Toomey v. Geithner

by Andrew Stiles

Sen. Pat Toomey (R., Pa.) and Treasury Secretary Tim Geithner are in a war of words over the efficacy of Toomey’s Full Faith and Credit Act, a bill currently with 20 co-sponsors in the Senate.

Here’s the essence of the bill, in Toomey’s own words:

The bill would simply require the Treasury to make interest payments on our debt its first priority in the event the debt ceiling is not raised. This legislation is designed to maintain orderly financial markets by reassuring investors in U.S. Treasury securities that their investments are perfectly safe even in the unlikely event that the debt limit is temporarily reached.

Toomey wrote Geithner on February 2 to express his frustration with administration officials who refuse to take his legislation seriously. For instance, Deputy Treasury Secretary Neal Wolin said the consequences of the bill would be “default by another name.”

From the letter:

I am deeply concerned about the recent comments made by several administrations officials stating or implying that failure to raise the nation’s debt limit, prior to reaching it, would constitute a default on our debt and precipitate a financial crisis . . .

Not only are these comments factually incorrect and disproven by historical events, but, most disturbingly, they could undermine investor confidence in the U.S. government’s debt, thereby potentially precipitating some of the very reaction the Treasury Department should be preventing.

Essentially, Toomey is arguing that the administration’s claims — that failing to raise the debt ceiling would cause a national default — are not only false but irresponsible. He goes on to say that his legislation would be “unnecessary had administration officials not publicly raised the specter of a government default.”

Geithner wrote back to say that, in effect, “you’re wrong.” He said Toomey’s legislation was not only “unworkable” but “would be quite harmful if enacted.” And with a tangible whiff of condescension, offered the following “simple analogy”:

A homeowner could decide to “prioritize” and continue paying monthly mortgage payments, while opting to cease paying other obligations, such as car payments, insurance premiums, student loan and credit card payments, utilities, and so forth. Although the mortgage would be paid, the damage to that homeowner’s creditworthiness would be severe.

Similarly, while your legislation seeks to ensure that debt service payments would continue to be made after the debt limit is reached, it does not protect from non-payment the other obligations of the United States, such as military and civilian salaries, tax refunds, contractual payments to individuals and businesses for services and goods, and many others. If payments of these obligations were abruptly stopped, the world would recognize it as a first-ever failure by the United States to meet its commitments.

Like most Democrats when it comes to this issue, Geithner seems to be missing the point. Toomey is simply saying that the national debt, in all its forms, must be paid. The first analogy therefore seems to be talking past this argument. Most of the “other obligations” he mentioned are merely other forms of debt. More importantly, Toomey is trying to initiate a serious discussion about federal spending.

Suppose that Geithner’s “homeowner” is living far beyond his means and swimming in debt. He would be forced to concentrate on paying off that debt while, say, cutting back on other expenses, e.g., babysitters, dog-walkers, body guards, pillow-fluffers, and belly-dancers he’s been keeping on staff all these years, in order to do so. Toomey would argue that the United States is in this very position. Getting the debt under control is simply the first step. Beyond that, we desperately need to scale back spending, and better to start now before it gets any worse.

When Geithner talks about the risk that “other obligations” might not be met, and argues that this would basically amount to “default by another name,” he is wrongly equating mortgage payments and babysitter wages, as if sending the babysitter home an hour early would be akin to missing a loan repayment.

But, of course, this is what Democrats would have you believe. It is part of a concerted effort to defend their beloved federal programs, while at the same time pushing for even more “investment.” In addition to painting Republicans as fiscal madmen intent on shutting down the government, Democrats will argue that deep cuts of any kind would be horribly disruptive — that they will complicate our efforts in Iraq, for example.

Even if significant spending reduction measures are painful initially, it would pale in comparison to the catastrophe that awaits us if we simply continue down the same path. If administration officials are really so concerned about what our bondholders think of us, they could start getting our debt under control, or at the very least, make an effort.