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Trying to keep up with Debt-Ceiling Crisisology has made me realize how much I’m needing to play catchup in order to get to the point of even understanding what the Smart People are talking about (and, taking for granted in their statements).
For example, one standard line is that if we breach/don’t raise the debt ceiling, we will somehow automatically ‘default’, or it will be a ‘default’, or the same thing as one. But this didn’t really sink in – and maybe it is just me being pedantic about credit – because I didn’t take this claim seriously or try to dig into what people mean saying this, thinking: um, surely we could still make our interest payments (about ~10% or less of net spending, last I looked). No failure-to-pay, no restructuring, no ‘default’.
So, here’s Ezra Klein explaining what they really mean by that:
The choices it will face quickly become stark. It can cover interest on the debt [hence no default! QED. Right?! -CR], Social Security, Medicare, Medicaid, defense spending, education, food stamps and other low-income transfers, and a handful of other programs, but doing all that will mean defaulting on everything — really, everything — else. The FBI will shut down. The people responsible for tracking down loose nukes will lose their jobs. The prisons won’t operate. The biomedical researchers won’t be funded […]
This is the difference between a debt-ceiling shutdown and a government shutdown. As Shai Akabas, a research at the Bipartisan Policy Center, puts it, “in a government shutdown, the government is shutting down future obligations. With the debt ceiling, They’ve already obligated the money. They owe these people the payments now, and they can’t make them.”
Hmm. Now that’s weird. When saying ‘default’, they are talking about how the government won’t spend every single dollar that Congress said it really really wanted to.
Hence: if Congress passes a bill saying ‘let’s spend $4.7 trillion on a Bridge to Nowhere’, and then Treasury doesn’t end up allocating that spending, that’s a ‘default’. Or if Congress passes a bill saying ‘let’s increase food-stamp payments by 33% year-over-year’, but then they only increase them 29%, that’s a ‘default’. In other words, what I’ve only just now realized is this: when Smart People talk about ‘default’, they aren’t talking about how that word is actually used in the credit markets.
Like, correct me if I’m wrong, but I don’t think the preceding examples – nor to not-spend on food stamps, or whatever – would trigger a CDS on the US or anything. Nor are they necessarily relevant to the credit rating of the US, or the interest it pays to borrow. Would US Treasury bondholders, if still getting all their interest payments, be somehow pissed off that the US Government reduced its Medicare compensation to doctors for referring fMRIs, or didn’t (re-re-re-)renew the unemployment-benefits extension? I don’t see how, or why. If anything, I’d think they’d be happy that all these other projects and transfers are getting stiffed but that the bonds are still honored. If anything, all else equal I’d think confidence in the creditworthiness of US bonds upon such a ‘default’ should go up, because the US gov’t would have shown by its behavior that it puts these bondholder creditors first, and things like pork/welfare/etc. second.
Contrary to spooking bondholders, that should be music to their ears. Right? What am I missing?
Is the US Government obligated (credit-wise) to ‘keep the FBI running’ and if they don’t they’re in ‘default’? Are they ‘obligated’, credit-wise, to engage in whatever unspecified ‘low income transfers’ Klein alludes to? Does the Moody’s credit-rating model of the United States require them to Not-Fire People Responsible For Tracking Down Loose Nukes in order to stay out of the “D” category?
Those things are all events of default? Sorry, but not in my language.
It’s almost like saying that Congress isn’t allowed to later decide to spend less money than it had decided to spend sometime in the past. If every such decision to spend money immediately creates an ‘obligation’ on our credit, then spending less money than that constitutes ‘default’. That’s what these people (not at all coincidentally I now see, from the left) apparently mean by ‘default’. Hell, as far as I can tell, if Congress ever retroactively cuts spending on something – anything – that’s a ‘default’! And that’s…weird. More to the point, if that’s what ‘default’ means, I don’t care about it. Indeed, I’m all for it. I would like to do it ASAP.
The trouble here is obviously partly semantic. The person quoted above uses the phrase ‘obligated to spend the money’ where I would probably use a phrase like have planned to spend the money. The Ezra Kleins of the world would have us believe that, the moment Congress passes a law with a dollar-number in it, that becomes an ‘obligation’ of the US on pari passu with a 6-month T-bill. But surely that can’t be right. For one thing, surely Congress can adjust how much money it wants to spend on stuff, even retroactively? Surely it’s not a ‘default’ for Congress to slash funding for something? Any given instance of such a ‘default’ you can name, Congress could immediately cure by making the changes retroactive. ‘We rescind the previous spending-bill as-of such-and-such date’ – i.e., we rescind the bill which (supposedly) immediately created an ‘obligation’ on our credit. There, problem solved.
