The National Journal’s daily e-mail blast contained this interesting tidbit in today’s edition:
WHO GETS PAID IF THERE’S NOT ENOUGH MONEY? Members of the Republican Study Committee introduced a bill on Wednesday that requires the Treasury to pay principal and interest on public debt before anything else if Congress doesn’t raise the debt ceiling. “This gives our creditors the certainty that U.S. Treasuries are still the safest investment in the world,’’ said a spokesman for Rep. Tom McClintock, R-Calif. But Senate Budget Chairman Kent Conrad, D-N.D., blasted the GOP debt bill. “Basically what they are saying is pay China first,” Conrad said. “Are we going to forget about the American public and the things that they need? Somehow they are secondary?”
The bill at issue debuted to some fanfare last week, as Sen. Pat Toomey, who will sponsor it in the Senate, penned a Wall Street Journal piece outlining reasons for it and the mechanics of how it will work.
Fortunately, even if Congress doesn’t raise the debt ceiling, a default on our debt need not follow when our borrowings reach their limit in the next few months. I intend to introduce legislation to make sure of this.
For months, some political leaders and commentators have argued that failure to raise the debt ceiling would necessarily cause the U.S. to default on its debt. President Obama’s Council of Economic Advisors chairman, Austan Goolsbee, recently warned, “If we get to the point where you’ve damaged the full faith and credit of the United States, that would be the first default in history caused purely by insanity. I don’t see why anybody’s talking about playing chicken with the debt ceiling.”
In fact, if Congress refuses to raise the debt ceiling, the federal government will still have far more than enough money to fully service our debt. Next year, for instance, about 6.5% of all projected federal government expenditures will go to interest on our debt, and tax revenue is projected to cover about 67% of all government expenditures. With roughly 10 times more income than needed to honor our debt obligations, why would we ever default?
To make absolutely sure, I intend to introduce legislation that would require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised. This would not only ensure the continued confidence of investors at home and abroad, but would enable us to have an honest debate about the consequences of our eventual decision about the debt ceiling.
Toomey noted that for the government to have to stop one-third of its spending on a cold-turkey basis would be extremely disruptive, and that’s why he would hope that some arrangement could be struck by which the debt ceiling could be increased in return for agreements for major spending cuts.
In other words, he says, a partial government shutdown – rather than default on the country’s debt – would be the wall Congress and the White House would find their backs to. Which, bad though it might be, is not the crisis/catastrophe administration officials have billed the debt limit issue to be.
In a Jan. 6 letter to Senate Majority Leader Harry Reid, the Treasury secretary warned failing to increase the national debt ceiling would “precipitate a default by the United States” and potentially “lead to the loss of millions of American jobs.”
Geithner claimed not raising the limit would have a “catastrophic” economic impact that would last for decades, and it could lead to the immediate cessation of the payments for military salaries and social security benefits, among other consequences.
He warns this looming default could happen as soon as March if Congress does not act.
Rep. Mick Mulvaney (R-SC), who has signed on to Toomey’s idea and is a sponsor of the House bill filed yesterday, wasn’t impressed by the Chicken Little rhetoric.
“The reason you are hearing there will be an automatic default is that Treasury does not as a checkbook function have the ability to prioritize,” Mulvaney said. “What they are saying is, ‘Whenever a check comes in we’ll pay it until we don’t have any money left.’
“Let’s give them the ability to prioritize and prioritize for them and say, ‘Let’s pay the debt first.’ And if you do that, you can put off this default for many, many months, and this spectre of an immediately impending default goes away.”
One would think the bill in question would be a common sense measure that would frame the debate in less-draconian terms than the destruction of the federal government’s credit. A default on the country’s debt would, if nothing else, likely increase the amount of interest the federal government has to pay on new notes it issues – and that would increase the deficit on its own. The economic effects Geithner describes might or might not happen; nobody has offered a scenario where things don’t become more difficult if we crash into the debt limit under current law.
And yet Conrad, who has said he’s not running for re-election when his term ends in 2012, attempts to frame the debate in the most demagogic terms possible. He’s offering the canard that somehow it would indicate the government doesn’t care about the people if it gave priority to paying its own debts.
That’s unfortunate, and it begs the question of what Conrad is really saying. One interpretation would be that for Democrats like Conrad, the prospect of key constituency groups no longer receiving federal largesse at current levels is more threatening than the loss of the federal government’s good credit. Another would be that Conrad isn’t interested in any formulation other than the one in which Republicans have a gun to their heads and vote to unconditionally raise the debt limit for fear of being blamed for a default.
It must be noted that a Reuters/Ipsos poll two weeks ago found a 71-18 margin opposing an increase in the debt limit. There is a broad consensus among the American people to undertake a real downsizing in the size, scope and spending of the federal government, and the level of confidence in Beltway politicians to curb spending is low.
Conrad’s unfortunate statements won’t help those numbers, or his party. Senate Democrats should support, and President Obama should sign, the bill prioritizing debt service atop Treasury;s spending list.