Can the Treasury Manage Its Own Payment System?
(Photo of Treasury Secretary Timothy Geithner from the White House Flickr feed)
As the date when the government will be forced to miss some of its payments because of the debt ceiling draws nearer, it’s worth considering the effects of the Treasury’s failure to clarify exactly what the consequences would be if Congress failed to raise the debt limit.
In rejecting the somewhat outlandish idea that minting a trillion-dollar platinum coin could represent a workaround to the debt limit, the White House signaled that it was in Democrats’ best interests to communicate that there was no way to avoid a catastrophic collapse in markets if the ceiling weren’t raised. A Treasury spokesman told the Wall Street Journal that "[t]here is no plan B” to raising the debt ceiling, and that the “only way to protect American families and businesses is for Congress to do its job." According to Paul Krugman, the White House told him that “it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling — that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP.”
Clearly, it’s in Democrats’ political interests to portray the debt ceiling as a fast-approaching, inescapable threat that Republicans are trifling with. Conversely, it strengthens Republicans’ bargaining position and messaging to be able to point to a possible recourse that doesn’t involve placing the broader economy at risk. Senator Pat Toomey, for instance, has long argued that it is possible for the Treasury to prioritize its payments in such a way that a default on interest payments on Treasury debt is never a risk, no matter how long the debt limit goes unaddressed. Toomey and other Republicans have pushed legislation that would ensure that the Treasury would pay the interest on U.S. debt before other obligations -- such as Social Security payments, debts to vendors, government worker pay, etc. – in that case.
Even if Toomey’s scenario played out, the economy would suffer, as retirees would be left to wonder if they’d be able to make rent and investors to guess which companies wouldn’t be able to make payroll in a given period. But whether or not some kind of prioritization of payments or delaying of payments is possible is an important question, both for knowing what might lie in store for the economy if Congress doesn’t act in time and, more importantly, for determining both sides’ bargaining positions.
In its excellent guide to the debt ceiling, the Bipartisan Policy Center sketches out the problems with trying to prioritize or delay payments. The Treasury is ill-equipped to suddenly stiff 40 percent of its creditors. It has to make 100 million or so monthly payments. Sorting and choosing between them would cause system-wide uncertainty, lead to all kinds of unfair results, and generally produce chaos. Similarly, delaying payments until all debts for a certain time period could be met would create all kinds of problems, as different bills come due each day, and in varying amounts (although this is the course of action the Treasury is reported to consider the best).
Even aside from questions about the legality or wisdom of prioritizing debt, though, it’s not obvious that the Treasury has the technical capability of picking and choosing where disbursements do and do not go. In reporting that a prioritization scheme would be a “logistical nightmare,” the Wall Street Journal cites a report from the Treasury inspector general which claims that “Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day. Furthermore, because Congress has never provided guidance to the contrary, Treasury’s systems are designed to make each payment in the order it comes due.”
Despite the Treasury’s insistence that prioritization is unworkable for logistical reasons, the same Journal story reports that interest payments on the debt are made through a separate system altogether: “It is technically possible to prioritize interest payments because they are delivered over a different payment system, known as Fedwire, than the millions of other day-to-day payments the government makes to vendors, Social Security recipients and others.”
Given that the point of prioritization schemes like Toomey’s is to ensure that U.S. Treasuries wouldn’t be called into question, this is an important fact. As the Journal notes, “Still, a system that paid bondholders their interest while delaying other payments could cause a political uproar.” Nevertheless, avoiding a debt default must be the number-one concern of the Treasury secretary, as U.S. Treasuries are crucial to the functioning of the world financial system. If the Journal authors, Damian Paletta and Jon Hilsenrath, are right, the Treasury does have the logistical capability to guarantee that the government never misses an interest payment, no matter what happens with the debt ceiling or with other government commitments.
Clarity on these issues would be helpful. If it is beyond the institutional capability of the Treasury to manage its payment system in the event of Congress’ failure to raise the debt ceiling, that represents a failure on the part of its administrators.