Economics

Debt Limit Reality

limitYesterday, the Congressional Budget Office released its updated budget outlook and reiterated a reality about the debt limit that Treasury Secretary Timothy Geithner recently expressed in a letter to Congress—that the debt limit will likely be reached this spring and, if left unaddressed, will become serious in the months thereafter. What to do about this problem has been a popular topic of discussion in Washington. In the Washington Post last week, former Minnesota Governor Tim Pawlenty advocated for entitlement reform as a critical component of tackling the serious fiscal challenge embodied in the debt limit debate.

In another recent op-ed, I offer my own views on the debt limit conundrum and note that the current rules do not measure anything of any economic value; before fighting about what the limit should be, we need to make the debt limit a meaningful metric. Debt limit reform should exclude economically irrelevant intragovernmental borrowing, and instead should apply a limit only to the debt held by the public—the debt that matters. First set the rules correctly, then set the limit appropriately.

For better or worse, this proposal hasn’t yet come under attack from Democrats, but another worthwhile proposal has. In a recent blog post on the Treasury Department’s website, Deputy Secretary Neal Wolin attacks an idea Senator Pat Toomey (R-Pennsylvania) recently proposed in the Wall Street Journal. Senator Toomey recommended that Congress ”require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised.” The senator clearly explains that while reaching the debt limit would certainly be disruptive to the economy, it does not mean that the U.S. government need default on its debt obligations. “Next year, for instance, about 6.5% of all projected federal government expenditures will go to interest on our debt, and tax revenue is projected to cover about 67% of all government expenditures. With roughly 10 times more income than needed to honor our debt obligations, why would we ever default?”

Wolin calls the proposal “unworkable,” arguing that it would “protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment.” But, in fact, that is exactly the purpose of the proposal, and it is completely workable. Nobody wishes for the scenario whereby the U.S. government cannot meet all of its obligations because the debt limit has been reached. But the reality is that if such were to occur, the Treasury Department would need to make hard decisions about which obligations to honor and which payments not to make. Senator Toomey should be commended, not criticized, for addressing the reality of the difficult choices such an event would require and for proposing to assure our lenders that our debt obligations face no risk. I would hope that the Treasury Department would think more carefully about this proposal and others (mine!) as Congress prepares to address this issue, and I would hope that the administration, instead of blogging false criticisms, try to engage in positive dialogue with Congress on finding a solution so that all financial obligations of the U.S. government can be honored.

Image by Richard Masoner.

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