Sen. Pat Toomey (R-PA) yesterday filed the “Full Faith and Credit Act” as an amendment to legislation reauthorizing the Federal Aviation Administration (FAA). Toomey’s bill is an attempt to codify the order in which the federal government will pay its obligations in the event the debt ceiling is not raised before the country’s legal borrowing limit is reached. Such an event would require the government to move to a cash-only budget, paying out only what comes in each month in tax revenue.
Toomey’s bill instructs the Treasury to pay interest on the federal debt above all other obligations (which is what Treasury would likely do in the event the borrowing limit was reached anyway). As Toomey himself explained in a Wall Street Journal op-ed (titled “How To Freeze The Debt Ceiling Without Risking Default”), the bill will “require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised.”
Toomey seems to think that this might, in some way, help the U.S. avoid a default on its debt:
[I]n the past when we’ve reached the debt ceiling, and it’s happened several times, the Treasury secretary has made sure we don’t default on our obligations on Treasury securities. All I’m saying is let’s codify that because the catastrophic consequences to senior citizens, to savers, to small business owners, to people seeking mortgage, to our entire economy, would be endangered if we had a default on our debt.
But as Matt Yglesias pointed out, this bill simply codifies the way in which the U.S. would default; it doesn’t actually prevent a default from occurring. “This is nonetheless a kind of default. A person whose creditworthiness is above question meets all his financial obligations,” Yglesias wrote. Deputy Treasury Secretary Neil Wolin said much the same thing, calling Toomey’s idea “unworkable”:
It would not actually prevent default, since it would seek to protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment. Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments.
Indeed, paying interest payments on the debt while failing to cover domestic mandatory payments like Social Security or veteran’s benefits is still a default, just in a way that concentrates the pain on Americans who had nothing to do with Congress’ inability to responsibly raise the debt ceiling. Much like the plan put forward by former Gov. Tim Pawlenty (R-MN), which prioritized payments in the same way, Toomey’s bill seems to be more about political posturing that anything else.
In the end, Congress needs to raise the debt ceiling and pay of all of the obligations. To do otherwise would be supremely irresponsible and detrimental to the world economy.