The wrong way for Washington to avoid defaulting

It's rare that the president explicitly pledges to veto a bill -- usually, the White House says the president's advisors would "recommend" a veto -- but that's what happened Tuesday. The measure in question is HR 807, the Full Faith and Credit Act, by California Rep. Tom McClintock (R-Rocklin), which the House is expected to take up this week.

The problem, from the White House's point of view, is that the measure would actually threaten the full faith and credit of the United States, which in turn would "cost American jobs, hurt businesses of all sizes and do damage to the economy." That's because it would encourage Congress not to raise the debt limit when the government runs out of borrowing authority later this year.

There's a sharp split between Republicans and Democrats over what the debt limit represents. The former contend that the debt limit is the last line of defense against overspending; threatening not to raise it gives them crucial leverage in negotiations over how to shrink the annual budget deficit. The latter counter that Washington's budget problems stem from the spending, tax and entitlement measures it adopts; failing to raise the debt limit merely stops the government from paying many of the bills it's run up.

It's worth noting that the two parties reverse their roles when there's a Republican president, with some Democrats railing against raising the debt limit and Republicans saying it would be irresponsible not to. For example, Barack Obama voted against a debt-limit increase sought by then-President George W. Bush back when he was the junior senator from Illinois. (Once he became president, Obama issued a mea culpa.)

But I digress. McClintock's original bill would have required the Treasury to make principal and interest payments on federal bonds the top priority in the event it could not borrow any more money, in the hope of averting any defaults on federal securities. The House Ways and Means committee replaced McClintock's language with a new version that would allow the Treasury simply to issue new bonds, regardless of the debt ceiling, to make principal and interest payments on debt held by the public and the Social Security Trust Fund.

The problem with the bill is that it assumes the government could stiff a significant portion of the people it is obligated to pay -- contractors, Medicare doctors, federal pensioners, service members and other federal employees -- without a peep from the financial markets. That's, umm, wrong.

Although the deficit is shrinking as a percentage of the budget, Washington collects enough money to pay for less than three-fourths of the expenses it's running up.

Some readers of The Times have suggested that rather than raising the debt limit, Congress could rescind some of the money it's appropriated but not yet spent. That way it could avoid stiffing any of its creditors. If only it were that easy.

The fact is, the vast majority of federal spending can't be canceled or put on hold without hurting someone or denying payment for services already rendered. Two-thirds of the budget goes directly to beneficiaries (retirees and food stamp recipients, for example), their service providers (e.g., Medicare doctors) and investors holding federal securities. The feds can't legally stop entitlement payments without changing the statutes that created those obligations.

About a fourth of the budget is for defense, and the rest is for every other discretionary program. If these areas had to absorb all the rescissions, most of the government would be shut down and much of the Defense Department idled. In other words, it couldn't be done without wreaking havoc.

That's all the more reason financial markets would react fiercely if Washington took the path McClintock has suggested. Investors would view it as a technical default, even if the government continued to make its debt payments. As the White House put it: "American families do not get to choose which bills to pay and which ones not to pay, and the United States Congress cannot either without putting the nation into default for the first time in its history. This bill ... would cause the nation to default on payments for Medicare, veterans, national security and many other critical priorities."

It seems inevitable that Republicans will continue to hold any increase in the debt limit hostage as they bargain for other things, whether it be spending cuts, tax reform or something else. And if the pressure led Congress and President Obama to finally agree to a long-term plan that puts the nation's fiscal house in order, that would be a very good thing indeed -- even better if the plan included an overhaul of the tax code.

But it would be a terrible mistake for lawmakers to assume that they can circumvent the debt-limit problem with the sort of artful dodge that HR 807 represents. If Washington deliberately punts on any of its financial obligations, the price exacted by the financial markets will be steep.


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