How Obama Can Win The Debt Ceiling Fight By Giving Republicans Exactly What They Want

the white house

Photo: flickr/acameronhuff

Republicans insist that there’s nothing particularly irresponsible about attaching demands to a debt ceiling hike, because under no scenario are we actually risking default on our debt. Everyone agrees that not paying our national debt coupon payments would be financially catastrophic, but conservatives point out that the U.S. government takes in far more money each day than it spends on interest payments. Ergo, all the Treasury needs to do is “prioritise” payments, so that bondholders get paid first.However, if you follow the GOP’s line on this, then Obama has an easy victory.

Let’s talk about what prioritization actually entails.

The Bipartisan Policy centre looked at what we’d need to cut if the Treasury were to “prioritise” payments in favour of crucial things.

Here are the two scenarios they examined:

Scenario 1: If we chose to keep paying interest payments, Social Security, Medicare/Medicaid, tax refunds, military pay, and unemployment, then we’d have to stop paying defence vendors, veterans, the FBI, food/nutrition benefits, federal salaries, the FAA (air traffic controllers), etc.

Scenario 2: If we chose to keep paying interest payments, Medicare/Medicaid, Social Security, Veterans Benefits, defence Vendors, Federal Salaries, etc., then we’d have to stop paying tax refunds, the FBI, the EPA, Air Traffic Control, and so forth.

You can see why this is an easy win for Obama.

As soon as you stopped paying, say, Air Traffic Control, the FBI, and tax refunds, the impasse would be resolved in just a couple of days, as you’d almost certainly get a clean debt ceiling hike right away. The scenario would be like a 1994-style government shutdown except the public would be 10x more furious, and the pressure on Boehner to bring a debt ceiling hike to a vote would be far larger.

We know that the GOP doesn’t really want a traditional government shutdown (where they just refuse to pass a Continuing Resolution). That being said, Newt Gingrich, who was behind the 1994 shutdown has urged the GOP to fight on that front.

The big question then is, in a debt ceiling-induced shutdown, does the Treasury have the technical means to prioritise? The Treasury makes 100 million computerized payments in a month, and it’s not clear that it will be easy to jump and not make some of the payments. And it would inspire lawsuits. So the logistical hurdles would be immense. But if it can be done, it’s really an easy win for Obama. And it might have long-term benefits, in that bringing to the public a taste of what hardcore austerity would look like might frame the debate. People like balanced budgets in theory. Putting them into practice would be enlightening.

One issue that arises, as Mike Konczal has pointed out, is that tax revenue and interest payments are lumpy, and you might actually have days when the amount of revenue coming in doesn’t match expenditures. This is where it might be useful, ,as Interfluidity suggests, to have some smaller denomination platinum coins on hand to manage cash flow when things got tight.

Bottom line though: If there’s no debt ceiling hike, and we instantly have to balance the budget, and we go into prioritization and have a major government shutdown, and people see all the services that stop functioning, the fight would be over fast.

SEE ALSO: We have seen a major turning point in the fight over the trillion dollar coin >

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