The prioritization of payments theory is not practicably feasible

Posted by AzBlueMeanie:

Right-wing think tanks are providing alternate reality cover to Tea-Publican economic terrorists in Congress threatening to take America hostage and to destroy the full faith and credit of the United States by defaulting on the U.S. debt. These analysts frauds are claiming that The threat of default is a myth:

“The only way the federal government would default on its debt in the
event the debt ceiling remains unchanged is for the Treasury to choose to default—an utterly implausible eventuality,” wrote Heritage Foundation analyst JD Foster. He elaborated his case in a longer report:
“Whether Treasury is required as a matter of law to prioritize incoming
receipts to pay interest costs first is an open question, but there
appears to be little doubt Treasury would do so. There is, therefore, no
real question that Treasury would take the actions necessary to
preserve the full faith and credit of the U.S. government and avoid
defaulting on debts due.”

The Cato Institute’s Michael Tanner makes
a similar argument in the National Review, though he acknowledges that
there are still some risks and market disruption involved, even if
Treasury prioritizes its interest payments as predicted. He predicts
that about $500 billion in debt would mature between Feb 15. and March
1, when we’re expected to hit the debt ceiling, and believes that
Treasury could still pay the principal on this debt by issuing new
securities.

“Theoretically, there could be a problem if no one is willing to buy
the new securities,” he writes, though he believes this is unlikely.
“More likely is the possibility that Treasury might have to offer higher
interest rates on this rolled-over debt, a not insubstantial concern: A
one-percentage-point increase in interest rates could cost taxpayers
more than $100 billion per year.”

The prioritization of payments theory is not practicably feasible. Brad Plumer explained in If we hit the debt ceiling, can Obama choose which bills to pay?:

This option is known as “prioritization.” It’s the idea that the
government can selectively pay some of its bills so that the nation
doesn’t default on its debt payments — the doomsday scenario. It may
sound appealing. But there’s also good reason to think prioritization
might be unworkable.

* * *

For many economists, there’s a clear priority: The United States
absolutely must not miss a payment to bondholders. The global financial
markets are structured around the notion that U.S. Treasuries are the
safest asset in the world. If that assumption were ever called into
question, havoc would ensue. It “would be like the financial market
equivalent of that Hieronymus Bosch painting of hell,” says Michael Feroli, chief economist at JP Morgan.

In theory, Treasury might be able to prioritize bond payments above all
else, says Steve Bell of the Bipartisan Policy Center. The computer
system that handles U.S. sovereign debt, Fedwire,
is separate from the system overseeing payments to government agencies
and other vendors. Yet it’s unclear whether Treasury has the legal
authority to prioritize in this way — the agency has never dealt with
this situation before. “Anyone who says they know for sure whether this
is legal is not telling the truth,” says Bell.

* * *

Some commentators have suggested the government could keep sending
out Social Security checks while halting payments to, say, defense
contractors. But, says Bell, it would be difficult to reconfigure
Treasury’s computers to do this in short order. The agency’s inspector
general agrees:
“Because Congress has never provided guidance to the contrary,
Treasury’s systems are designed to make each payment in the order it
comes due.”

The end result could be far more chaotic than past government
shutdowns. Essentially, 40 percent of the checks the government sends
out could not be honored, and there would be no way to predict in
advance who gets paid and who doesn’t.

The Washington Post's fact checker Glenn Kessler today debunks this Tea Party myth. A misguided tea party claim on the debt ceiling:

“It is pure baloney to say we have to pay the bills for things
Congress has already approved. We are drawing the line on future
spending, not the debt or obligations to Social Security, Medicare and
the military, which can all be met without an immediate rise in the debt
ceiling.”

— Amy Kremer, chairman of the Tea Party Express, in a statement, Jan. 14

Kremer issued that statement after President Obama, in a news conference on Monday, argued that if Congress did not raise the debt limit, the United States would not be able to pay for services rendered in the past: “If congressional Republicans refuse to pay America’s bills on time, Social Security checks and veterans’ benefits will be delayed,” Obama said. “We might not be able to pay our troops, or honor our contracts with small business owners.”

* * *

Both the Treasury Department and the Congressional Research Service
say that there is tremendous legal uncertainty about whether some
payments could be honored while others ignored if the nation goes about
the borrowing limit.

* * *

The sheer volume of transactions — as many as 5 million a day — would
make it difficult to pick and choose. Moreover, Treasury says its
systems are designed to make payments in the order in which they are
due.

* * *

Taylor Budowich, a spokesman for the Tea Party Express, defended Kremer’s statement, pointing us to a recent report by the Bipartisan Policy Center, which he said included “some options” for spending priorities.

“It
is unadvisable to get into a situation where we must prioritize
spending, but it is irresponsible and absolutely unacceptable to
continue down a path of increased debt, increased spending, and
increased taxes,” Budowich said.

 We looked at the Bipartisan
Policy Center report and actually found that it completely undercut
Kremer’s statement. We also double-checked with Steve Bell,
a co-author of the report and a former staff director of the Senate
Budget Committee under Sen. Pete V. Domenici (R-N.M.). He agreed that
Kremer’s statement was incorrect.

“You don’t have to be an MIT
mathematician to figure this out,” Bell said. “As a matter of math, the
tea party person is wrong.” On a given day, he said, payments for Social
Security, Medicare, active-duty soldiers and interest on the debt would
add up to $53 billion — while the government would have only collected
$20 billion.

Bell also agreed that as a practical matter it was
all but impossible for Treasury to pay a defense contractor ahead of a
Social Security recipient, or vice versa.

The Bipartisan Policy Center, in its report, also provides a few
illustrative examples, such as Treasury not paying any income tax
refunds in order to pay higher-priority bills first. But it says none of
the options are practical and would be difficult to maintain for a
period of time.

 The Pinocchio Test

Kremer used pretty strong language — “baloney”— to condemn
Obama’s statement, but the evidence provided by the Tea Party Express
actually supports the president’s point. By available evidence, it
appears all but impossible for the Treasury Department to pick and
choose among payments — or to keep up that balancing act up for very
long.

UPDATE: Ed Kilgore has more at the Political Animal blog: "The GOP’s business buddies need to make it clear this ostensibly clever “half-pregnant” approach is not a pain-free option…" The Dangerous “Prioritization” Canard.