Don't Blame the Computers for a Default
The U.S. government would have us believe that it has no ability to prioritize payments if Congress fails to raise the debt limit later this month.
In 2011 President Barack Obama and Treasury Secretary Tim Geithner used the same argument -- and the threat of default -- during debt-ceiling negotiations. "Default" was even redefined, for political purposes, to mean any missed payment, which is above and beyond what Standard & Poor's considers in assigning sovereign-credit ratings. Obama and Treasury Secretary Jack Lew are using the same playbook now.
Let me repeat what I said then: The U.S. isn't going to default on its debt. In any given month, withheld income taxes exceed interest payments by a huge margin. For the first 11 months of fiscal 2013, Treasury took in, on average, $225 billion a month and paid out $36 billion in interest. The ratio varies from month to month, but the coverage is always positive. (The Monthly Treasury Statement for September, with final fiscal 2013 results, is being delayed because of the shutdown.)
Treasury claims it can't prioritize payments because its data-processing systems are automated. And under normal circumstances, we wouldn't want it to. "It would become just another tool for the president to reward supporters and punish adversaries," says Jim Bianco, president of Bianco Research in Chicago.
But these aren't normal circumstances, and a failure to pay interest means paying more interest. Ratings companies would downgrade U.S. sovereign debt. Investors would demand higher interest rates to compensate for the added risk. The U.S. would no longer be the world's safest port, no matter the storm.
That's why it would be a huge mistake not to pay bondholders before everyone else. Yes, there would be an outcry if the Treasury made interest payments to the People's Bank of China and stiffed Gram and Gramps on their Social Security checks or withheld nutrition from starving infants. Obama could always blame Republicans for harming the neediest Americans, but he would be derelict in his duty not to make that choice.
The Treasury makes 100 million payments each month, but the idea that it has no ability to determine what it pays to whom doesn't pass the smell test. How is it the Treasury's computer system can differentiate between essential and non-essential government workers when it comes to issuing paychecks? (Furloughed, non-essential workers aren't getting paid during the partial government shutdown.) Or what happens when the government discovers it's been sending disability checks to dead people for years? Surely there's a way for a human to intervene.
The Government Accountability Office has said the Treasury secretary has the authority to prioritize payments. Former budget Director David Stockman says it can be done. Former Treasury Secretary Paul O'Neill tells me Treasury "could prioritize, and it's a lot easier today than when people were doing payrolls in advance." But any such actions "would start eating into things that would cause a revolution," he says.
Instead of telling CNBC that financial markets should be worried about a possible default, the president should be doing everything to reassure investors that the U.S. has the means, and the intention, of making timely payment of principal and interest on its debt. To suggest otherwise is the height of irresponsibility. Why, it's right up there with holding the debt ceiling hostage to changes in the health-care law.
(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)