Recently, we discussed Keith Hennessey’s shrewd proposal to Speaker Boehner on raising the debt limit: essentially, House Republicans should commit to providing 50 votes for a clean debt limit increase for three months, thus placing the onus on House Democrats to provide the remaining votes. As Keith said at the time, however, is that this strategy “requires significant tactical and message coordination among House Republicans, possibly more than they are currently able to execute,” which might be the understatement of the year so far.
The intra-conservative discussion has since moved on to talk of “payment prioritization,” i.e., passing legislation that provides explicit guidance regarding how the spending obligations the executive branch should meet first in the event that the federal government breaches he debt ceiling. Sen. Patrick Toomey (R-PA) has taken the lead in advancing “payment prioritization” legislation that is designed to prevent a technical default (the federal government fails to meet some of its spending obligations) from becoming a real default (the federal government fails to pay its creditors on time). The editors of National Review, for example, offer one of the more attractive versions of this approach:
Since the Democrats insist that the prospect of default is the reason they will not negotiate about spending restraint, Republicans should begin the debt-ceiling fight by permanently eliminating that prospect, turning the debt-ceiling debate into an argument about future spending rather than past borrowing.
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. [Emphasis added]
Yet in a new post, Keith Hennessey casts doubt on whether payment prioritization of this kind would improve America’s creditworthiness, e.g.:
1. Credit rating agencies and investors may not be reassured because they may insufficiently distinguish between default and technical default. It’s easy to imagine a credit rating agency downgrading the U.S. for not paying contractors or States on time, even if principal and interest payments on U.S. Treasuries are all being made when they should be. The credit risk might be mitigated but it certainly wouldn’t be eliminated. If you make your credit card payments on time but miss your rent payment three months in a row you’re probably a bad credit risk.
2. To the extent that the enactment of such a law increased the expectation of future legislative brinksmanship surrounding these non-debt obligations, such a law might actually increase credit risk.
And so Keith calls for a different approach. House Republicans should pass a debt limit increase, but they should attach spending cuts as part of the legislation:
On the debt limit, state loudly and repeatedly a simple principle: We will pay our bills on time and we will cut future spending. Rather than being against a debt limit increase unless it also cuts spending, say that you’re for a debt limit increase that also cuts spending. You’re the legislative branch, you control what’s in the law. Act as leaders doing the right thing, rather than as rebels trying to block President Obama and Congressional Democratic spenders from doing the wrong thing. Agree with the President that we must pay our bills, and politely smile and say “And we’re going to cut spending, too.” Make him argue against cutting spending, rather than giving him the opportunity to attack you for risking financial disaster.
There are other elements of the strategy that he lays out that would be very constructive, e.g.:
Propose specific entitlement spending cuts to substitute for the sequester cuts you don’t like (presumably in defense). On this one sit and wait for Democratic nondefense appropriators to panic. You won’t have to wait long.
This would be an opportunity for House Republicans to rally around the Domenici-Rivlin Medicare reform proposal. This also ties into the next element of Keith’s strategy:
Publicly state your willingness to agree to (and vote for) a longer-term debt limit increase as soon as the President is willing to cut spending a lot or at least to commit to a credible long-term fiscal path. If he won’t, state that you will repeat step 3 as often as needed.
Recall that the Domenici-Rivlin Protect Medicare Act is projected to save between $3-5.4 trillion between if implemented in 2016 between now and 2042, depending on the baseline.
I am an outlier on the debt limit question. My view is that the sequester and the continuing resolution give House Republicans the leverage they need to press the president onto a more credible long-term fiscal path, and that a fight over the debt limit, or rather a series of fights over the debt limit, will ultimately do more harm to the cause of fiscal sustainability than good. Fundamentally, I think we need to pivot away from legislative brinksmanship and towards a growth agenda. The sooner conservatives in Congress can do that the better.