Treasury has routinely rejected the idea that once the government reaches the debt limit, federal spending could be prioritized to avoid a default. During a previous debate over the debt limit in 2011, my colleague Jason Fichtner and I wrote a paper explaining that even if Treasury is unable to issue more debt, it can still avoid a default and thus give policymakers more time to implement reforms that would put the government on a more sustainable fiscal path.
Contrary to Treasury’s claims, we argued that it has several financial management options to continue paying the government’s primary obligations. Specifically, Treasury could use incoming tax receipts to cover high priority claims including the interest on existing debt, the principal on that debt, Social Security benefits, and more. Government assets could also be liquidated to pay bills.
Treasury claimed that such options were neither acceptable nor feasible, and thus the only choice was for Congress to promptly agree to increase the debt limit. Then-Treasury Secretary Timothy Geithner claimed that prioritizing was out of the question and that failing to pay any of the government’s bills would be the equivalent of defaulting on the debt. The same thing happened again during the administration’s 2013 showdown with Congress over lifting the debt limit. This time it was Geithner’s replacement, Jacob Lew, claiming that prioritization was not an option.
We now know that the administration’s claims were untrue. As it turns out, documents subpoenaed by the House Financial Services Committee reveal that during the 2013 debt ceiling debate the Obama administration knew it was actually capable of prioritizing payments. Indeed, the Federal Reserve Bank of New York was conducting “tabletop exercises” in preparation for what the administration was publicly stating couldn’t be done. The documents show that while Treasury was helping the administration scare the public, its behind-the-scenes actions proved otherwise.