Republicans Downplay ‘Default,’ Dismiss Debt Deadline

Some GOP lawmakers say White House officials — and global financial experts — are exaggerating the potential impact of missed payments.

An employee counts USD notes at a money change outlet in Jakarta on June 14, 2013.
National Journal
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Michael Catalini and Tim Alberta
Oct. 6, 2013, 7:45 a.m.

The White House is sound­ing alarms about the fast-ap­proach­ing Oct. 17 dead­line for rais­ing the na­tion’s bor­row­ing lim­it. Fail­ure to do so, Pres­id­ent Obama and Treas­ury Sec­ret­ary Jac­ob Lew have warned, could res­ult in a first-ever de­fault on Amer­ica’s debt and trig­ger glob­al eco­nom­ic calam­ity.

But some Re­pub­lic­ans in Con­gress aren’t buy­ing it.

Not only do some con­ser­vat­ives say Oct. 17 is an ar­ti­fi­cial dead­line — “Nobody thinks we’re go­ing to de­fault on Oct. 17th,” said Rep. Tim Huel­skamp, R-Kan. — but they also are at­tempt­ing to nar­rowly define what would con­sti­tute de­fault.

In in­ter­views with more than a dozen GOP law­makers, the Re­pub­lic­ans re­jec­ted the no­tion that Wash­ing­ton could de­fault on its debt un­less a bor­row­ing in­crease is ap­proved be­fore Oct. 17. For the United States to ac­tu­ally de­fault, these Re­pub­lic­ans ar­gue, the Treas­ury De­part­ment would have to stop pay­ing in­terest on its debts — something GOP law­makers claim is in­con­ceiv­able.

“There’s al­ways rev­en­ue com­ing in­to the Treas­ury, cer­tainly enough rev­en­ue to pay in­terest,” said Rep. Justin Amash, R-Mich. “Demo­crats have a dif­fer­ent defin­i­tion of ‘de­fault’ than what we un­der­stand it to be. What I hear from them is, ‘If you’re not pay­ing everything on time that’s a de­fault.’ And that’s not the tra­di­tion­ally un­der­stood defin­i­tion.”

If this sounds fa­mil­i­ar, it’s be­cause it has been Re­pub­lic­ans’ line of at­tack since their debt-ceil­ing battle with Obama in the sum­mer of 2011.

Then, as now, the GOP ar­gues it’s not the debt lim­it that would cause de­fault, it’s Obama. The coun­try would have the funds to pay its cred­it­ors if the ad­min­is­tra­tion would just delay pay­ments to cer­tain agen­cies.

Hop­ing to turn that ar­gu­ment in­to law, Re­pub­lic­ans have touted le­gis­la­tion that would force Treas­ury to pri­or­it­ize which bills it pays, push­ing in­terest pay­ments to the coun­try’s cred­it­ors, as well as to seni­or cit­izens and vet­er­ans, to the front of the line and put­ting everything else second.

The meas­ure makes for sol­id mes­saging — few voters are likely to dis­agree that So­cial Se­cur­ity and vet­er­ans’ dis­ab­il­ity pay­ments should be top pri­or­it­ies — but budget wonks and fin­an­cial in­dustry ex­perts cri­ti­cize the idea.

“I don’t know any ser­i­ous per­son who doesn’t think this will be cata­clys­mic,” said Steve Bell, a former Re­pub­lic­an staff dir­ect­or of the Sen­ate Budget Com­mit­tee and now seni­or dir­ect­or with the Bi­par­tis­an Policy Cen­ter.

The as­sump­tion that the U.S. will hon­or all of its debts — and hon­or them on time — is the found­a­tion for much of the glob­al fin­an­cial sys­tem, Bell ar­gues. So the fun­da­ment­al prob­lem with the Re­pub­lic­an po­s­i­tion is that Treas­ury makes between 3 mil­lion and 5 mil­lion fin­an­cial trans­ac­tions a day, and if the fed­er­al gov­ern­ment starts to pick and choose which it will hon­or, it will land the eco­nomy in chaos.

