Category Economy

Can Treasury Prioritize Interest Payments?

Danny Vinik 4 Comments

Reuters Felix Salmon seems to think it can:

The problem with it is that the government would still need to miss an interest payment on its Treasury securities, and there’s no way that it’s ever going to do that, whatever happens to the debt ceiling.

Think about it this way: if I roll over my debts, then my total debt does not actually increase. So if a T-bill is coming due today, then the government can pay it off in full, and issue a new T-bill, without increasing its total indebtedness.

…

[W]ith Jack Lew (or anybody else, really) as Treasury secretary, you can be sure that debt service payments would be priority number one.

This only makes sense if the Treasury Department can choose which bills to pay and which not to. Imagine instead of just a T-bill is coming due today, there are millions of different payments coming in. Some are T-bills and the rest are made up by everything else the government pays for on a daily basis. When we breach the debt ceiling, the revenues coming in will not be enough to pay all of those bills. Salmon is suggesting that the federal government use those revenues to pay off all of the T-bills, freeing up more borrowing space and preventing the government from missing any payments. Treasury than could use the new borrowing space to pay off more of its bills, although it would still be unable to pay them all off. This is what conservatives mean when they say that the government can prioritize interest payments. This a pretty simple idea to make sure that the U.S. does not technically default on its debt, since defaulting requires missing an interest payment.

This plan assumes that Treasury has the technical capacity and legal authority to prioritize payments, though. If it cannot do that, then this entire idea falls apart. Treasury will pay whichever bills come in first. If a T-bill comes in when it has no more revenue and no more borrowing space, it would miss an interest payment. The U.S. government would default on its debt.

The question then is: can Treasury prioritize interest payments?

Implicit in Salmon’s piece is that it can, although he offers no evidence to support his belief. Back in 2011, he addressed the legality of prioritizing payments and came to the following conclusion:

As Treasury’s stated idea that it would simply pay bills as they came due, on a pari passu basis, and then stop paying when it ran out of money, it’s simply unthinkable. Treasury bonds and bills will get paid — they have to be. The bond markets know that, which is why they’re still pretty sanguine about this whole debt-ceiling issue.

Salmon seems to believe that there is absolutely no way Treasury would ever default on its obligations. Period. But while he offers a moderately convincing answer to whether prioritizing payments is legal, he doesn’t even try to answer whether Treasury has the technical ability to do so.

Last week, Slate’s Matt Yglesias and FT Alphaville’s Cardiff Garcia both pointed to an RBC Capital report that analyzed those technical abilities and concluded that Treasury wouldn’t be able to prioritize payments. Just today, a senior official at Treasury explicitly said that it “would be impossible to prioritize payments on debt.” Of course, the Treasury Department has every incentive to lie and convince Republican lawmakers that the department can do nothing if Congress doesn’t raise the debt ceiling. Nevertheless, it’s still meaningful.

That’s pretty good evidence to demonstrate that prioritizing debt payments is not possible. At the very least, it should make Salmon question his air-tight conviction that even if Congress refuses to raise the debt ceiling, Treasury has the technical capacity to ensure we don’t miss an interest payment. Given the evidence against it, that’s a big assumption to make.

Debt Ceiling Negotiations Are Now Almost Unavoidable

Danny Vinik 2 Comments

Now that the government shutdown does not seem to be ending anytime soon, liberals are going to have to accept the fact that the debt ceiling is no longer non-negotiable, at least from a messaging standpoint. With both sides digging in, there seems to be little hope of solving the government shutdown before October 17 when we hit the debt limit. That means that any negotiations over a continuing resolution – which will happen eventually – will also have to include a debt ceiling raise. From Politico today:

Reid is highly unlikely to accept a budget deal if it does not increase the debt ceiling, Democratic sources said Tuesday. If the House GOP won’t back the Senate’s stopgap plan by later this week, Democrats are prepared to argue that it makes little sense to agree to a short-term spending bill if Congress is forced to resolve another fiscal crisis in just a matter of days.

A White House official said Tuesday night that the president could get behind Reid’s strategy.

Across the Capitol, House Republicans were quickly coming to a similar conclusion. Republicans were internally weighing including a debt ceiling hike in their demands to convene a House-Senate conference committee to discuss a bill to reopen the government. In the coming days, the GOP leadership is likely to change its rhetoric, with Republicans arguing about government funding and the debt ceiling in the same breath.

The two issues are now inherently connected. The president can maintain his position that he will not negotiate over the debt ceiling, but it will be harder to prove that is the case. In a worst case scenario, Democrats actually do negotiate over the debt ceiling and it becomes a piece in the compromise. That would once against set precedent for the debt ceiling to be used as an extortion device. Senate Majority Leader Harry Reid (D-NV) cannot let that happen.

But even the best case scenario is not very satisfying. In that situation, Reid declares that Congress must raise the debt limit and Republicans acquiesce. Except because of the tight schedule, the two sides continue negotiating over the CR. Eventually, they come to some type of agreement and both sides pass a bill with that includes a debt ceiling increase. In this case, the debt ceiling was never part of the negotiations and was never used as an extortion device, but that’s hard to prove. The media will analyze the deal as if it was part of a compromise. Republicans will head home to their constituents and say that they made the Democrats negotiate over the debt ceiling. They will say they broke President Obama’s no-negotiating position. Democrats will have no way to prove otherwise. It will be their word versus the Republican’s and the final deal will have a debt ceiling increase in it. Once again, the precedent will be set for using it as an extortion device.

