CHN: Choosing Which Federal Debts to Honor; House Passes Bill to Protect Only Bondholders, Social Security If Federal Borrowing Authority Expires
Should Congress make increases in the amount the federal government can borrow contingent on certain policy goals? When the debt limit was tangled up in disputes over deficit reduction in 2011, it did not go well. That “political brinksmanship,” as the credit ratings agency Standard and Poor’s put it, jeopardized confidence that the full faith and credit of the U.S. government would remain sound, and resulted in downgrading the U.S. credit rating – a first. Congressional Republicans have not given up bargaining over the debt limit (see tax reform article in this issue), but they do not want to be seen as threatening the ironclad assurance that the U.S. government will pay its creditors. Avoiding this peril is the intent of the Full Faith and Credit Act (H.R. 807), sponsored by Representative Tom McClintock (R-CA), which passed the House 221-207 on May 9.
The federal government borrows money by issuing bonds. About one-third of that debt is held within the government, by the Social Security Trust Fund. Of the rest of the debt, nearly one-half is held by foreign governments; the remainder by corporate, pension fund, and other private financial interests. The U.S. Treasury borrows enough to fill the gap between revenues collected and obligations to spend (that is, the deficit). Despite the fact that Congress approves federal spending, it separately sets in statute limits on how much the federal government can borrow.
If the federal government hits up against the statutory ceiling on debt and Congress refuses to raise it, the federal government would not be able to spend more than the revenues it takes in each month. H.R. 807 sets priorities for which bills to pay, placing bondholders at the front of the line. Those who have bought U.S. bonds would be paid their principal and interest, and the Treasury would be authorized to exceed the limit on borrowing if necessary to prevent any default on bonds. The bill was amended to add federal bonds held by the Social Security Trust Fund to its “must-pay” list. By prioritizing repayment of funds borrowed by the federal government from the Social Security Trust Fund, it would make it make it possible to keep paying Social Security benefits without interruption.
H.R. 807 would not prevent the federal government from reneging on its other funding commitments, however, if the debt ceiling were not raised by Congress. This legislation would in effect re-set the priorities established by Congress when it passes any legislation related to funding. Bondholders and Social Security come first; everything else government does, from Medicaid to transportation to nutrition aid, is funded in part or not at all.
The Obama Administration issued a statement promising to veto this legislation if it made it to the President’s desk. The Democratic leadership in the Senate has also voiced opposition. However, Senator Pat Toomey (R-PA) previously introduced the Ensuring the Full Faith and Credit of the United States and Protecting America’s Soldiers and Seniors Act (S. 46) which he will seek to move as a stand-alone bill or attached to other legislation. It has three items on its “must-pay” list – bondholders, Social Security bonds and beneficiaries, and military salaries. As with H.R. 807, the Treasury would be allowed to borrow, even if it exceeds the existing debt ceiling, in order to pay these obligations. The Senate Democratic caucus is not expected to support this legislation either.
There is reason to doubt that continuing to pay bondholders and a few powerful constituencies will end the risk to U.S. fiscal stability if Congress refuses to allow borrowing to pay its other bills. When Standard and Poor’s downgraded the federal credit rating in 2011, it did so because it felt the stalemate that left us uncomfortably close to default made the federal government “less stable, less effective and less predictable” in its financial management. New cliff-hanging negotiations threatening massive non-payment of bills and salaries will not be seen as a boon to stability and predictability.