Many of the world’s lead­ing fin­an­cial ex­perts, who are watch­ing the slow pace of ne­go­ti­ations in Wash­ing­ton with dread, agree.

“The gov­ern­ment shut­down is bad enough, but fail­ure to raise the debt ceil­ing would be far worse, and could very ser­i­ously dam­age not only the U.S. eco­nomy, but the en­tire glob­al eco­nomy,” IMF Dir­ect­or Christine Lagarde said Thursday.

In­deed, while Re­pub­lic­ans and the White House might dis­agree over how to define a de­fault, the world’s mar­kets are likely to see any missed pay­ment as a sig­nal of pro­found fin­an­cial weak­ness in the United States, and re­act ac­cord­ingly.

“It’s just un­think­able,” said Sen. An­gus King, an in­de­pend­ent from Maine. “We don’t have to spec­u­late about this; just go back and look at 2011. See what happened when we even flir­ted with it. Mar­kets went down. Jobs went down. The eco­nomy con­trac­ted.”

Re­pub­lic­ans don’t dis­pute the risks of toy­ing with Treas­ury’s Oct. 17 dead­line. (In fact, some ex­pressed con­cern about scar­ing Wall Street.) Rather, they seem de­term­ined to cor­rect what they view as a blatant mis­con­cep­tion of what truly con­sti­tutes a de­fault on the na­tion’s debt.

“We’re not go­ing to de­fault; there is no de­fault,” said Rep. Mick Mul­vaney, R-S.C. “There’s an [Of­fice of Man­age­ment and Budget] dir­ect­ive from the 1980s, the last time we got fairly close to not rais­ing the debt ceil­ing, that clearly lays out the pro­cess by which the Treas­ury sec­ret­ary pri­or­it­izes in­terest pay­ments. Tim Geithner un­der­stood that, be­cause the last week­end in Ju­ly of 2011 he was in New York City telling the primary deal­ers that we were not go­ing to de­fault on our debt.”

Mul­vaney even went so far as to say Obama and White House of­fi­cials have been dis­hon­est when warn­ing of de­fault: “If the pres­id­ent wants to lie to the pub­lic, I can’t stop him.”

Con­gres­sion­al Demo­crats do not dis­pute this nar­row defin­i­tion be­ing pushed by the GOP. Rather, they won­der openly as to why Re­pub­lic­ans would even risk de­fault.

“I wouldn’t re­com­mend play­ing Rus­si­an roul­ette with the full faith and cred­it of the United States,” said Rep. Chris Van Hol­len of Mary­land, the rank­ing Demo­crat on the House Budget Com­mit­tee. “The sec­ret­ary of the Treas­ury has giv­en his best es­tim­ate of the time at which it be­comes very risky not to raise the debt ceil­ing. He’s nev­er said that you can be ab­so­lutely pre­cise about these things, but he says the risks are way too high at that point.”

While some Re­pub­lic­ans cast the Oct. 17 cutoff as ar­ti­fi­cial, mem­bers like Re­pub­lic­an Rep. Dave Reich­ert of Wash­ing­ton — who sug­ges­ted the date was “fudged” by the Treas­ury De­part­ment — said law­makers have no choice but treat it like a real dead­line.

Demo­crats con­cede what they cast as a small point: The ac­tu­al date might in­deed fluc­tu­ate de­pend­ing on the gov­ern­ment’s re­ceipts. But that’s not the point, they say.

“I don’t think it mat­ters be­cause it’s the buildup, the lack of in­vest­ment, the ef­fect that it has on the mar­ket,” said Sen. Amy Klobuchar, D-Minn. “I really don’t think we should be mess­ing around with try­ing to out-pre­dict the Treas­ury De­part­ment. When they say that they’ve used all ex­traordin­ary means and that they pre­dict this date will be in mid-Oc­to­ber, I be­lieve them.”

Contributions by Stacy Kaper and Patrick Reis
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