There is one way to avoid all of this though: President Obama can unilaterally raise the debt ceiling. Unfortunately, this is highly unlikely to happen. The Administration ruled out using the 14th Amendment again yesterday and minting a trillion-dollar platinum coin seems even more absurd. Nevertheless, this would eliminate the need to raise the debt ceiling and prevent any negotiation over it. If Obama is really determined to not negotiate over the debt ceiling, he will look at both options carefully, because negotiating is now unavoidable.

Americans Reject Using A Government Shutdown To Legislate

Danny Vinik 5 Comments

Yesterday evening, President Obama gave a short speech where he urged Congress to pass a continuing resolution to prevent a government shutdown and criticized Republican leaders for attempting to extract concessions from him without giving anything up themselves.

“[O]ne faction of one party in one house of Congress in one branch of government doesn’t get to shut down the entire government just to refight the results of an election,” Obama said. “Keeping the people’s government open is not a concession to me. Keeping vital services running and hundreds of thousands of Americans on the job is not something you give to the other side. It’s our basic responsibility.”

In fact, Democrats have already agreed to a deal with Republicans where they are giving up something and the GOP isn’t. It’s the clean CR that keeps sequestration. Democrats are giving billions in budget cuts to Republicans, who are giving up nothing. Yet, a small, but powerful group of conservative House Republicans won’t even consider that deal and House Speaker John Boehner (R-OH) won’t bring up the bill out of fear of them. If he did take the political risk and bring the clean CR to the floor, it would pass with a large majority, the Senate would pass it and the government shutdown would end, all with a bill in which Democrats make concessions and Republicans don’t.

Now, imagine if Republicans were looking to cut spending beyond sequestration ($986 billion in discretionary spending) to the level laid out in the 2014 Ryan Budget ($967 billion). Under this scenario, the Republicans starting position would still be absurd as the Senate Democrats original 2014 budget set spending at $1,058 billion. The sequester has already trimmed that to a $986 billion. Reducing it all the way to the levels of the Ryan Budget would be an outrageous demand. But at least that demand would have to do with levels of federal spending. There would be a very clear, logical connection between the government funding and the Republican position. But Republicans aren’t asking for anything related to federal spending right now. It’s all about finding ways to undermine Obamacare. That’s what sets this government shutdown apart from previous ones.

This is the 18th government shutdown in U.S. history. Here’s how the causes of them breakdown (thanks to Wonkblog’s Dylan Matthews for the great roundup):

  • 9 were caused by disagreements over spending levels on certain programs, projects, departments or the entire government (1976, 1978, 1981, 1982 #2, 1983, 1987, 1990, 1995, 1996)
  • 4 were caused by disagreements over whether Medicaid dollars could go towards abortion (1977 #1, 1977 #2, 1977 #3, 1979)
  • 2 were caused by disagreements over Civil Rights legislation and a couple of projects (1984 #1, 1984 #2)
  • 1 was caused by disagreements over labor contracts and welfare expansion (1986)
  • 1 was caused by negligence (1982 #1)

In nearly every shutdown, the two parties disagreed on issues related to levels of funding or how federal spending would be used. These were differences of opinion directly related to budget negotiations. In almost every situation, there was an actual negotiation and each side compromised to find a solution. It required a government shutdown, but the structure for negotiations always existed as the initial starting positions for each party were related to federal spending.

There were a couple of occasions where that was not the case, such as when Democrats attempted to enact a Civil Rights law in 1984 and ensure that the FCC enforced the “Fairness Doctrine” in 1987. However, the party looking to use a government shutdown to legislate always lost. Democrats eventually relented on the Civil Rights legislation and the “Fairness Doctrine.” This doesn’t mean that it’s impossible to enact legislation unrelated to federal spending during a government shutdown, but it has never succeeded before. The main reason for that is that negotiations over funding the government are supposed to be just that. They aren’t supposed to be a place where one party can extort the other.

Yet, this is what House Republicans are trying to do. They are trying to force the Administration to delay or defund Obamacare in order to fund the government at a level that everyone agrees on. When a final agreement is reached (or Republicans relent), the CR will almost certainly be set at $986 billion. Republicans aren’t concerned about spending levels. They are using the government shutdown to legislate. This is exactly what President Obama said in his remarks earlier today as well.

“No, this shutdown is not about deficits,” he said. “It’s not about budgets. This shutdown is about rolling back our efforts to provide health insurance to folks who don’t have it. It’s all about rolling back the Affordable Care Act.”

Fortunately, Americans seem to be well aware of what Republicans are trying to do and are wholeheartedly rejecting it. A Quinnipiac Poll today found that 72% of respondents disapprove of Congress using a government shutdown to block Obamacare. Just 22% approve of the tactic. This is in stark contrast to the overall approval rating of the law, which sits at -2% (45% in favor, 47% opposed). That demonstrates that Americans disapprove of the Republican’s tactic of using a government shutdown to legislate.

If the numbers were reversed, Democrats would face political pressure to adjust the law. It would alter the dynamics of government spending negotiations forever – allowing the party not being blamed for the shutdown to enact legislation via extortion. That’s not a proper way for our government to function. By overwhelmingly rejecting the Republican’s strategy, Americans are sending a message loud and clear: using a government shutdown to legislate is not acceptable. Hopefully, Republicans get the message soon enough.