National Review: The GOP should take default off the table in debt-ceiling negotiations

They’re not saying Republicans should cave and raise the debt ceiling across the board, they’re saying the GOP should pass something that lets Treasury continue to borrow only for the purpose of paying interest owed to creditors. Missing those payments would mean true default and a potential meltdown for global markets, which is why Democrats keep talking up the scenario for negotiating leverage. If you take away that leverage by guaranteeing that debt obligations will be met then this becomes just like a more traditional government shutdown, with all non-interest federal spending frozen unless and until Obama agrees to cuts.

The House should pass a bill to redefine the debt limit so that it constrains primary spending but not debt service. Under this reform, a Treasury that had hit the statutory borrowing limit could continue to borrow what it needed exclusively for paying interest on the national debt and to roll over existing debt obligations, but it could not borrow for any other government spending until the limit had been increased. This would take default entirely off the table.

Other spending would have to be put off or reduced, based on the amount of revenue available at any given time, until the debt limit had been raised. Since debt service now amounts to roughly 8 percent of the budget while the deficit is well over 30 percent, this would mean very significant limits on spending until the debt limit had been increased — whether by a large, across-the-board reduction of remaining spending or a partial shutdown of the relevant government programs and services. Both parties would have a strong incentive to come to agreements that prevented the debt limit from being hit, at least for long.

This proposal would improve, rather than undermine, America’s creditworthiness, as it would both avert any possibility of default and compel a discussion about getting our government finances into order.

Is it only the prospect of default on debt obligations that’s keeping Democrats from negotiating? If you read Obama’s opening statement from yesterday’s presser, when he was talking about Congress not paying its bills, he didn’t dwell on the prospect of Treasury not being able to make interest payments. He focused on not being able to pay the troops, not being able to send out Social Security checks, and so on — exactly the type of traditional spending that would be frozen even under NR’s modified debt-ceiling standoff scenario. In other words, he’s already treating this more or less as a traditional government shutdown. And with good reason: If the GOP did categorically refuse to raise the ceiling, Treasury could still cover its interest payments with the new revenue it takes in every day. The Journal gamed that out a few days ago:

Under this approach, the government would pay bills on a day-by-day basis only when it had enough cash on hand from tax receipts and other revenue. On days when it was short of cash, it would postpone all payments until enough cash came in to make that day’s payments. Then it would put off the next day’s payments until enough cash came in to make those, and so on…

Officials appeared to have ruled out as unworkable the idea of prioritizing payments. The U.S. government makes 80 million payments a month. Figuring out which to pay first could be a logistical nightmare…

One area could get special consideration. The report left unanswered whether a delayed-payment regime would have included postponing interest payments on U.S. Treasury securities. Obama administration officials declined to comment on the matter.

Interest payments are delivered over a different system than other federal payments so Geithner could segregate those easily for special attention if need be, which is almost certainly what would happen in order to preserve America’s creditworthiness if it ever did come to this. All National Review is doing, really, is calling on the GOP to codify this scheme, instructing Treasury to prioritize debt obligations over other spending (and to engage in limited borrowing if necessary to meet those obligations) so that the world’s bondholders don’t have a panic attack while Congress and the White House try to reach a deal on cuts.

But that raises the question: If the goal here is to turn this into a traditional government shutdown, why not forget the debt ceiling and use the expiration of this year’s allotment of federal spending in March as an opportunity to shut down the government and extract cuts? Ed has an entire column up at The Week today making the case for that strategy. If you want (a) deep spending cuts, (b) leverage for Republicans in the form of a shutdown, and (c) minimal risk of a global financial panic that could drive the country into a deeper economic rut, use the expiration of this year’s continuing resolution on the budget to fight for reduced spending instead of the debt ceiling. More from Ed:

Of course, Republicans remember all too well that they attempted to force a budget victory in 1995 over Bill Clinton with a government shutdown, and ended up losing the political war. That case, however, differed from today in a couple of significant ways. The deficit was much smaller, although still politically potent, and Clinton had already started to triangulate after the 1994 midterm fiasco for Democrats. The budget standoff looked much less like a crisis than a public-relations stunt for the new Contract with America majority. In this case, the crisis is obvious and very potent politically, although not certain by any means to favor Republicans. It will take a great deal of effort to get the messaging started immediately for a March 27 standoff over budgeting for the rest of FY2013, an effort that Republicans haven’t done much in the last two weeks to push.

The GOP should forget the ghosts of 1995 and force the showdown over the real issue — out-of-control spending. At this point, after the beating Republicans took in November and the disarray after the New Years Day fiscal-cliff deal, they don’t have much to lose, especially by fighting on the high ground and forcing Democrats to defend inflated spending.

Supposedly Boehner and the House GOP leadership are already trying to steer the caucus towards taking a stand on the continuing resolution rather than the debt ceiling. But even if it happens and the government shuts down for a few days, is there any reason to think they won’t cave? What kind of cuts are they expecting from a Democratic president and Democratic Senate? A shutdown is always risky, but in ’95 the GOP was at least coming off a huge midterm win the year before with public opinion presumably on their side. As it is, Gabe Malor sees a replay of the fiscal cliff debacle, where tea-party congressmen vote no and the rest of the caucus gets nervous about a public backlash and votes with Democrats to pass something lame.

Exit question: Which option does the “let it burn” crowd favor here? The point of LIB is to force Democrats to fully own the fiscal mess they’ve made and to force voters to live with the consequences of electing those Democrats, so presumably you guys want the GOP to vote “present” on the debt ceiling and let the Dems keep borrowing until the whole budgetary facade finally collapses, yes?

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