The Dangerous “Prioritization” Canard

The idea got a big boost from a National Review editorial yesterday. And now, according to Reuters, it’s gaining steam among congressional Republicans: the suggestion that “debt default” be “taken off the table” by directing the Treasury to pay existing obligations but not those associated with “future” spending.

You can see how a scheme to absolve conservatives of threats to Social Security beneficiaries and bondholders while maintaining their leverage over other kinds of federal spending would powerfully appeal to Republicans. But the trouble with it is plain enough: financial analysts say it would not eliminate severe damage to the federal government’s credit-worthiness, as the New York Times‘ Jonathan Weisman reports:

Fitch Ratings Ltd. warned on Tuesday that Congress’s failure to raise the federal government’s statutory borrowing limit would “very likely” prompt a downgrading of the United States Government’s credit rating, and the agency seemed to suggest that Congress should simply do away with the debt ceiling altogether.

In a pointed statement, Fitch dismissed the assurances of some Republicans that the Treasury Department would be able to use incoming tax receipts to prioritize the payment of government debt and interest, as well as vital services like military pay and Social Security. That warning echoed the Treasury’s own assessment that breaching the debt ceiling could not be managed in any way that would minimize the economic turmoil or avoid default.

“It is not assured that the Treasury would or legally could prioritize debt service over its myriad of other obligations, including Social Security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met,” Fitch wrote.

A ratings downgrade, of course, would not only rattle global markets immeasurably, but would directly increase federal spending via higher interest rates on government debt instruments, no matter how faithfully the debt is paid.

The GOP’s business buddies need to make it clear this ostensibly clever “half-pregnant” approach is not a pain-free option, before those congressional hardline conservatives who really wouldn’t mind a complete debt default insist on prioritization as a “compromise.”

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.