Dancing With Default
Obama opposes the House GOP's offer to pay debts first.
WSJ Editorial, October 2, 2013
For people who claim that defaulting on U.S. debt is unthinkable, President Obama and Harry Reid are sure behaving as if they can't wait for that day to arrive. Why else are they refusing to take up the multiple Republican offers to guarantee that the U.S. will never default?
Treasury Secretary Jack Lew now says his department can't be sure it will have enough cash to guarantee interest payments after October 17, and he is raising alarms about a default catastrophe. Mr. Obama declared again on Wednesday that he'll only negotiate with Republicans on taxes and spending if they first raise the debt limit without conditions—so dire would the damage from default be to the U.S. economy and reputation.
House GOP leaders also insist they don't want a default, and they've already passed a bill to prevent it—not that the media have paid any attention. First sponsored in 2011 by California Republican Tom McClintock and Pennsylvania Senator Pat Toomey, the Full Faith and Credit Act is essentially an insurance policy against miscalculation. Their bill certifies that U.S. sovereign debt will always be repaid, on time and in full.
If Congress fails to authorize a statutory increase in the debt limit—during a period of, say, intense political conflict over the fisc like the one now—the bill stipulates that Treasury can continue making contractual interest and principal payments to bond holders and rolling over debt with incoming tax payments. Debt service gets the first call on revenue.
The McClintock-Toomey bill replicates the guarantees that state constitutions have had for hundreds of years to strengthen investor confidence. It gives the Treasury Secretary discretion to prioritize among other federal obligations until the political deadlock ends, tempers cool and the parties can reach a deal. But it makes his first priority to protect the full faith and credit of the U.S.
Yet instead of embracing this insurance against default, Democrats have voted to kill it even as they cry havoc about the risk of default. The House passed McClintock-Toomey in May, but only on a 221 to 207 party-line vote after a raucous debate. The White House issued a formal veto threat, calling it "unwise, unworkable and unacceptably risky."
House Republicans have continued to press the measure, attaching it to a continuing resolution last week. But Mr. Reid moved to strip it out, and his motion passed the Senate 54 to 44. The Majority Leader denounced McClintock-Toomey as the "Pay China First Act."
Mr. Reid may think that is clever xenophobic political cover, but someone should tell him that millions of Americans have a stake in Treasurys through pension funds, 401(k)s, savings accounts and as individual investors. Two-thirds of U.S. debt is held domestically and the Chinese own roughly 7% to 10%, though who cares who U.S. creditors are if the goal is for the U.S. to reassure its creditors?
In the May debate, Democrat after Democrat made the argument that the provision would make school lunch programs, student loans, unemployment insurance and the rest second-class. So they are denouncing Republicans for putting U.S. credit at risk even as they are denouncing Republicans for putting U.S. credit first. Which is it?
A more serious objection to the bill is that investors might still interpret such a funding shortfall as a reason to panic about U.S. finances. Investors and bond vigilantes might read a failure to make prompt Medicare payments as tantamount to default. But this would still be better than an actual default that would mean breaking legal and financial contracts. Markets can tell the difference between a failure to pay contractually obligated interest on time and a need to delay some government bills due to a political impasse.
Let's be clear: We aren't recommending either outcome. The U.S. should meet all of its obligations. But amid Washington's current dysfunctions and partisanship, anything can happen. Mr. Obama's refusal to negotiate and his demands that Republicans surrender entirely to his priorities has created his mirror political image in a GOP faction that wants to treat him the same way. This is when accidents happen.
The U.S. will pay its bills, but a short-term miscalculation is possible. A President who really wants to limit the chance of default would take the GOP up on its Full Faith and Credit offer. Mr. Obama's refusal suggests that his real goal is to go to the edge of default, gambling that he can then either coerce total surrender or blame a default on Republicans and use it to take back control of the House in 2014. This isn't how leaders looking out for the interests of all Americans behave.