10.15.2015 1

Taking default off the table?

Fiscal Cliff 600

By Robert Romano

On Sept. 10, the House Ways and Means Committee marked up legislation by U.S. Rep. Tom McClintock (R-Calif.), the Default Prevention Act, which seeks to prioritize payments of principal and interest owed on the $18.1 trillion national debt in the event the statutory debt limit is reached.

Conceptually this is a really good idea. Every time the debt limit is reached, President Barack Obama threatens default, because he can. Nothing in the law explicitly requires the Treasury to make debt payments first before everything else in the budget.

The Obama Treasury goes further, stating it lacks the statutory authority to prioritize payments at all, according to a 2012 Treasury Inspector General’s report.

“While Congress enacted these expenditures, it did not prioritize them, nor did it direct the President or the Treasury to pay some expenses and not pay others,” the report states. “As a result, Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day. Furthermore, because Congress has never provided guidance to the contrary, Treasury’s systems are designed to make each payment in the order it comes due.”

All that, even though there is more than enough revenue every year to pay interest owed on the debt. Even if you count gross interest owed on the debt, which includes payments to the Social Security, Medicare, and other government trust funds — something public officials are in the habit of ignoring — those came in at $429 billion in 2014. In the meantime, the federal government collected $3 trillion in taxes.

Existing debt could be refinanced up to the limit. It is new debt that would not be able to be contracted to finance the full budget, but default on the existing debt itself would be unnecessary, and with a properly constructed debt payment prioritization plan, impossible.

That would give credit markets the confidence that whatever partisan differences occur around a debt ceiling increase, existing debt will always be covered.

So long, that is, as the debt payment prioritization plan actually covers all of those obligations.

Enter the House Ways and Means Committee, chaired by U.S. Rep. Paul Ryan (R-Wis.). The last time this legislation was marked up by the same committee, it was blasted by Democrats because although it covered principal and interest owed on debt held by the public, and in the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund (i.e. Social Security), it left out the $266.4 billion Medicare Hospital Insurance Trust Fund and the Supplemental Insurance Trust Fund.

At the time, Democrats on the committee wrote in the mark-up’s dissenting views, “This legislation would require the Department of the Treasury to pay Chinese and other foreign bondholders first, before our troops in harm’s way if they are paid at all, before the doctors and hospitals that care for our seniors on Medicare if they are paid at all, before our veterans if they are paid, and before our American small businesses if they are paid.”

That was in April 2013. So, surely after more than two years, and with a new committee chairman in Paul Ryan at the helm, Republicans fixed such a glaring omission, right?

In addition to debt prioritization, to insulate Congress from the accusation it is ditching Grandma and the troops, this legislation could have provided a wider range of prioritization, including utilizing revenue to pay Social Security, Medicare, active duty military payments, and veterans’ benefits.

But, no, instead, the bill was marked up without amendment and sent on its merry way to the House floor, where a vote could come as soon as next week, failing to protect members of Congress from charges it is paying China before seniors.

Predictably, Democrats in the committee’s dissenting views once again noted the omission, “We are further concerned that the plan contained in the legislation would prioritize payment of debts to bondholders, including those in China, Switzerland, and the Cayman Islands, over our obligations to America’s veterans, seniors, students, and troops in harm’s way.”

Democrats added, “[We] urge our Republican colleagues to avoid repeating their mistakes.”

It should have been really easy to fix, since the Medicare portion of the debt only constitutes 1.4 percent of the total $18.1 trillion debt. And even after payments on interest are made, there is still enough revenue to pay Social Security, and veterans’ benefits, plus defense.

Based on prior experience, one might think Ryan would be careful to avoid the predictable political theatrics of being perceived as pushing Grandma off the fiscal cliff.

Instead, because Ryan’s Ways and Means Committee could not be bothered with ensuring that the entire debt and essential obligations were covered by the legislation, including Medicare, the Default Prevention Act sadly fails to live up to its name, which is hard to say, because, again, prioritization of debt payments is a really good idea.

Default should never be an option for any president, especially when the debt limit is reached.

But in its current form, even if the bill passed and by some miracle was signed into law, it would still give the executive branch all the leverage it needs to force Congress to rubber stamp increases and suspensions of the debt limit — because when push comes to shove, Congress does not want to be held responsible for defaulting on debt that helps pay for Medicare benefits.

Why would House Republican leaders put their own members in front of such a political buzzsaw? By now, Paul Ryan should know better.

Robert Romano is the senior editor of Americans for Limited Government.


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