Vice President for
Federal Fiscal Policy
The House will vote this week on a Republican proposal allowing the Treasury to borrow funds to pay bondholders and Social Security recipients if there's a prolonged standoff over raising the debt ceiling. This approach is extremely dangerous. By appearing to make a default legitimate and manageable, it would heighten the risk that one will actually occur.
Millions of people beyond bondholders and Social Security beneficiaries depend on timely federal payments. The House bill says nothing about how Treasury can pay veterans, troops, doctors and hospitals that treat Medicare patients, state and local governments, private contractors, and recipients of unemployment insurance, SNAP, and Supplemental Security Income.
The Treasury reached the debt ceiling on March 15, and the department warns that the “extraordinary measures” it's taken since then to continue paying the nation's bills will run out by November 3. At that point, Treasury will have less than $30 billion of cash on hand, an amount that it says “would be depleted quickly.” Congressional Budget Office and Bipartisan Policy Center analyses confirm Treasury’s estimates.
Lawmakers shouldn't fool themselves: simply protecting bondholders and Social Security beneficiaries won't avert financial chaos or soothe creditors.
The Treasury makes roughly 80 million separate payments each month, so deciding which bills to pay would be extremely difficult, even if interest and Social Security benefits could be paid. And domestic and foreign lenders would hardly be reassured at the sight of Treasury grappling with how to meet its legal obligations when cash is short.
During a standoff over raising the debt ceiling in early 2013, one rating agency explicitly warned that honoring interest and principal payments but delaying payment on other obligations would trigger a review and possible downgrade of the nation’s creditworthiness. At that time, the Economist called failing to raise the debt limit — or attempting to prioritize payments — an “instrument of mass financial destruction.” We agree.
As we've said before, lawmakers shouldn't play politics with the debt ceiling. The United States is virtually alone among advanced countries in setting a debt ceiling independent of the decisions that drive higher debt in the first place — the choices about how much to spend and how much to raise in revenues.
Among other problems, that disconnect enables lawmakers to support tax and spending policies that necessitate borrowing, then oppose raising the debt limit to let the government pay the resulting bills.
Lawmakers should raise the debt limit in a timely way and for an extended period of time so that the government doesn’t risk defaulting on any of its obligations. Better yet, they should repeal the debt limit and concentrate instead on thoughtful budgeting.