Treasury Secretary Jack Lew appeared before the Senate Finance Committee on Thursday to warn lawmakers about the threat of economic disaster if the nation defaults and said there was no option but for Congress to raise the debt limit.
Lew took on the claims of Republicans who argue that the Treasury can manage the country's bills if the limit not raised, a group derided by Sen. Chuck Schumer, D-N.Y., as “debt-ceiling deniers.”
Lew told the panel that trying to prioritize payments on the Treasury’s obligations, thereby guaranteeing that there would be no delays to interest and principal payments on Treasury securities, would be unworkable.
“I don’t know how you could possibly choose between Social Security and veteran’s benefits, between Medicare and food assistance,” the Treasury secretary said.
Lew also noted the legal and logistical challenges to any prioritization schemes. “I don’t think the legal process is clear at all,” he said.
He told the committee’s chairman, Sen. Max Baucus of Montana, that the Treasury Department’s computer payments systems cannot be reprogrammed to prioritize among payments. “They were not designed to not pay our bills,” he said.
“I have been trying to be as transparent as possible because I fear that a miscalculation could have very severe consequences,” Lew said, warning that the Washington “parlor sport” of waiting until the last minute to act is “irresponsible and reckless” when it comes to the debt ceiling.
Lew also defended the White House's refusal to negotiate with Congressional Republicans, who insist on attaching major fiscal reforms or changes to Obamacare to a debt ceiling vote.
Lew and other administration officials have avoided spelling out their contingency plans if the borrowing limit is not raised by Oct. 17, the last day Lew said he will be able to employ extraordinary measures available to create headroom under the debt ceiling. That caution is likely because Congress has in the past held out until the last possible moment to act on the debt limit.
In formulating such contingency plans in 2011, according to a 2012 Treasury inspector general’s report, the department determined that the least-harmful option was a “delayed payment regime,” in which “no payments would be made until they could all be made on a day-by-day basis.”
Interest payments on the debt would still be prioritized in this scenario, but the drastic and immediate cuts to other government expenditures would become worse each day as the Treasury fell further and further behind.
A memo from Moody’s Investors Service circulated among Congressional Republicans earlier in the week suggested that the Treasury does have the logistical ability to prioritize U.S. sovereign debt over other payments, keeping the nation’s creditworthiness intact.
But the Treasury IG report and Lew argue that the massive, immediate spending cuts necessitated by such a delayed payments regime — the Treasury would have to immediately balance the daily budget — would tip the country back into recession.
Uncertainty over which payments would be made would also cause investors to panic.
Some Republicans, however, have suggested in recent days that the process of paying the nation’s bills if the debt limit is hit would be manageable.
Sen. Tom Coburn, a staunch fiscal conservative from Oklahoma, said Wednesday morning on CNN that not raising the debt ceiling and defaulting on the debt are “two different and distinct things.”
“I’m not saying we shouldn’t pay our bills. …What I’m saying is we should put ourselves in the position where we have to start making hard choices now,” he said.