“I think it’s irresponsible of the president and his men to even talk about default. There’s no reason for us to default. We bring in $250 billion in taxes every month. Our interest payment is $20 billion. Tell me why we would ever default.”
– Sen. Rand Paul (R-Ky.), interview on NBC’s “Meet the Press,” Oct. 6, 2013
The Fact Checker was away as the government shutdown began, so we apologize to readers who have sent many questions about the claims and counterclaims. We will try to make up for lost time.
As a start, let’s take a look at this statement by Sen. Paul, which reflects a view common among some Republicans. Even a noted economist such as Harvard University’s Martin Feldstein has stated there is “no risk of default” because “the U.S. government collects enough in taxes each month to finance the interest on the debt.”
The debt ceiling is set at $16.699 trillion, for both publicly traded bonds and intergovernmental obligations such as Social Security, and the United States actually hit it back in the middle of May. But the Treasury has juggled money around in an effort to keep from going over the debt limit. But by most estimates, sometime between Oct. 17 and Nov. 1, the game of financial musical chairs must end and Treasury would no longer be able to pay all bills that are due.
Paul’s aides said his figures were averages, and we won’t quibble with the numbers, except to note that in some months (such as when annual and quarterly taxes are due), there is a revenue gusher; in other months, tax collections are relatively slim.
According to the Bipartisan Policy Center, between Oct. 18 and Nov. 15, the government would have estimated receipts of $222 billion and owe $35 billion in interest on Treasury securities. So a monthly average does not really tell the whole story.
Moreover, let’s not forget that, even with the improvement in the economy, the United States is still running a substantial deficit — some $600 billion in the fiscal year that ended Sept. 30. That means that revenues are generally far short of expenses, month by month.
Paul’s main point is Treasury should be able to prioritize its payments, an aide said. In other words, it would choose to pay just the interest on the bonds held by Wall Street and foreign investors (such as the Chinese and Japanese governments) while stiffing other creditors. For instance, IRS refunds could be delayed or federal salaries withheld.
All told, in this period, some $100 billion in bills in the month after Oct. 15 would need to be delayed. An especially difficult day would be Nov. 1, when $58 billion in Social Security payments, disability benefits, Medicare payments, military salaries and retiree pay is due.
We will leave aside the question of whether any politician would want to tell Americans that Chinese bondholders get higher priority than their Social Security checks. Is this even possible?
(Update: We should have used an example other than Social Security checks. Because of the interaction with the trust funds, there would be no savings, as economist Dean Baker points out.)
Paul’s aides pointed to a 1985 General Accounting Office report that the “Treasury is free to liquidate obligations in any order it finds will best serve the interests of the United States.” But both the Treasury Department and the Congressional Research Service say that there is tremendous legal uncertainty about whether some payments could be honored while others ignored if the nation goes above the borrowing limit.
This is a bit of an academic dispute. The sheer volume of transactions — as many as 5 million a day — would make it difficult to pick and choose. Moreover, Treasury says its systems are designed to make payments in the order in which they are due.
After the 2011 showdown, Treasury concluded that “the least harmful option available to the country at the time, of these very bad options,” was a delayed payment regime. In other words, Treasury would only pay all of the bills for a particular day once it had collected enough cash for every outstanding claim due that day.
So, in theory, Monday’s payments would be held until, say, Wednesday. Then, Tuesday’s payments would be held until enough money was collected for that day’s payments, which could be Thursday or Friday. So the government could start the following week already three days behind in payments — and continue to fall ever farther back.
But if this even were possible, would it be advisable? Steve Bell, who worked on Wall Street and was a former staff director of the Senate Budget Committee under Sen. Pete V. Domenici (R-N.M.), says the financial markets likely would judge any delay in payments related to the debt ceiling as an effective default and would punish U.S. Treasuries accordingly by demanding higher interest rates on U.S. securities.
During the 2011 debt ceiling confrontation, elevated interest rates cost taxpayers $1.3 billion, according to the GAO. Over 10 years, Bell says, the impact of that relatively minor blip totals nearly $19 billion. In other words, if Wall Street decided that a delay in some payments meant the same thing as an actual default, traders could demand the same kind of rates as if the government had defaulted — at a substantial cost to U.S. taxpayers.
Wall Street executives, quoted in The Wall Street Journal this week, in fact warned against attempting to make some payments ahead of others, saying it would “drive up borrowing costs and cause market disruptions.”
“Senator Paul is not advocating merely paying the interest on the debt,” the aide said. “These are all hypothetical situations in terms of the U.S. not fulfilling all obligations. The point is that there is no reason to default on the debt.”
“Markets would be unhappy if the government didn’t pay any bills but it would be much, much worse if they didn’t pay interest on the government debt,” Feldstein said in an e-mail. “I imagine that the government is not writing checks to some suppliers, etc. now but the markets are not upset because they know it will come later. So from a ‘fact checking’ point of view, the fact is that the government can avoid defaulting on the debt payments.”
The Pinocchio Test
On a theoretical level, it might be possible to just pay interest on the national debt, while delaying payments to others, and thus avoid an actual default on the national debt. But the Treasury Department has argued it is not actually possible to pick and choose, and that instead it could only delay payments.
Moreover, the impact on Wall Street is all but impossible to predict, as a default on some payments might be viewed as an actual default on the debt. The Fact Checker used to cover Wall Street, and can attest that the image is often more important than the reality.
With his numbers, Paul made the solution appear too easy, saying there is “no reason for us to default.” In fact, the issue is very complicated — and potentially dangerous for the health of the U.S. economy. He earns Two Pinocchios.
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