Failure to raise the debt ceiling, pace Messrs. Obama-Geithner-Goolsbee, would not cause America to default on its debts.
Traditionally, when the national debt approaches the debt ceiling, the minority party in Congress engages in a little no-cost demagoguery. They let the majority take responsibility for the necessary “yes” vote, and then publicly denounce them for fiscal irresponsibility. This routine is so familiar that Donald Marron, a former Congressional Budget Office official, describes the debt-ceiling increase vote as a “a tax on the majority.” The Tea Party-minded Republicans, however, are making things play out very differently than in past years.
The Democrats only received one Republican vote in the Senate to raise the debt ceiling in 2010, and none in 2009. Similarly, in 2004 and 2006, with Republicans in charge, the debt ceiling increases went according to script. Senate Republicans received only two votes from their Democratic counterparts in 2004, and none in 2006. In 2006, notably, then-Senator Obama unloaded both barrels on George W. Bush: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure.… Americans deserve better.”
Now that his Treasury needs the debt limit raised from the current $14.3 trillion, though, Obama has changed his tune dramatically, He’s denouncing the Republicans’ refusal to raise the limit. The Treasury is expected to hit the ceiling as soon as March 31, and Republicans have shown no desire to raise it before then without first extracting concessions on spending cuts from Obama. Because the Republicans now possess a majority in the House and the ability to sustain a filibuster in the Senate (a threat that has been levied by freshman Mike Lee of Utah) the administration faces the real possibility of hitting the debt ceiling if it doesn’t win the GOP’s cooperation.
So the state of play is an inverted one: Republicans are daring the White House to test their resolve on the limit, while Obama would give anything just to accept the normal political ramifications of raising the ceiling without having to make concessions on spending. The Republicans’ strategy is to signal that they are willing to countenance the Treasury running out of debt to issue. For its part, the administration is overstating the dangers of a self-triggered debt default, and accusing the GOP of senselessly putting the public at risk.
In one of the administration’s first moves, Austan Goolsbee, the chairman of the Council of Economic Advisers, accused Republicans of “playing chicken” on the debt, and warned that “[t]his is not a game. The debt ceiling is not something to toy with.… If we hit the debt ceiling, that’s… essentially defaulting on our obligations, which is totally unprecedented in American history.… the impact on the economy would be catastrophic.”
Reacting to the administration’s demagoguery, Pat Toomey of Pennsylvania and Tom McClintock of California have introduced a measure in the Senate and House, respectively, that would ensure that hitting the debt ceiling would not immediately result in a debt default. Called the Full Faith and Credit Act, the bill would simply clarify that, in the event the ceiling were reached, the Treasury would be obligated to prioritize interest payments on the debt above other obligations, ensuring that an inability to issue new debt would not disrupt the market for bonds and destroy the government’s credit.
Shortly after the bill’s introduction, Treasury secretary Tim Geithner took the unusual step of addressing a letter to Toomey to criticize the bill’s provisions as “unworkable” and to claim that it was “factually incorrect” that the government had prioritized certain kinds of payment in the past.
But Geithner’s attack is not convincing. In an address to the Heritage Foundation, Toomey claimed that Geithner “would rather keep the specter of a debt default out there as a way to intimidate” Republicans, and reiterated that he wouldn’t support raising the debt limit without “significant reforms.” McClintock reacted similarly in a conversation with the Spectator, calling Geithner’s letter “a political polemic, with no basis in reality.” McClintock noted that many states, including California, have provisions similar to the Full Faith and Credit Act, and that California continues to issue debt even though it is a “worse credit risk than Lindsay Lohan.” McClintock says the principle of the bill is that “if you’re living off your credit cards, you better be sure to make the minimum payment on your credit card first.”
The Republicans have the facts to their advantage in this debate. Although it would be inadvisable, a failure to raise the debt limit would not have immediate dire consequences the administration claims. The mere introduction of the Full Faith and Credit Act establishes that fact, giving the GOP a valuable bargaining chip. The bill will likely never reach Obama’s desk, but it demonstrates that the Republicans aren’t deterred by the administration’s apocalyptic rhetoric.
Kevin Hassett, an economist for the American Enterprise Institute who has briefed the Republican caucus on the debt ceiling, disagrees with Geithner’s assessment of what constitutes a default, explaining that default “is really a debt market event” that cannot be triggered unless interest or capital payments on the debt are missed and that “there are a number of tricks the Treasury can pull out before it’s forced to borrow again.”
According to Hassett, those tricks can include painless actions such as withdrawing funds from the U.S. Treasury General Account at the Federal Reserve, which currently stands at about $80 billion, or drawing on money the Treasury has set aside for contingency interventions in foreign exchange markets. These funds alone would probably be enough to tide the Treasury over until April 15, when tax revenue begins to come in.
And, contra Geithner, the Treasury does have a history of prioritizing payments in the past. As recently as 2003, Congress failed to act before Treasury approached the then-$6.4 trillion debt ceiling. In late February of that year, Treasury was forced to stop issuing new debt and took a number of measures to pay interest on the existing debt, including skipping payments to investment funds for federal worker retirees, drawing down money from the Exchange Stabilization Fund, and withdrawing from the Treasury general fund. Using these stop-gap measures, Treasury was able to continue meeting its obligations until May 27, when Congress finally voted to increase the debt ceiling. At that point Treasury repaid the funds from which it had taken money or skipped payments.
Plainly, recent history shows that a failure to raise the debt ceiling would not result in immediate disaster. In fact, according to Josh Barro, a fellow at the Manhattan Institute, the government “could muddle through for months or, theoretically, years without a debt limit increase, and without an acute crisis in the bond markets.”
The Obama administration’s dire warnings about the debt, then, amount to nothing more than a bluff to discourage Republicans. But the Republicans’ goal — reducing federal spending — is undoubtedly a good one. Federal spending is on an unsustainable trajectory, and yet the Obama team is engaging in scare tactics and demagoguery to prevent the GOP from addressing the problem.
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