John Delaney, a Democrat, represents Maryland’s 6th District in the U.S. House.
With the United States fast approaching its debt limit, Congress has again begun to grapple with complex questions about whether and how to raise the cap on borrowing. There is no perfect answer, but proposals such as the Full Faith and Credit Act (H.R. 807) won’t fix the problem. The legislation has 105 co-sponsors in the House, which is likely to vote on it this week. This bill purports to prevent the federal government from defaulting, but it would undermine the nation’s credit standing and make matters worse in the short term and potentially much worse in the long term.
The reason is simple: It’s not rooted in the reality of how finance works.
Rather than raising the federal debt ceiling, the bill would “prioritize” the payment of debt. The federal government would rank its various obligations — monies owed to the owners of Treasury bills, benefits to veterans, payments to contractors, etc. — and pay them accordingly. Debts that ranked lowest would be paid last and would have the highest likelihood of not being paid at all.
This seemingly technical matter would have stark implications that anyone with even a basic background in finance should understand.
As the founder and former chief executive of two publicly traded companies, I have had a great deal of exposure to how debt markets work. The best companies with the strongest credit ratings borrow like the United States: on a non-prioritized basis. This means that in the event of a default, all of their debts are of equal priority because lenders and creditors believe default is highly unlikely. And they spend considerable effort maintaining this status. Weaker companies borrow on a prioritized basis, with debts ranked to reflect a higher risk of default, and as part of the process, they often pledge specific assets to the lenders in first priority.
An institution that borrows on a non-prioritized basis would never contemplate borrowing on a prioritized basis. Doing so would undermine its standing in the bond market and suggest that it is not worthy of its strong credit rating. This type of self-imposed downgrade would materially affect its financial prospects.
Yet this is precisely what the Full Faith and Credit Act would do to the United States. It would immediately signal to the market that our country is not a good credit risk. Many of my congressional colleagues believe this legislation may solve some of the problems posed by our inability to strike a “grand bargain” on the deficit. They suggest that we should run our government like a household or a business. Yet no chief executive or chief financial officer would voluntarily propose this course of action. What would come next? Pledging Yellowstone National Park to our creditors?
The last time Congress played politics with the debt ceiling, in the summer of 2011, we wounded our economy. We sent a message to the markets that we were considering destructive actions, and they listened. The Dow Jones Industrial Average dropped 2,000 points, and August 2011 was the worst month for private-sector job creation in the past three years. For the first time ever, Standard & Poor’s downgraded the nation’s credit rating.
Instead of making the same mistake, we should do the hard work required to reach a long-term grand bargain. This means three things: (1) reforming entitlements by adopting a form of “chained CPI” to lower the long-term costs of these programs, adjusting the retirement age for those not engaged in manual labor and raising the cap on Social Security taxes; (2) generating more revenue through a “Buffett rule” approach that makes sure high-earners pay a similar rate to that of the middle class and by closing certain corporate tax loopholes while lowering corporate tax rates; and (3) adjusting discretionary and defense spending to better reflect our country’s priorities, which are vastly different than the indiscriminate cuts imposed by the sequester. With this framework, we can manage our fiscal trajectory in the next 10 years, and beyond, while also investing in our children, caring for the less fortunate and protecting our nation.
The United States has the world’s largest and most innovative economy, an unmatched rule of law and a free market that is the envy of the international community. For investors, we are the reserve currency. Despite S&P’s misguided downgrade, we remain the most creditworthy nation and, for many, the only place to invest. Members of Congress have an obligation never to jeopardize that. U.S. debt has reached an unsustainable level. Left unchecked, it will crowd out all other priorities and put the republic at risk. Rather than make things worse, let’s tackle the structural problems driving our debt without undermining the full faith and credit of the United States.