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Opinion: Government: Unreasonable debt-ceiling denial

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This is a corrected version of the original post; see the note below.

It’s probably stupid of me to pick a fight with the folks at Reason, a bunch of smart people who have the distinct advantage of a clear ideological foundation. But Nick Gillespie and Meredith Bragg’s post on the ‘myths dominating the debt-ceiling debate’ is so wrongheaded, I can’t help myself.

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The pair start by asserting that Aug. 2 is a phony deadline, noting that the Treasury Department has pushed by the ‘drop-dead date’ three times already. But unlike the earlier estimates, the department calculated this one after hitting its borrowing limit, at which point it had a finite number of borrowing options (e.g., from cash held in federal trust funds) before the spigot of credit ran dry.

The Treasury has had some experience with situations like this, as well as an intimate knowledge of the government’s cash flow. One reason Aug. 2 is assumed to be the drop-dead day is because a batch of monthly Social Security checks are due to be mailed Aug. 3. Though it’s true that the Treasury collects more over the course of a month than it needs to cover those payments, it’s not at all clear that it will have the money on Aug. 3. When you have no way to borrow, cash flow is a real concern.

The second bit of ‘malarkey’ called out by Gillespie and Bragg is the notion that reaching the debt limit is the same as defaulting on the debt. ‘You can max out your credit cards but as long as you keep paying the minimum amount due each month, your creditors don’t go crazy,’ they write. Yes, but as The Times’ editorial board pointed out Friday, that sort of reasoning is ‘akin to arguing that you could survive just fine if you paid your mortgage every month but stiffed the gas company, MasterCard and your babysitter in order to do so.’

When people stop paying some of their bills, credit ratings agencies place them in a higher risk category. The rest of their creditors react by raising their interest rate, demanding swifter repayment or taking other steps to guard against losses. The same would happen to the federal government if it stopped paying 35% or more of its obligations, as it will be forced to do if the debt limit is not raised. As a result, its borrowing costs would go up, increasing the deficit and deepening the financial hole.

Why is this point so hard for folks to understand? Perhaps Gillespie and Bragg never missed a MasterCard payment or were late on a utility bill.

The third point the authors make is that the debt-limit debate is no time to craft a budget deal:

The reason we’re in this mess is because government can’t stop spending. And the government can’t even pass a budget on a year’s notice. But we’re expecting them to come up with a good plan for the country’s borrowing in a couple of weeks?

I’ll echo their complaint about excessive spending and the absurdity of using the debt ceiling as a proxy for a debate about the budget. But spending-cutters chose this fight, so it’s a little strange to see Gillespie and Bragg lament it. Besides, thanks to the work of umpteen commissions, task forces and think tanks, there’s no shortage of proposals for bringing the deficit under control.

Instead, there’s a shortage of centrists willing to meet in the middle -- a ground that Reason is proud not to occupy -- in order to cut the kind of deal that divided government requires. I don’t blame Republicans for refusing to accede to Democrats’ demands, even if all it means is eliminating some tax breaks in exchange for renewing the payroll tax cut. They’re pretty confident that it won’t be a divided government after 2012.

Naturally, that depends on whether the credit markets freak out and, if they do, where the political fallout lands. Congress actually defaulted temporarily on some T-bills in 1979 when Congress was slow in raising the debt limit and the Treasury was hampered by technical snafus. The result was a brief but notable spike in interest rates. Just imagine how the market would react if the impasse over the debt ceiling forced the Treasury not to write some of its monthly checks, whether they be to Social Security recipients, contractors or federal employees.

Gillespie and Bragg claim that the Treasury Department is sitting on $320 billion in loans and stock from the Troubled Asset Relief Program that it could sell to keep creditors happy until a prudent long-term path is found. The latest Treasury report, however, shows that the TARP holdings are down to $129 billion, about two-thirds of which are (as the name suggests) troubled -- they’re securities related to American International Group, struggling banks and other institutions bailed out by the federal government. The rest of the holdings are in General Motors, Chrysler and GM’s former lending arm. I’m not sure how easy it would be to convert much of those holdings into cash, but doing so under duress would certainly be a good way to maximize the taxpayers’ losses on the program.

[For the Record, added 9:47 a.m. July 16: The original post suggested that $49 billion in Social Security payments were due to be paid Aug. 3, based on the latest monthly report from the Social Security Administration. But reader Steve Bowen pointed out that the government spreads out Social Security checks over the course of the month, so the amount needed on Aug. 3 will be significantly less. D'ohhhh! According to a calendar published by the government, supplemental disability payments are due Aug. 1, then on Aug. 3 checks will be mailed to anyone who started receiving benefits before May 1997. I stand by my point, though, that the government faces real cash-flow problems in August.]

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Adding a dimension to the debt-ceiling game of chicken

-- Jon Healey


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