The US is not going to default on its debt, even if Congress does not increase the statutory borrowing authority in the next couple of months. Everyone in Washington knows, or should know, this. Any assertions to the contrary are tantamount to – perish the thought – playing politics with the debt ceiling.
This is the second time in less than two years that the nation finds itself at this juncture, with Republicans in Congress threatening to hold the debt ceiling hostage. Some legislators are willing to shut down the government in order to put pressure on President Barack Obama to agree to spending cuts.
A shutdown is certainly possible. A debt default? Not going to happen.
Why? Because the income tax withheld from most Americans’ pay cheques each month far exceeds the interest the Treasury owes on its outstanding debt.
In November, for example, the Treasury’s interest expense totalled $25 billion (about R216bn). That compares with tax receipts of $161.7bn. The ratio of receipts to interest expense varies from month to month, but what comes in more than covers what goes out in debt service.
Without an increase in the $16.394 trillion debt limit, the federal government cannot pay all of its bills: it borrows 40c of every dollar it spends. Still, “debt service would come first”, says Lou Crandall, the chief economist at Wrightson Icap.
Wait. The Treasury claims it has no authority to prioritise payments, to pay bondholders first. Others beg to differ. In response to a congressional inquiry on the issue in 1985, the Government Accountability Office (GAO) concluded the following: “We are aware of no statute or any other basis for concluding that Treasury is required to pay outstanding obligations in the order in which they are presented for payment unless it chooses to do so.”
The GAO is equally unaware of any new law that would alter its opinion in any way. So repeat after me: the US is not going to default on its sovereign debt. If it can’t issue new debt, it can roll over maturing debt. Creditors may demand a higher interest rate, especially if Obama and Treasury Secretary Timothy Geithner raise the spectre of default, as they did in 2011.
Issuing such a threat is irresponsible and even counterproductive if it prompts bondholders to dump treasuries. That happened initially during the debt-ceiling negotiations in 2011, costing the Treasury an additional $1.3bn in interest expense, according to the GAO. And Standard & Poor’s cut the US’s AAA rating on August 5.
I am not suggesting that a failure to raise the debt ceiling wouldn’t cause undue hardship to those who rely on government cheques. Social security payments may not be processed. Medicare and Medicaid providers wouldn’t get paid. Neither would those serving in the military.
The sad part is that the debt ceiling has nothing to do with the debt problem. It merely allows the Treasury to borrow what Congress has already spent. It does not authorise new spending commitments.
The only solution is to address the debt ceiling directly. Obama has made it clear he will not negotiate with Congress over the government’s borrowing authority. Republicans have made it equally clear they will not give him what he wants without extracting concessions on spending cuts.
Given the public’s view of them as spoilers, Republicans should rather use their leverage in talks over the sequester. As part of the deal to avert the fiscal cliff, the first instalment of the 10-year, $1.2 trillion of not-so-automatic discretionary spending cuts was delayed for two months.
Obama no longer has the leverage he had in the cliff negotiations: tax increases for all if Congress failed to act.
Republicans, as a rule, oppose cuts in defence spending. Obama doesn’t want to pare non-defence spending. In fact, he would like to increase it under the guise of “investment”. (It sounds so much better.)
The president has also said that any deficit-reduction agreement must be balanced, by which he means spending cuts only in return for additional tax increases.
Congress has just made the Bush-era tax cuts permanent for all but the top 0.7 percent of earners. And Senate Minority Leader Mitch McConnell said the “tax issue is finished, over, completed”.
The lines in the sand have been drawn – rather sharply, as it turns out. The talks could get interesting if Republicans pick their battles carefully, addressing spending cuts at an appropriate time and place.
Caroline Baum is a Bloomberg View columnist.