“Debt Prioritization” Is Simply Default by Another Name

Update, September 26: Although described as a “debt prioritization” measure, the provision in the continuing resolution that the House approved on September 20 really isn’t.  It would actually allow the Treasury to borrow funds that would not count toward the debt limit to pay interest and Social Security benefits.  While that would still leave the Treasury short of funds to pay other government obligations, it would not — contrary to what we originally wrote — leave less cash available for these purposes.  Our conclusion, however, remains: by appearing to make default legitimate and manageable, the proposal would heighten the risk that a default will actually occur.

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The House will vote tomorrow on a Republican proposal directing the Treasury to pay bondholders and Social Security recipients first if there’s a prolonged standoff over raising the debt ceiling.  This “debt prioritization” is extremely dangerous.  By appearing to make defaulting on the debt legitimate and manageable, it would heighten the risk that a default will actually occur.

In reality, debt prioritization would make things worse for the millions of people and businesses who count on timely federal payments.  Protecting bondholders and Social Security beneficiaries would leave even less cash on hand to pay veterans, doctors and hospitals who treat Medicare patients, soldiers, state and local governments, private contractors, and recipients of unemployment insurance, SNAP, and Supplemental Security Income.

The Treasury bumped up against the debt ceiling on May 17, and the department warns that the “extraordinary measures” it’s taken since then to continue paying the nation’s bills will run out by mid-October.  The Bipartisan Policy Center echoes Treasury’s warning.

Lawmakers shouldn’t fool themselves:  simply putting bondholders at the front of the queue won’t avert financial chaos or soothe creditors.

The Treasury makes roughly 80 million separate payments each month, so deciding which bills to pay would be extremely difficult.  And, domestic and foreign lenders would hardly be reassured at the sight of a cash-strapped superpower picking which bills it could afford to pay.

One rating agency explicitly warned in January that honoring interest and principal payments but delaying payment on other obligations would trigger a review and hence a possible downgrade.

We’ve said before that lawmakers shouldn’t play politics with the debt ceiling.  The United States is virtually alone among advanced countries in setting a debt ceiling independently of the decisions that drive higher debt in the first place — the choices about how much to spend and how much to raise in revenues.

Among other problems, that disconnect enables lawmakers to support tax cuts and wars that necessitate borrowing, then oppose raising the debt limit to let the government pay the resulting bills.

The Economist called failing to raise the debt limit — or attempting to prioritize payments — an “instrument of mass financial destruction.”  We agree.

Lawmakers should raise the debt limit in a timely way and for an extended period of time so that the government does not risk defaulting on any of its obligations.