Ban Extraordinary Measures

The past 24 hours have seen a mini-breakthrough in the stalemate over the government shutdown and debt ceiling  with House Republicans looking to pass a six-week debt ceiling hike in return for formal negotiations on the budget and a permanent ban on the Treasury Department’s use of extraordinary measures to extend the debt ceiling. President Obama has already come out against the condition of formal negotiations on the budget so this deal is a non-starter. But Boehner could easily downgrade the “formal negotiations” to a mere resolution seeking Democrats to negotiate, something non-binding and not a substantial concession. In that scenario, would Democrats accept a permanent ban on extraordinary measures? I hope so, not just because it will get us closer to a solution to both crises, but also because it makes policy-sense as well.

A quick recap: We actually hit the debt ceiling of $16.999 trillion in May, but the Treasury Department has been using some strange budgetary gimmicks to extend our borrowing authority. However, those gimmicks, known as extraordinary measures, have a limit and we’ll hit that limit next Thursday. After that, we default. An example of these extraordinary measures including delaying payments for public employee pension funds (more info here). That’s what Republicans want to permanently ban.

This makes a lot of sense. The only thing that using extraordinary measures accomplishes is delaying us from officially breaching the debt limit. But the only time Treasury actually has to use them are when one political party is looking to fight over raising the debt ceiling. Extraordinary measures delays that fight a couple of months. Think about it this way: why is having the debt ceiling fight now better than having it this past May? There never is a good time for these fights (and the debt ceiling should be abolished), but extending them for an undetermined period of time is pointless.

Since Republicans have not put forward an official proposal, Democrats haven’t commented on the idea of banning extraordinary measures. Wonkblog’s Neil Irwin offers one possible reason for White House opposition:

Such a step would give this and future administrations less leeway to influence when the debt ceiling becomes a binding constraint, so it won’t be shocking if the Obama administration opposes the idea.

One of the dirty secrets of the Treasury’s cash management function is that very few people on earth understand how it really works, and almost all of those people work for the Treasury. So Republicans on Capitol Hill have felt that they don’t have reliable information on when exactly they really, really need to raise the debt ceiling and when Jack Lew & Co. have more tools in their bag of cash management tricks.

That’s all true, but that doesn’t seem like a good reason to keep extraordinary measures. The minority party should never use the debt ceiling as a hostage, but if they are, it’s better for everyone that they have reliable information on when they need to raise the debt ceiling. If House Republicans want to wait until the last second to strike a deal, they really need to know when that last second is. Otherwise, there is a (small) risk we accidentally default. That’s a risk we don’t need to take.

In addition, it’s much easier for journalists and politicians to explain to the public when we hit the debt limit, instead of when Treasury can no longer use extraordinary measures to stop us from breaching it. It’s an unnecessary complication that confuses the public and simply delays a nasty fight with no real benefits. Let’s get rid of it.

Can Treasury Prioritize Interest Payments?

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.