritization Is “Fanciful & Misunderstands Federal Financing Requirements.” In January, Tony Fratto, a former Treasury Department assistant secretary and senior George W. Bush White House staffer, expressed concern with payment prioritization on Twitter, stating:
The idea that Treasury *could* prioritize - even if desired - is fanciful & misunderstands federal financing requirements.
Some think Treasury can somehow navigate through this, but Treasury can't tell [Social Security] beneficiaries to wait until the 3rd week of the month.
Some want to believe [the Administration] is bluffing or being political by saying “default” . To me, actual default is not just possible but likely. [American Enterprise Institute, 1/15/13]
Bipartisan Policy Center: Prioritization Scheme Is “Essentially Impossible,” At Least 40 Percent Of 80 Million Monthly Government Payments “Would Go Unpaid.” As ThinkProgress reported in January, the Bipartisan Policy Center found that legislation to prioritize debt payments in order to prevent a government default would leave “popular and necessary programs” unfunded and it would be “essentially impossible” to implement because revenue doesn't always come in on time to make payments:
The Bipartisan Policy Center found that between 40 and 45 percent of the government's 80 million monthly payments would go unpaid, and even if payments could be prioritized, popular and necessary programs would be among those forced to go unfunded. The government, the report said, could afford to pay interest on government debt, Social Security payments, Medicare and Medicaid, unemployment insurance, and defense contractors. But that would leave it unable to pay troops and other government workers, and it would leave the criminal justice and education systems totally unfunded. And even then, it could afford those payments only as revenue came in, not at the beginning of the month, meaning the payments would face significant delays. In short, BPC concluded, a prioritization scheme would be “essentially impossible.” [ThinkProgess, 1/16/13]
Even If Payment Prioritization Were Possible, Default Would Still Occur And Would Entail Disastrous Consequences
Deputy Treasury Secretary Neal Wolin: Prioritization Proposal “Would Not Actually Prevent Default.” In January 2011, Deputy Treasury Secretary Neal Wolin wrote on a Treasury Department blog that legislation prioritizing debt payments is “unworkable” and would not prevent the U.S. government from “default by another name” since many financial obligations would go unpaid and the “world would recognize it as a failure by the U.S. to stand behind its commitments” :
While well-intentioned, this idea is unworkable. It would not actually prevent default, since it would seek to protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment. Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments. It would therefore bring about the same catastrophic economic consequences Secretary Geithner has warned against, including sharp rises in mortgage interest rates and other borrowing costs for families; reductions in the value of homes, 401(k)s and other retirement savings; and negative effects on the dollar and the safe haven status of Treasury bonds and other Treasury securities. Such a policy would also be unacceptable to American servicemen and women, retirees, and all other Americans, who would rightly reject the notion that their payment has been deemed a lower priority by their government. For these reasons, the Department of Treasury has always emphasized - regardless of which party has held the White House or either house of Congress - that the only way to prevent default and protect America's creditworthiness is to enact a timely increase in the debt limit. [Department of the Treasury, Treasury Notes Blog, 1/21/11]
The Economist: Prioritizing Debt Payments Would “Wreak Havoc,” Threaten Recession. A January 12 article from The Economist warned that a debt payment prioritization policy that delayed raising the debt ceiling would “force immediate spending cuts equal to 6% of GDP” which could “send the economy back into recession.” The article also explained that default on debt payments could still happen:
The Treasury could try to soften the blow of hitting the debt ceiling by making interest payments on its debt the priority while leaving some other bills unpaid. Yet that would still wreak havoc. The federal government now borrows nearly 30 cents of every dollar it spends. Failure to raise the debt ceiling would force immediate spending cuts equal to 6% of GDP. Not only would that threaten to send the economy back into recession. It would also deprive doctors, pensioners, contractors and millions of others of money needed to meet their own obligations, setting off a chain reaction of defaults.
Nor would the sanctity of the debt be guaranteed. Disgruntled creditors could challenge the legality of prioritising interest payments; populists could demand that Chinese bondholders be paid last, not first. One miscalculation could leave the Treasury without enough money to make an interest payment. Even a few days' default would roil the global financial system, which relies on Treasuries in countless transactions. The mere possibility could incite skittish investors to dump their holdings, driving up interest rates. [The Economist, 1/12/13]
Treasury Department: Default Would Be “Unprecedented,” Could Echo 2008 Economic Crisis. An October Treasury Department report outlined the effects of a debt default if Congress fails to increase the borrowing limit on or before October 17. From the report:
A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse. [Department of the Treasury, “The Potential Macroeconomic Effect Of Debt Ceiling Brinkmanship,” October 2013]
Paul Krugman: Default Likely “Would Create A Huge Financial Crisis.” Nobel Prize-winning economist Paul Krugman argued in his New York Times column that undermining the fundamental role of U.S. Treasury bonds in the American and global financial system could create an economic crisis far exceeding the financial crash of 2008. From the Times:
First of all, hitting the ceiling would force a huge, immediate spending cut, almost surely pushing America back into recession. Beyond that, failure to raise the ceiling would mean missed payments on existing U.S. government debt. And that might have terrifying consequences.
Why? Financial markets have long treated U.S. bonds as the ultimate safe asset; the assumption that America will always honor its debts is the bedrock on which the world financial system rests. In particular, Treasury bills -- short-term U.S. bonds -- are what investors demand when they want absolutely solid collateral against loans.
Now suppose it became clear that U.S. bonds weren't safe, that America couldn't be counted on to honor its debts after all. Suddenly, the whole system would be disrupted. Maybe, if we were lucky, financial institutions would quickly cobble together alternative arrangements. But it looks quite possible that default would create a huge financial crisis, dwarfing the crisis set off by the failure of Lehman Brothers five years ago. [The New York Times, 9/29/13]
Center On Budget And Policy Priorities: Debt Prioritization Is “Extremely Dangerous And Probably Not Even Feasible.” In testimony to the Senate Budget Committee, Center on Budget and Policy Priorities chief economist Chad Stone cited Moody's Analytics chief economist Mark Zandi to explain how dangerous and unfeasible debt prioritization would be, describing the difficulty the Treasury Department would have with deciding which of its 80 million monthly payments to meet, leaving “even less cash on hand to pay veterans, doctors and hospitals who treat Medicare patients, soldiers, state and local governments, private contractors, and recipients of unemployment insurance, SNAP, and Supplemental Security Income” :
Nor should policymakers fool themselves into thinking that directing the Treasury to pay bondholders and Social Security recipients first if there's a prolonged standoff over raising the debt ceiling is not simply default by another name. This “debt prioritization” is extremely dangerous, and is probably not even be feasible, as Mark Zandi has testified at this hearing. By appearing to make defaulting on the debt legitimate and manageable, it would heighten the risk that a default will actually occur.
In reality, debt prioritization would make things worse for the millions of people and businesses who count on timely federal payments. Protecting bondholders and Social Security beneficiaries would leave even less cash on hand to pay veterans, doctors and hospitals who treat Medicare patients, soldiers, state and local governments, private contractors, and recipients of unemployment insurance, SNAP, and Supplemental Security Income.
The Treasury makes roughly 80 million separate payments each month, so deciding which bills to pay would be extremely difficult. And, domestic and foreign lenders would hardly be reassured at the sight of a cash-strapped superpower picking which bills it could afford to pay.
One rating agency explicitly warned in January that honoring interest and principal payments but delaying payment on other obligations would trigger a review and hence a possible downgrade. The Economist called failing to raise the debt limit -- or attempting to prioritize payments -- an “instrument of mass financial destruction.” [Center on Budget and Policy Priorities, 9/24/13, emphasis added]