04.13.2011 0

The Next Big Lie

Relax About the Debt Ceiling Cartoon

By Bill Wilson – Barack Obama is threatening that if Congress does not increase the $14.294 trillion national debt ceiling, the nation will default. In a letter to Congress, Obama’s Treasury Secretary, Timothy Geithner wrote, “Failure to raise the limit would precipitate a default by the United States.”

It is a rather curious formulation. Note that the Administration is not saying that if we continue to borrow trillions of dollars year on end without ever presenting a plan to repay the debt, we will default. But that if we do not continue borrowing, we cannot meet our obligations to creditors.

Call it the next big lie.

And it is nothing more than a scare tactic. Just like a consumer credit limit, if the debt ceiling is reached, this will simply mean that the Treasury cannot issue new debt. The existing debt could still be refinanced, but interest owed on the debt would have to be paid out of revenue and the budget would also have to be balanced immediately. That is not a default.

Surely, it would mean big cuts in spending. Of the $2.173 trillion in revenues, $430 billion would have to be dedicated to paying total interest owed on the national debt, including to the Social Security and Medicare trust funds. That would leave $1.743 trillion to pay for the remaining $3.612 trillion of the budget, requiring approximately $1.869 trillion of immediate cuts.

That’s what really would happen. But that’s not stopping the media from reporting otherwise. Helping to perpetrate the lie is the Washington Post’s Ed O’Keefe and Eric Yoder. They write, “Employees wouldn’t be sent packing, and paychecks would still be issued. But hitting the debt limit would likely delay the government’s payment of financial obligations and might disrupt the flow of other normal government operations.”

The Post’s O’Keefe and Yoder are assuming that the nation’s creditors would not be paid first out of the existing pot of revenue. What gave them that idea? “Treasury officials believe they don’t have the legal authority to prioritize which payments to make, meaning the government would have to pay its obligations as they come due,” they write, citing a Congressional Research Service report.

So, the Treasury is claiming that it would not pay off the nation’s creditors as a first priority to prevent default — that it would just continue spending money on everything until it simply runs out.

To take the Obama Administration’s threat off the table, Republican Study Committee (RSC) Members Tom McClintock, along with RSC Chairman Jim Jordan, Rep. Virginia Foxx, and Rep. Scott Garrett have introduced the Full Faith and Credit Act. It mirrors a bill in the Senate offered by Pennsylvania Republican Senator Pat Toomey.

According to an RSC description of the bill, “The Full Faith and Credit Act directs the United States Treasury, in the event the debt ceiling is reached, to pay principal and interest due on debt held by the public before making any other payments.”

Critically, the description notes, “This bill would merely codify standard Treasury practice.” So, which is it? Does the Treasury, as standard practice, pay the debt first or not?

In reality, the Treasury makes the decisions of who it needs to write checks to every day. The only difference is that every week it holds new auctions to sell U.S. debt, and so has a relatively limitless supply of funds to meet all of the government’s obligations. The sensible thing to do would be to pay the creditors first.

And if there is any question, then the only other sensible thing to do would be for Congress to pass the Full Faith and Credit Act.

Of course, the real reason for the Obama Administration to pretend that the nation will default if the debt limit is not raised is because it does not wish to make any concessions to achieve the vote. Republicans need to say: Too bad. And to use its leverage to achieve something big.

Senator Marco Rubio has proposed conditioning support of an increase in the $14.294 trillion debt ceiling to passage of the Balanced Budget Amendment and other key reforms. He is right to put strict conditions on any increase in the national debt ceiling.

At a minimum, any debt limit increase should be conditioned on the amendment — so that there comes a day when it will never need to be increased again. Instead, we are hurtling on a trajectory where the debt will become so large that it cannot be refinanced, let alone repaid, no matter how high the debt ceiling is.

That is when the Treasury’s house of cards will come crumbling down.

Bill Wilson is the President of Americans for Limited Government.

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