Experts agree: Prioritization is “default by another name”

Tomorrow, the Ways and Means Committee will mark up legislation that would direct the Treasury Department to prioritize payments – once the debt limit prevents the U.S. from paying all our bills – to China and other foreign bondholders before meeting obligations to Americans. As we see below, experts agree that such prioritization is simply “default by another name”:

“Any plan to prioritize some payments over others is simply default by another name. The United States should never have to choose, for example, whether to pay Social Security to seniors, pay benefits to our veterans, or make payments to state and local jurisdictions and health care providers under Medicare and Medicaid. There is no way of knowing the damage any prioritization plan would have on our economy and financial markets.” – Treasury Secretary Jack Lew (9/25/13)

“The idea that Treasury *could* prioritize - even if desired - is fanciful & misunderstands federal financing requirements.” – Tony Fratto, former Treasury Department assistant secretary and senior George W. Bush White House staffer (1/15/13)

“While well-intentioned, this idea is unworkable. It would not actually prevent default, since it would seek to protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment. Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments.” – Former Deputy Treasury Secretary Neal Wolin (1/21/11)

“The Treasury could try to soften the blow of hitting the debt ceiling by making interest payments on its debt the priority while leaving some other bills unpaid. Yet that would still wreak havoc… Not only would that threaten to send the economy back into recession. It would also deprive doctors, pensioners, contractors and millions of others of money needed to meet their own obligations, setting off a chain reaction of defaults.” – The Economist (1/12/13)

“The problem is that the federal government is literally not set up to do this. Jack Lew doesn't sit around in the evenings logged in to some online bill pay system deciding which checks to send and which not to send.” – Matt Yglesias (9/27/13)

“This ‘debt prioritization’ is extremely dangerous, and is probably not even feasible... By appearing to make defaulting on the debt legitimate and manageable, it would heighten the risk that a default will actually occur. In reality, debt prioritization would make things worse for the millions of people and businesses who count on timely federal payments.” – Center on Budget and Policy Priorities chief economist Chad Stone (9/24/13)