The Corner

Enough Doomsday Scenarios, Secretary Geithner

I understand the strategy that consists of making a risk look  much worse than it is in order to get something you want, but Treasury Secretary Tim Geithner is really pushing it. On Friday, he sent another letter to Sen. Michael Bennet (D, CO) arguing that a U.S. default would cause a double-dip recession and focusing on the doomsday scenario if we default on the debt.

I wish he would stop. We know that the debt ceiling will ultimately be raised. The real question is which safeguards and reforms need to be put in place so that the United States gets off the unsustainable financial path it is currently on. Designing such reforms take time and there is no need to rush. The good news is that we have time. Besides, I think it has been well established that when the secretary claimed in the past that he wouldn’t be able to advert a default if the ceiling wasn’t raised by the time we hit the limit, he didn’t really mean it. For one thing, May 16 came and went and the sky didn’t fall, Second, his actions have demonstrated that when he sets a date at which the U.S. will default on its debt, that date really shouldn’t be taken seriously.

I have said it many times, but I will say it again: While United States should not consider defaulting on its debt, Congress shouldn’t be forced to raise the debt ceiling under false pretenses. And here is the thing: There is absolutely no reason for the U.S. to default on its debt unless it would like to. The U.S. owns roughly $2 trillion in assets that it can use, in addition to $2.2 trillion in tax revenue.

Also, it is really shocking to read Secretary Geithner continue to make threats about not being able to send out Social Security checks, Medicare payments, or military paychecks. This year, this would only be the case if Geithner decided not to pay for these obligations. According to the GAO, the Treasury secretary has the authority to prioritize payments, which means that, considering the country’s assets and revenue, there is enough cash to pay for these priorities and Geithner can make these payments first — that is, if he wants to. (Not to mention that as long as there are assets in the Social Security trust funds, Treasury has to honor them.)

As a side note, the Washington Post had a substance free article that was quick to point out that back in the 1980s, President Reagan warned of a possible U.S. default if the debt ceiling wasn’t raised. However, the Post failed to mention that one thing that came out of that debate was that Treasury has the authority to prioritize its payments.

And, by the way, the Post also makes the argument that Reagan’s language in the 1980s about the risk of default is the same as the language used by Geithner, so it must be true. That’s nonsense. The tone is the same because the party in power always wants to increase the debt ceiling (Republicans and Democrats alike) and the party in the minority always drags its feet. Read this great post by Donald Marron. Let’s not forget that Senator Obama voted against raising the debt ceiling back in 2006 and while he now claims it was a mistake, that doesn’t change the fact that he voted against it in a matter entirely consistent with the history of debt-ceiling votes.

The bottom line is that the United States has enough expected cash flow (tax revenue) and assets on hand to avoid either defaulting or raising the debt ceiling. And while at some point the debt ceiling will have to be raised, it is essential that part of the legislation that increases the debt ceiling also provide for a framework to reduce government spending and eventually reduce the need to borrow more money.


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