Originally published on August 13, 2011
A Politco story released this week regarding comments by S&P senior director Joydeep Mukherji is being used to suggest that Tea party intransigence is the root cause of the debt downgrade. However, I think the finger is really pointing at the Administration instead.
Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default,” “That a country even has such voices, albeit a minority, is something notable,” he added. “This kind of rhetoric is not common amongst AAA sovereigns.”
It is worth noting that had the debt ceiling not been raised then it would have been up to the Treasury under Secretary Geithner, in consultation with the President and Congress, to decide which bills would be paid and which would be suspended. Tea Party Republicans, like Michelle Bachmann, assumed that the government would never default on our debt obligations. It was accurate to say that the government would not have to default since there were plenty of revenues coming in to cover all principal and interest repayments. Instead, the government could have suspended payments on discretionary programs and the effect would be much like a partial government shutdown. These effects would not be small or inconsequential but they would not amount to a default on debt.
However, this isn’t what the administration was saying. In Timothy Geithner’s Jan 6, 2011, letter to Majority leader Harry Reid he implores Congress to reach a deal to raise the debt limit.
He says in paragraph two, “Failure to raise the limit would precipitate a default by the United States.” He also says in the letter that failure to raise the debt ceiling would not be the same as a partial government shutdown. He wrote, “Those government shutdowns, which were unwise and highly disruptive, did not have the same long-term negative impact on U.S. creditworthiness as a default would, because there was headroom available under the debt limit at that time.”
In other words, the reason things would be different this time, is because we would fail to make our interest payments. At the end of the letter, he describes likely economic impacts of failure to raise the debt limit, most of which would clearly be the consequence of an actual default on US debt repayment. Thus, Geithner is strongly suggesting that the US might be inclined not to make some debt repayments if the debt ceiling were not raised.
Or listen to Obama’s Economic advisor Austen Goolsbee in January. He talks about default as if we would not make repayment of our principal and interest and does not make the distinction between discretionary spending and repayment of debt. Clearly he describes as catastrophic the impact of debt default.
But then listen to President Obama later in June. In this clip President Obama seems to equate the term default with not paying some government bills. So, for example, if the government did not pay some social security obligations, one might say the US had defaulted. So maybe when he says default he doesn’t really mean a debt default. However, at the end he asks whether we really would choose to send interest payments to China to avoid default on the debt rather than sending out social security checks. He doesn’t answer the question, but if I had to infer what his preference was based on the way he presented it, I’d have to say he’d prefer to pay the SS checks. The inference is that had the debt ceiling not been raised, the President may have been inclined to “really default” on some interest payments.
These are the voices S&P is more likely referring to, especially since these are the individuals who are empowered to administer the payment of government obligations. The administration could have avoided this criticism by saying throughout the crisis that the full faith and credit of the US would not be impaired EVEN IF we hit the debt ceiling. They then could have explained the serious repercussions if we were forced to go through a partial government shutdown. However the administration didn’t do that. Instead they told the default implication story over and over again and did not accurately reflect the true situation. That is …. unless it really WAS President Obama’s intention to default on debt to avoid a reduction in social security and other government payments!!
