Our federal government is currently $14.1 trillion in debt. The vast majority of the American people believe this number is far too high and on track to go far higher. Fortunately, Congress created a mechanism to force itself to reexamine its spending habits when budget deficits got out of control: the debt ceiling. Once total outstanding federal debt reaches the limit, the Treasury Department is no longer authorized to issue new debt. Like the states and family budgets, the federal government would then be forced to make do with tax receipts. The current debt limit is $14.294 trillion. The Treasury Department predicts that we will reach that limit sometime this spring. Somewhere between 62 percent and 71 percent of the American people oppose raising it. Will Washington listen to the American people? Or will they heed the Obama Administration and just continue their reckless spending ways?
In defense of never-ending reckless spending, Treasury Secretary Timothy Geithner has been trying to bamboozle Congress into raising the debt ceiling so that the Obama Administration can continue their free-spending ways unchecked. Geithner claims that unless the debt ceiling is raised by “the end of the first quarter of 2011,” the “full faith and credit of the United States” would be “called into question” and there would be “catastrophic damage to the economy.” As we have detailed before, this is simply false. In the fall of 1995, the federal government reached its $4.9 trillion debt ceiling. Congress refused to raise it. The world did not end. Instead, Treasury took several measures during the period to raise funds to meet federal obligations without exceeding the debt ceiling. Was, as Geithner warns, the “full faith and credit of the United States … called into question”? No. Was there “catastrophic damage to the economy”? No.
To remove any possible doubt regarding “the full faith and credit of the United States,” Senator Pat Toomey (R–PA) and Representative Tom McClintock (R–CA) have introduced the Full Faith and Credit Act, which would make the payment of interest on the debt the top priority. The Obama Administration quickly identified this legislation as a threat to their scare tactics and thus their big government spending plans, so Deputy Treasury Secretary Neil Wolan wrote a letter to Toomey claiming that any form of non-payment, be it to a retiree holding a U.S. savings bond or to the state of California to build its train to nowhere, “would merely be default by another name” and “would therefore bring about the same catastrophic economic consequences Secretary Geithner has warned against.”
Yesterday, Federal Reserve Chairman Ben Bernanke reluctantly contradicted this claim after persistent questioning from Representatives McClintock and Mick Mulvaney (R–SC). McClintock went first, asking: “In January you told the Senate Budget Committee that we’re not seeing extraordinary stress in the municipal market, which suggests that investors still are reasonably confident that there won’t be default among major borrowers. One reason they might believe that is because most states have rules which put debt repayment and interest payment at a very high priority. Above many other obligations of the state and locality. Wouldn’t be a good idea if the federal government did the same thing?”
Bernanke responded: “Well, it would reduce the risk with the debt limit that is for sure. You haven’t done that yet, of course. I would like to just comment that it would take some time for us to change our systems and computers and so on to make sure that we could change that prioritization, but doing that would reduce some of the risks associated with the debt limit.”
Later, Mulvaney followed up: “Given our fiscal situation, if we are able to figure out a way to work through those workability problems if we were able to figure out a way to prioritize, would that assuage your concerns about using the debt ceiling as an environment to have a discussion about changing our fiscal policy?”
Bernanke: “Well, my concern since I’m involved on the financial side, my concern is about not defaulting on the debt, and for me that is a very high priority so that would help on that count very much.”
So yes, there are some minor technical issues to be worked out and some computer programmers at the Treasury Department may have to pull an all-nighter. But Bernanke’s testimony clearly confirms that prioritizing interest and debt payments is possible and, in direct contradiction to claims by Wolan and Geithner, would help reduce the risk of default “very much.”
The responsibility for driving down spending and borrowing rests—under our Constitution—squarely with Congress and the President of the United States. In light of the nation’s fiscal plight, raising the debt limit should not be the first option but rather the last resort, and it should be accompanied by immediate, substantial spending reductions and other actions to set the nation on a path to reduced spending and borrowing.