The day before formally announcing her candidacy for president, Republican Rep. Michele Bachmann did a wide-ranging interview with CBS’s Face the Nation.
When host Bob Schieffer quizzed Bachmann about the congressional showdown over raising the debt ceiling, she said President Obama’s administration is using “scare tactics” to convince people that it’s necessary to increase the amount the nation can borrow.
“The interest on the debt isn’t any more than 10 percent of what we’re taking in… And so, the Treasury secretary can very simply pay the interest on the debt first then we’re not in default.”
Bachmann’s strategy is easier said than done.
Congress must approve increases to the nation’s debt limit, but Congressional leaders and the president have been unable to reach agreement. If Congress doesn’t raise the $14.3 trillion ceiling by Aug. 2, the U.S. will be unable to borrow more money to pay for its spending obligations. As a result, it will face default.
Let’s now consider the Bachmann’s proposal: Delay default by paying bondholders the interest due to them before covering other government costs.
Bachmann’s staff didn’t respond to our requests for sourcing, but according to the Congressional Budget Office’s (CBO) baseline budget projections, the U.S. will bring in about $2.6 trillion in fiscal year 2012, and it will owe about $257 billion in interest payments.That’s about 10 percent of revenue, which means Bachmann is correct that the U.S. has enough money to cover the interest payments.
Theoretically, it works: The U.S. never has to raise the debt ceiling and could continue to prioritize making interest payments to avoid default. But budget experts think Bachmann’s approach provides a false sense of security and ignores significant spending commitments. The U.S. spends more than it collects in revenue, and that means all sorts of other financial obligations, including federal worker salaries, tax refunds, and Medicare and Medicaid payments, could be delayed.
“Even though it’s not as bad as debt default, it still would paint the U.S. as a deadbeat,” wrote Donald Marron, director of the Urban-Brookings Tax Policy Center and former CBO director, in a recent commentary.
Treasury Secretary Timothy Geithner has argued that paying interest on the debt – and not fulfilling other obligations — could ruin the country’s reputation in the global market. To underscore that point, he made this analogy:
“A homeowner could decide to ‘prioritize’ and continue paying monthly mortgage payments, while opting to cease paying other obligations, such as car payments, insurance payments… Although the mortgage would be paid, the damage to that homeowner’s creditworthiness would be severe.”
Bachmann is correct that there’s plenty of revenue to cover U.S. interest on its debt. But her claim is misleading because she makes it sound as if the strategy is a quick fix. In fact, freezing the debt ceiling and paying interest only could create big problems for the U.S. when it comes to other financial obligations.
Face the Nation, transcript, June 26, 2011
The Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012, April 2011
The Economist, Dancing on the ceiling: Talk of America defaulting on its debt is just that, Jan 13. 2011
The Economist, The debt ceiling and default, Jan. 13, 2011
The Treasury Department, Debt Subject to Limit, accessed June 27, 2011
The Washington Post, What’s the debt ceiling and why is everyone talking about it?, by Ariana Eunjung Cha, April 18, 2011
The Christian Science Monitor, America is playing with fire with its default talk, by Donald Marron, June 23, 2011
The Treasury Department, Secretary Geithner Sends Debt Limit Letter to Congress, Jan 1, 2011
The Treasury Department, letter to Sen. Patrick Toomey, Feb. 3, 2011
Interview, Alan Viard, resident scholar, the American Enterprise Institute, June 27, 2011
Interview, Daniel Mitchell, senior fellow, the Cato Institute, June 27, 2011
Interview, Eileen Appelbaum, senior economist, the Center for Economic and Policy Research, June 27, 2011
Interview, Bill Frenzel, guest scholar, the Brookings Intitution, June 27, 2011