Debt ceiling baloney from Republicans

As part of the stopgap spending bill that would “defund Obamacare,” House Republicans have proposed a temporary exemption to the debt limit, ostensibly to prevent the government from defaulting on Treasury securities. But the exemption would protect only bondholders, leaving other creditors at risk should Congress fail to raise the debt limit next month. If the Treasury can’t keep the commitments Congress has already made to federal workers, contractors and beneficiaries, it could lead investors to panic, damage Washington’s credit rating and exacerbate the fiscal problems the House GOP says it’s trying to solve.

The current debt ceiling is $16.7 trillion, but even House Republicans have acknowledged that they can’t stay within that limit. The purposefully austere budget they passed in March proposed to add $1 trillion to the debt next year.

Treasury Secretary Jacob J. Lew has said the government will hit the current limit in mid-October, at which point the revenue it collects would cover only about two-thirds of the government’s bills. Instead of proposing a higher limit, the House’s stopgap funding bill (HJ Res 59) would allow the Treasury to borrow more money solely to make principal and interest payments on Treasury securities. Sen. Ted Cruz (R-Texas) said such a change would guarantee that the government wouldn’t be in “default,” even if Congress missed the debt-limit deadline.

That’s baloney. The moment Washington fails to pay the people it has committed to pay, whether it be veterans, bridge repair crews or Border Patrol agents, it will call into question the federal government’s reliability as a debtor. Investors would respond by demanding higher interest on government bonds, raising federal costs and widening the budget deficit. As Keith Hennessey, a former top economic advisor to President George W. Bush, put it: “It’s easy to imagine a credit rating agency downgrading the U.S. for not paying contractors or states on time, even if principal and interest payments on U.S. Treasuries are all being made when they should be.... If you make your credit card payments on time but miss your rent payment three months in a row, you’re probably a bad credit risk.”

The real point of the House proposal is to give Republicans political cover as they force Democrats to play chicken with the debt limit. The GOP’s price for raising the limit is major concessions by Democrats on spending, entitlements and the 2010 healthcare law. No matter what you think about those demands, it’s irresponsible to take the debt ceiling hostage, especially when the automatic across-the-board sequester spending cuts enacted in 2011 are motivating both sides to seek a broad fiscal deal. And it’s disingenuous to pretend that paying bondholders while stiffing other creditors is good policy.