This also explains why I hadn’t understood the supposed huge difference between a debt-ceiling-induced spending crunch and the spending crunch that leads to what they call a ‘government shutdown’. The former becomes defined as a ‘default’ by these ‘spending plan=obligation’ people. But if you don’t accept the ‘spending plan=’obligation’ equation, you may find yourself scratching your head like I was. To me, a crisis-induced spending crunch (which involves things like shutting down the FBI) and a government shutdown (which involves things like…well, like shutting down the FBI, right?) are a sort of six-of-one, half-dozen-of-the-other type of thing. If ‘shutting down the FBI’ (due to debt-ceiling) is a ‘default’, wouldn’t a ‘government-shutdown’ leading to..the shuttering of the FBI also have to be a ‘default’? What is the substantive difference here? But there’s the rub, I’m evaluating those outcomes on the substance. I forgot to focus on the superficial semantics, like how if you define a discretional spending bill as an ‘obligation’, and verbally elide the difference between that and Treasury bonds, you can call a debt-ceiling-induced spending crunch a ‘default’, and imply we should all suddenly be extra-scared of it over and above the ‘government shutdown’ kind.
Yeah, whatever. So annoying that I have to actually read these people not to be confused by them.
Also confusing are the ‘solutions’. I’m already on the record being basically okay with the trillion-dollar coin (seignorage) approach so I wish the Smart People would just quit while they’re ahead and do it already. Instead they keep muddying the water with bizarre statements. For the oblivious self-parodic entertainment value alone I can’t not mention Kevin Drum:
I want to ask something else: is this really the road liberals want to go down? Do we really want to be on record endorsing the idea that if a president doesn’t get his way, he should simply twist the law like a pretzel and essentially do what he wants by fiat?
Wait what? You mean ‘liberals’ have a problem with that? Yes I know they have a problem with that when the President has (R) after his name but what does that have to do with the current situation?
There’s also, of course, Matthew Yglesias whose brilliant alternative to the trillion-dollar coin idea is that Treasury should ‘pay’ their bills while getting around the (ahem) debt-ceiling by, I kid you not, writing IOUs:
So if the Treasury Department can’t get its hands on the dollars it needs to pay the bills it’s legally required to pay, it should just issue IOUs to institutional creditors.
‘Issue IOUs’? You mean, like, writing on a piece of paper ‘the holder of this here piece of paper is entitled to such-and-such amount of cash in the future’?
Funny, where I come from, that’s called…debt. Someone is, at best, unclear on the concept here; Yglesias’s solution to the debt ceiling is to issue a lot of debt over and above the debt ceiling. But just not call it that, or not notice that’s what it is, or something.
And I think all of this misunderstanding and confusion traces back to this:
The point, after all, is that the government is legally obliged to pay Social Security benefits. It is legally required to keep making grant payments to state governments. It has no choice but to pay soldiers’ salaries and to pay defense contractors for the work they perform. Doctors and hospitals are legally entitled to be paid for treating elderly patients.
Yglesias, Klein, Drum etc. treat all these (planned) payments as legal obligations but somehow neglect to fully comprehend that the debt ceiling is every bit as much of a ‘legal obligation’. It’s simply not the case that we have a bunch of spending ‘legal obligations’ but then some sort of weird, extra-legal debt ceiling that came out of nowhere and, like, Doesn’t Really Count. The debt ceiling is a law too. Congress could always revise, repeal, amend, or clarify that law to make it clear that the spending ‘legal obligations’ should indeed – as all these people seem to just assume sans argument – take precedence. But unless/until that happens, it’s simply the case that we have contradictory legal obligations.
NOT one set of legal obligations (the spending) that is being weirdly and bizarrely held up by, like, a Weirdo Tradition That No One Knows Where It Came From (the debt ceiling). No. It’s one set of legal obligations that conflicts with another, equally-valid and equally-live set of legal obligations.
And absent other info, or clarification from Congress, or resolution in the courts, I’m not seeing an obvious way to break the symmetry between these two obligations. At least not from the lefty Smarty People commentariat whose thinking and definitions on this matter I’m still, only now, struggling to catch up with and fully understand.
This symmetry – this absolute and equal ambiguity as to which ‘legal obligation’ is supposed to take precedence – is why I still say, based on everything I’ve read on this, that my Split The Difference idea is really the best, most defensible, and most honorable solution out there.
America, let’s get to work: Split The Difference! Pass it on.
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