Prioritizing Ain’t Easy

by Brian Bolduc

Congress can tell the Treasury to prioritize payments, but telling is easier than doing, a former Treasury official tells NRO.

The politicians who write the laws rarely realize the full costs of implementing them. The official remembers a similar instance in the fall of 2001, when Congress first required that all checked luggage be x-rayed. It later had to adjust the implementation timeline because it underestimated how long it would take to acquire the necessary equipment.

Similarly, going through the Treasury’s mechanized system for processing payments and selecting which ones will be made in the event of a partial default is very difficult. The official remembers an incident ten years ago, when the Treasury updated its auction process. The adjustment required the review of 10,000 lines of FORTRAN computer code. “It’s not a flick of the light switch,” the official says.

Even uncertainty over the debt limit today might increase the nation’s borrowing costs tomorrow. Because the Treasury’s receipt of revenue is uneven during the year, it constantly takes on short-term debt to meet its bills. As a result, it holds auctions of its debt three or four times a week.

“The Treasury’s philosophy since the time of William Simon, Pres. Richard Nixon’s Treasury secretary, has been one of operating in the market on a regular and predictable schedule, since that offers the Treasury the best chance to achieve its objective of getting the lowest cost of financing over time on behalf of the taxpayers,” the official says.

But the Treasury must schedule these auctions ahead of time, and in the current environment, it may be unable to do so considering its uncertain legal authority. In return, interest rates might rise as the U.S. loses its “regular and predictable” character in the market.

The official agrees that the U.S. should rein in spending but maintains that the debt ceiling is the wrong tool to be using for that end: “The objective is the right one; tool is wrong one.”

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