The Debt-Ceiling Crisis Is Real – The New York Times – New York Times

First, the administration is confounded by inexperience, incompetence and infighting. Treasury Secretary Steven Mnuchin has little expertise in congressional stage management, but he understands the gravity of the situation and has lobbied for a clean debt ceiling bill one without conditions or unnecessary amendments.

But that puts him in tension with his White House colleague Mick Mulvaney, the director of the Office of Management and Budget and a founding member of the Freedom Caucus, who has intimated that breaching the debt ceiling would not be that consequential, and who has argued that the must-pass legislation should be used to advance the hard rights agenda. Without a firm signal from the White House that the debt ceiling should not be held hostage to political agendas, it will be hard to get Congress to do the right thing.

And thats the second problem: Congress, and in particular the Freedom Caucus. As the health care fight showed, the caucus is fixated on cutting entitlement spending. It has made it clear that if the House leadership balks on their demands for major cuts in the 2018 budget, theyll refuse to vote on raising the debt ceiling.

Finally, some conservative policy makers besides Mr. Mulvaney have convinced themselves that crashing into the debt ceiling wont be a big deal because the government can prioritize its bill payments, so that interest on Treasury debt will be paid on a current basis, while other bills sit unpaid.

Understanding the false allure of prioritization requires a little background. Hitting the debt ceiling is not the same as a government shutdown or other fiscal brinkmanship. Think of the United States, acting through the Treasury, as holding a bank account at the Federal Reserve. Every day, millions of bills arrive and are promptly paid by debiting Treasurys account at the Fed. At the same time, millions of dollars in tax and other receipts arrive and are credited to that bank account. The money coming in is systematically less than the money being disbursed (thats what it means to run a deficit), and Treasury makes up the difference by borrowing in the capital markets.

A government shutdown occurs when the Treasury has money in its bank account but Congress refuses to appropriate the funds necessary for the government to function. Crashing into the debt ceiling, by contrast, would occur if Treasury had no money in its bank account because Congress prohibited it from funding deficits through incremental borrowing.

If Treasury hits the ceiling, it has only two realistic responses. Treasury can pay the governments bills on a first-in, first-out basis, with the wait for payment growing every month, or it can prioritize bills, as Mr. Mulvaney and others have suggested it would.

But there are profound doubts as to whether the Treasury could even implement prioritization, beyond ring fencing interest payments, because its payment systems are designed to pay all claims as they are due, regardless of their origin. More important, prioritization is default by another name. The consequences are the same, regardless of which i.o.u.s Treasury chooses to dishonor.

All valid claims against the United States are backed by the credit of the United States, full stop; the Constitution does not contemplate that some claims are more senior than others. The deliberate nonpayment of billions of dollars of uncontested claims every month thus constitutes default, even if the Treasury is paying some of its other debts. The resulting class-action lawsuits will enrich generations of lawyers.

Once the unthinkable happens, no future constraints on congressional irresponsibility with regard to the national debt will remain. Prioritization will constitute the intentional subordination, not just of one claim to another, but of all claims to the pettiness of congressional politics. As a result, the once unassailable credit of the United States will become a perennial hostage to politics, and in response the debt markets will demand much higher interest rates.

These are noisy times in Washington. But even in this context, the awfulness of a debt ceiling crisis should galvanize us. Like an impending execution, it should concentrate our minds now, while something can still be done.

Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff of the Congressional Joint Committee on Taxation, is the author of We Are Better Than This: How Government Should Spend Our Money.

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A version of this op-ed appears in print on August 7, 2017, on Page A19 of the New York edition with the headline: The Debt-Ceiling Crisis Is Real.

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The Debt-Ceiling Crisis Is Real - The New York Times - New York Times