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.

A Few Republicans Are Crazy But Consistent

When I read National Review reporter Jonathan Strong’s piece this morning that some House Republicans weren’t happy with their first offer to President Obama in return for raising the debt ceiling, I was shocked. The offer is basically everything House Republicans could ever want and they weren’t happy with it?! But as I’ve thought it over, it actually makes a bit of sense. From Strong’s article:

“It definitely has a lot of goodies in it – things that arguably would grow the economy and arguably would generate revenue. But still you have to address the spending problem,” said Representative Mo Brooks of Alabama.

“The reason that we have to raise the debt ceiling is because we have deficits. The reason that we have deficits is because we spend a whole lot more money than we bring in in revenue. And this debt-ceiling package does not fix the underlying cause of the problem, which are the deficits,” he added.

Other House Republicans expressed similar sentiments. This is actually consistent with what House Republicans have been screaming about for years: more spending cuts in return for raising the debt ceiling. Now, our deficits are falling fast and the long-term debt has decreased significantly so it’s absurd to be cutting spending more. But this makes more logical sense then the christmas tree list of demands in the Republicans first offer.

The ironic thing is (and always has been) that by having the U.S. risk default, it actually drives up our borrowing cost and increases our debt. If we were to breach the debt ceiling, it would likely increase our long-term interest payments by nearly a trillion dollars. So it makes absolutely no sense to use the debt ceiling as leverage to extract spending cuts or anything else from the president. It’s a crazy, irresponsible tactic. The debt ceiling should be forever abolished.

But at least some House Republicans haven’t lost sight of the fact that their original reason for using the debt ceiling as an extortion device was because of the long-term debt. Business Insider’s Josh Barro wrote today that all of this shows that “the pretense that debt limit fights are about the public debt is over.” For most Republicans, that is certainly the case. But Strong’s article demonstrates that there are some who are still sticking to that principle. They are reckless, rash and stupid for holding the debt ceiling hostage, but unlike the rest of their colleagues, they are also consistent.