A down and dirty look at the coming debt ceiling fight
This week, the House is considering H.R. 807, the Full Faith & Credit Act of 2013 (FFCA), a GOP-supported bill that would instruct the Treasury Department to prioritize federal spending on Social Security payments and interest payments should the debt ceiling be breached.
Treasury says it cannot prioritize payments:
The Full Faith and Credit Act is a preemptive attempt by Republicans to defuse the warnings from the White House and Democrats about holding the debt ceiling “hostage” in fiscal negotiations. The bill would give the Treasury Department the ability to borrow above the limit to cover bond and Social Security payments.
While the Treasury insists it cannot prioritize payments and avoid a default if its borrowing capacity is reached, Republicans disagree, and say their bill should assure markets that the country will always pay its debts.
Lawmakers will likely have to increase the debt ceiling sometime in the late summer or early fall.
The Treasury Department has made a significant error in saying it can’t prioritize payments. Per the Congressional Research Service, which found that prioritization could be used:
Some have argued that prioritization of payments can be used by Treasury to avoid a default on federal obligations by paying interest on outstanding debt before other obligations. Treasury officials have maintained that the department lacks formal legal authority to establish priorities to pay obligations, asserting, in effect, that each law obligating funds and authorizing expenditures stands on an equal footing.
In other words, Treasury would have to make payments on obligations as they come due. With regard to this view, Treasury noted in 2011 that an attempt to prioritize payments was “unworkable” because adopting a policy that would require certain types of payments taking precedence over other U.S. legal obligations would merely be “a failure by the U.S. to stand behind its commitments.”
In contrast to this view, GAO wrote to then-Chairman Bob Packwood of the Senate Finance Committee in 1985 that it was aware of no requirement that Treasury must pay outstanding obligations in the order in which they are received. GAO concluded that “Treasury is free to liquidate obligations in any order it finds will best serve the interests of the United States.” In any case, if Treasury were to prioritize, it is not clear what the priorities might be among the different types of spending.
While the positions of Treasury and GAO may appear at first glance to differ, closer analysis suggests that they merely offer two different interpretations of Congress’s silence with respect to a prioritization system for paying obligations. On one hand, GAO’s 1985 opinion posits that Congress’s legislative silence simply leaves the determination of payment prioritization to the discretion of the Treasury Department. Conversely, Treasury appears to assert that the lack of specific legislative direction from Congress operates as a legal barrier, effectively preventing it from establishing a prioritization system.
In short, Treasury is being disingenuous, especially since the Act specifically directs Treasury’s future actions.
It looks like Republicans have a back-up plan, though, if/when the Act does not become law: tax reform in exchange for a debt ceiling hike. The short version of this plan is that debt ceiling hikes would be rewards for passed legislation. As summarized by Politico:
The idea is in its infancy, according to sources involved in planning, but here’s how it would work: Legislation would authorize something like a three-month bump in the debt limit while simultaneously giving the same amount of time for the House to act on its tax-reform plan. When the House passes something, the debt limit would bet increased again, and when the Senate moves its own tax-reform product, Congress would authorize another bump in the debt ceiling. A larger increase in the borrowing limit could come if President Barack Obama signs the legislation, according to a source familiar with the thinking of the Ways and Means Committee. The plan would most likely be accompanied by a road map that lays out certain guidelines for Tax Code rewrite.
In other words, Congress would be able to borrow more in exchange for significant tax reform.
Five other points to be aware of as this week moves on, and the rest of the debt ceiling fight comes closer:
1. The Full Faith & Credit Act prevents Congress from spending more than the debt ceiling. In essence, the debt ceiling would be put back into place on May 19 per the legislation that allowed it to be temporarily abolished a few months ago. The Treasury Department would then be told to prioritize approximately $150 billion (Social Security interest payments, which are in the tens of millions of dollars, according to a Hill aide, plus interest payments on our principal debt, which are much larger) in spending with revenues as they came into the Treasury Department. Since there are plenty of revenues to pay for both of these areas of the budget, both the political weapon of Social Security payments and the investor weapon of debt defaults would be taken off the table.
Camp spokesperson Michelle Dimarob verified this, saying “This legislation specifically prevents Treasury from issuing new debt to pay for any new spending.”
2. The legislation prevents default on the debt by instructing Treasury to pay principal interest and make payments into the Social Security Trust Fund, but it puts prioritization on the shoulders of the President. Given the President’s record with sequestration, this is dangerous, both politically and for the American people. According to Dimarob, however, “the legislation specifies what ratings agencies like Moody’s and S&P have said is important with regards to distinguishing between defaulting on our debt and how the government treats other obligations. Specifically, this legislation prevents any threat of default on U.S. debt obligations. This legislation encourages the President to be more involved with taming our debt, something Republicans have long wanted.”
I’m still hesitant to trust that the President will do what’s responsible regarding prioritization, but the Chairman of the Ways & Means Committee appears more confident than I am.
3. The first quote in this post ends by saying Congress “will likely have to” raise the debt ceiling. While I don’t think this is intentional bias on the part of the article’s author, it would be more accurate to say “[l]awmakers will likely choose to increase the debt ceiling,” thus accounting for the apparent unwillingness of most politicians to cut spending via the debt ceiling. If the FFCA becomes law, it would force Congress to spend no more than it takes in, except for the payments listed in Point 1.
4. Another side note: Proponents of big government tend to argue that we must raise the debt ceiling or default on our debt. Hitting the debt ceiling would not actually cause a default, unless Washington decided to not pay interest payments. During the 2011 debt ceiling debate, and again last year, many claimed the debt ceiling is about past debts. In truth, hitting the debt ceiling has the same effect as that of reaching a credit card limit – spending can happen willy-nilly until that limit. It’s going forward with more spending that’s the problem, not what happened in the past.
This is where Democrats, who like to place blame for current debt ceiling increases on President Bush, are correct. If we hit a debt ceiling limit in the middle of a fiscal year, money has already been obligated. Congress has promised to spend money in certain areas, so it is past obligations, not past spending, that can be problematic.
5. Regarding the tax reform proposal in exchange for a debt ceiling hike, those talks are not even close to specifics yet. As importantly, Politico reported “[Camp] is so eager to rewrite the Tax Code, a source close to him said, he is open to discussing any framework to encourage tax reform, as long as it leads to reform.” Which means whatever comes out of these discussions may not be as thorough or economically sound as hoped.
In the end, it would be great if the American people could trust Congress to get control of spending. Instead, Tea Party activists know it’s always “one more time” with the debt ceiling. Congress can talk about “smart cuts” all it wants to, but when push comes to shove, a meat cleaver is better than nothing, especially when “nothing” is going to cripple America. Even tax reform is not a good enough trade for raising the debt ceiling. Overspending must stop now, not at some phantom point in the future.