Emails, Gary Burtless, senior fellow, Economic Studies, the Brookings Institution, Oct. 14, 2013

1:14 pm

The CBO document to which the Congressman referred you tells readers (on page 8) that total federal revenues in fiscal year 2014 are predicted to be $3.042 trillion and expected spending in FY 2014 is expected to be $3.602 trillion, which leaves an annual deficit of $0.560 trillion.  The deficit must be covered by selling additional Treasury securities.   On p. 16 of the same CBO report readers are told that by the end of FY 2014 the expected total Federal government debt subject to the debt limit will be $17.591 trillion, which is far above the statutory ceiling on debt subject to a limit ($16.699 trillion since May 18, 2013).

 

The cash flow of the U.S. government thus covers all but $0.560 trillion of this fiscal year’s expected outlays.  The question is how long the Treasury can continue to take “extraordinary measures” to prevent the government from defaulting on its debt.  It is conceivable that the Treasury can prevent default on Treasury securities by making timely payments of maturing securities and interest payments on all outstanding securities.  However, whether that prevents Federal government default depends on your definition of “default.”  Assuming that the Congress passes appropriation bills or a continuing resolution authorizing levels of spending currently recommended by GOP and Democratic Congressional leaders, anticipated revenues over the next 4 or 6 weeks will not be large enough to pay for those anticipated spending amounts.  If a business makes timely payments on its secured and unsecured bank debt but does not make promised payment to its suppliers (for supplies already delivered), workers (for hours of work already supplied), and pensioners (for pensions promised under the company pension plan), most observers would say the company has defaulted on its obligations to some of its creditors.  Suppliers, workers, and pensioners are creditors of the company just as certainly as banks that have extended the company a loan.

 

As I understand it, the Treasury does not have any current method to pick and choose the Federal government creditors it will offer to pay (except perhaps the owners of Treasury debt securities, like T-bills and 10-year bonds).  This means, it cannot prioritize its payments to contractors, Social Security pensioners, Medicare payees (doctors and hospitals that have provided services to the Medicare-insured population), non-furloughed civilian workers, members of the uniformed military, etc.  If a supplier, a pensioner, a non-furloughed worker, military serviceperson, doctor or hospital does not receive timely payment, does that constitute a “default”?  Perhaps your Congressman does not think so.  I think it probable that the supplier, pensioner, non-furloughed worker, military serviceperson, doctor or hospital will feel differently.  Perhaps your own parents or grandparents collect a Social Security check.  I would like to hear you – or Congressperson X – explain to them why the failure of the Federal government to make the Social Security payment on time is something other than a “default” on a Federal obligation.

 

I hope this is helpful,

 

Gary Burtless

Economist, the Brookings Institution

Washington, DC

From: Selby, Gardner (CMG-Austin) [mailto:wgselby@statesman.com]

Sent: Monday, October 14, 2013 2:50 PM

To: Gary Burtless

Subject: RE: Texas reporter on a fresh urgent fact check

 

Thank you.

 

If I understand the congressman’s point, it is that if the government covers interest costs going forward ($237 billion projected for f14 against the $3 tr in projected revenue) and picks and chooses which other obligations to fulfill, it won’t default, though results could be chaotic.

 

Agree? Why or why not? What other sources would you recommend we consider?

 

g.

2:06 pm

I do not have enough specialized knowledge to know whether the payments to Federal security holders can be separated from the other obligations of the government (payments to contractors, Social Security pensioners, doctors and hospitals that have provided services to the Medicare-insured population, non-furloughed civilian workers, members of the uniformed military, etc.).  If the payments for interest and maturing Federal securities can be paid promptly, independent of the fact that other federal obligations cannot be paid in full, then Congressperson X’s claim is correct.

 

There are two questions:

 

·         Can his proposed strategy actually be implemented?  That is, can the Treasury distinguish the two kinds of bills and pay some of them but not others?

 

·         Is it legally permitted for the government to delay or suspend payments to some classes of government creditors (Social Security pensioners, contractors, etc.) while making timely payments to another class of creditors (people, institutions, and countries – including Russia and China, by the way) that own Federal Treasury securities?  I understand this is a legally controversial issue.

 

Up to now, I have seen different viewpoints expressed on both these questions.  I am not an expert in the payment procedures of the government or in the legal issues that arise when the government does not have enough funds on hand to pay all of them.

 

Good luck!

Gary B.