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January 16, 2013 11:59 AM The Dangerous “Prioritization” Canard

By Ed Kilgore

The idea got a big boost from a National Review editorial yesterday. And now, according to Reuters, it’s gaining steam among congressional Republicans: the suggestion that “debt default” be “taken off the table” by directing the Treasury to pay existing obligations but not those associated with “future” spending.

You can see how a scheme to absolve conservatives of threats to Social Security beneficiaries and bondholders while maintaining their leverage over other kinds of federal spending would powerfully appeal to Republicans. But the trouble with it is plain enough: financial analysts say it would not eliminate severe damage to the federal government’s credit-worthiness, as the New York Times’ Jonathan Weisman reports:

Fitch Ratings Ltd. warned on Tuesday that Congress’s failure to raise the federal government’s statutory borrowing limit would “very likely” prompt a downgrading of the United States Government’s credit rating, and the agency seemed to suggest that Congress should simply do away with the debt ceiling altogether.
In a pointed statement, Fitch dismissed the assurances of some Republicans that the Treasury Department would be able to use incoming tax receipts to prioritize the payment of government debt and interest, as well as vital services like military pay and Social Security. That warning echoed the Treasury’s own assessment that breaching the debt ceiling could not be managed in any way that would minimize the economic turmoil or avoid default.
“It is not assured that the Treasury would or legally could prioritize debt service over its myriad of other obligations, including Social Security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met,” Fitch wrote.

A ratings downgrade, of course, would not only rattle global markets immeasurably, but would directly increase federal spending via higher interest rates on government debt instruments, no matter how faithfully the debt is paid.

The GOP’s business buddies need to make it clear this ostensibly clever “half-pregnant” approach is not a pain-free option, before those congressional hardline conservatives who really wouldn’t mind a complete debt default insist on prioritization as a “compromise.”

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • Ron Byers on January 16, 2013 12:24 PM:

    How does this idea work exactly? I didn't know the Treasury spent money before it was due and no money is paid by the government unless it has been approved by the Congress.

  • Josef K on January 16, 2013 12:25 PM:

    The GOP’s business buddies need to make it clear this ostensibly clever “half-pregnant” approach is not a pain-free option, before those congressional hardline conservatives who really wouldn’t mind a complete debt default insist on prioritization as a “compromise.”

    Um, anyone care to speculate how many of the GOP caucus pushing for a default (a) actually understand the consequences from a purely practical and fiscal perspective, (b) have the intellectual capacity to understand the consequences from a purely practical and fiscal perspective, (c) actually give a rat's arse about the consequences from a purely practical and fiscal perspective?

    I'm willing to wager the number for (a) through (c) gets significantly smaller with each successive answer. Fixed ideology plus a self-centered hero complex (notice how much of the GOP's rhetoric comes in Herculean mythic flavors?) makes for very poor capacity for critical thinking.

    Hopefully the Wall Street moneybags will have more luck getting through to these self-styled heroes, but I'm not going to hold my breath.

  • c u n d gulag on January 16, 2013 12:30 PM:

    I suggest we start on the salaries of politicians and their staff members - DON'T PAY 'EM!

    Then, we cut off money from Red States, and Red Congressional Districts.

  • Anonymous on January 16, 2013 12:33 PM:

    "directing the Treasury to pay existing obligations" by passing a bill through BOTH houses of Congress???

    it is to laugh.

    Boehner couldn't pass a parked car.

  • jjm on January 16, 2013 12:34 PM:

    The GOP and we should remember this: the radical Tea Party types are a relatively small group in the House: so we need to remember that it is a MINORITY that represents ideas that are abhorrent to the MAJORITY of Americans. It's time to stop allowing this tyranny of the minority over the rest of us.

    The GOP used to get by with a lot of awful stuff by (falsely) claiming to speak 'for the American people,' the 'silent majority.' Now that the majority has regained its voice, it cast over a million more votes for Democrats than the GOP for Congress.

  • Peter C on January 16, 2013 12:36 PM:

    I'm anonymous, abouve.

  • david1234 on January 16, 2013 1:15 PM:

    I think the 14th Amendment already requires President Obama to pay the government's debts if it is possible to do so. The question becomes which obligations qualify as debts, and whether there is enough incomming revenue to cover all of them.

  • Aynsley on January 16, 2013 2:36 PM:

    A downgraded credit rating causes the US Govt to pay more in interest rates (worse for deficit). PLUS, since just about every interest is pegged to the Fed's interest rate, EVERYONE who has interest payments, will pay more. EVERYONE.
    I'm at a loss to understand why THAT fact is not stage center, in this discussion.

  • Butch on January 16, 2013 6:23 PM:

    In fact, a law passed back during the Nixon administration says the president MUST spend what Congress has authorized. (Ole Tricky decided he could unilaterally cut spending on programs he didn't like - Congress had another opinion.)