Unless Congress intervenes, the U.S. government will bump against the debt ceiling sometime in late February. At that point, the government will only have enough tax revenue to pay about 60 percent of its bills — and it won’t be able to borrow more money to make up the difference. So what happens then?
For some Republicans, the answer is simple: The United States should keep funding the crucial stuff and let the rest of the government shut down. “We should pass a bill out of the House,” said Sen. Pat Toomey (R-Pa.), “saying there will be certain priorities attached to certain things, namely payment of debt services and payment of our military.”
This option is known as “prioritization.” It’s the idea that the government can selectively pay some of its bills so that the nation doesn’t default on its debt payments — the doomsday scenario. It may sound appealing. But there’s also good reason to think prioritization might be unworkable.
Consider how the U.S. government actually pays its bills. Each and every day, computers at the Treasury Department receive around two million invoices from various agencies. The Department of Labor might say, for example, that it owes a contractor $3 million to fix up a building in Denver. The Treasury computers make sure the figures are correct and then authorize the payment. This is all done automatically, dozens of times per second.
Now say Congress fails to lift the debt ceiling by late February. Treasury will be confronted with around $450 billion in obligations in the next month, and it will only be bringing in enough revenue to cover about $277 billion. Who gets paid and who gets stiffed?
For many economists, there’s a clear priority: The United States absolutely must not miss a payment to bondholders. The global financial markets are structured around the notion that U.S. Treasuries are the safest asset in the world. If that assumption were ever called into question, havoc would ensue. It “would be like the financial market equivalent of that Hieronymus Bosch painting of hell,” says Michael Feroli, chief economist at JP Morgan.
In theory, Treasury might be able to prioritize bond payments above all else, says Steve Bell of the Bipartisan Policy Center. The computer system that handles U.S. sovereign debt, Fedwire, is separate from the system overseeing payments to government agencies and other vendors. Yet it’s unclear whether Treasury has the legal authority to prioritize in this way — the agency has never dealt with this situation before. “Anyone who says they know for sure whether this is legal is not telling the truth,” says Bell.
Back in 2011, Toomey proposed a bill that would authorize Treasury to pay bondholders before anyone else. Assuming his bill ever passed, that would resolve the legal issues. But the government would still have to decide what to do about all its domestic obligations. And that could get messy.
Some commentators have suggested the government could keep sending out Social Security checks while halting payments to, say, defense contractors. But, says Bell, it would be difficult to reconfigure Treasury’s computers to do this in short order. The agency’s inspector general agrees: “Because Congress has never provided guidance to the contrary, Treasury’s systems are designed to make each payment in the order it comes due.”
The end result could be far more chaotic than past government shutdowns. Essentially, 40 percent of the checks the government sends out could not be honored, and there would be no way to predict in advance who gets paid and who doesn’t. The sudden drop-off in spending could also deal a sharp blow to the U.S. economy, analysts say.
That leaves two remaining options if we hit the debt ceiling. First, Treasury could try to buy time by merely delaying payments — agency officials deemed this the least-bad approach back in 2011. If Treasury was facing $10 billion in obligations on Monday, but only $7 billion in revenue came in, the agency could wait until it had the full $10 billion on hand before paying Monday’s bills in full. The problem is that during the delay, Tuesday’s bills are piling up. Then Wednesday’s. This tactic would quickly become unsustainable.
Alternatively, the White House’s Office of Management and Budget could try to stem the rush of invoices coming out of government agencies. Technically, the OMB has wide latitude to tell federal agencies that they can’t spend the funds allotted them until later in the year — a power known as “apportionment.” The hitch, says Barry Anderson, a former OMB official, is that this process can take weeks to have a meaningful impact. And OMB can only slow the rate of agency spending; it can’t stop it altogether.
The Obama administration, for its part, has consistently maintained that it can not prioritize payments. In 2011, Treasury Secretary Tim Geithner told Congress that prioritization was “a radical and deeply irresponsible departure from the commitments by presidents of both parties, throughout American history, to honor all of the commitments our nation has made.”
Ever since the United States officially hit its $16.5 trillion borrowing limit on Dec. 31, the Treasury Department has been taking a slew of “extraordinary measures”—such as tapping its exchange-rate funds—to make sure the government has the money to meet all of its obligations. But, according to a recent report from the Bipartisan Policy Center, these measures will only last until Feb. 15 or so. After that point, the risk of missing a payment becomes real.
Last week, Senate Democrats sent the president a letter urging him to “to take any lawful steps to ensure that America does not break its promises and trigger a global crisis — without congressional approval, if necessary.” Yet the White House has insisted that it has neither the authority nor the ability to do so. It has ruled out options like minting platinum coins or invoking the 14th amendment to circumvent the debt ceiling.
“There are only two options to deal with the debt limit,” said White House press secretary Jay Carney on Saturday. “Congress can pay its bills, or they can fail to act and put the nation into default.”