David R. Henderson  

Geithner and Debt: A Better Analogy

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The Wallison Dissent... Excellent Sentences...

I posted last week on the dispute between Treasury secretary Tim Geithner and U.S. Senator Pat Toomey and argued that Toomey got the best of Geithner in the debate. I quoted this argument that Geithner used against "prioritizing" federal government revenues to be paid as interest on the debt:

A homeowner could decide to "prioritize" and continue paying monthly mortgage payments, while opting to cease paying other obligations, such as car payments, insurance premiums, student loan and credit card payments, utilities, and so forth. Although the mortgage would be paid, the damage to the homeowner's creditworthiness would be severe.

I pointed out the problem with this analogy. But now that I've thought about it more, I've got a more a propos analogy.
A homeowner could decide to "prioritize" and continue paying monthly mortgage payments, while opting to cease buying concert tickets, buying a new car, going on trips to Europe, spending money at a tanning salon, buying expensive Champagne, and paying gangs to prevent powerless people from using marijuana.

Or, to get beyond analogies, here's what Geither could have said:
We in the U.S. government could decide to "prioritize" payments of interest on the debt but only by cutting foreign aid to Israel and Egypt, ending the wars in Iraq and Afghanistan, bringing the troops homes from Asia, Africa, and Europe, ending subsidies to farmers, getting the federal government out of schools, getting the U.S. out of the United Nations, the World Bank, and the IMF, ending the Department of Energy, and quitting paying gangs to prevent powerless people from using marijuana.

HT to Tom Lee.


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CATEGORIES: Fiscal Policy



COMMENTS (5 to date)
david writes:

I think Senator Toomey would have blanched more at your choice of analogy.

State of Thought writes:

Mr. Henderson's analogy seems to have strayed off course by assuming that the govt is paying for all sorts of luxuries. That is incorrect. There may be an extra cookie somewhere in the cupboard, but there's no giant bottle of Champagne and not a hint of caviar. That we've had to borrow bread to feed the kids does not mean there is a cake stockpile.

A more accurate analogy would be to cease buying spaghetti and milk, buying work clothes, and paying the electric bill because the wealthy billionaire who owns our company talked us into taking a pay cut so he could shift even more money into his own well-filled pockets.

rpl writes:

David,

I think the thing that is getting lost in all of this is that all these expenditures are authorized by an appropriations bill which is itself voted on by the Senate. Senator Toomey seems bizarrely unaware of this fact. He talks of "getting control of the budget" as though the budget is something that just happens, like snowstorms or crappy reality TV shows. The budget is the way it is because he and his colleagues voted it that way.

So, what's the appropriate "homeowner" analogy in this circumstance? The best I can come up with is that the homeowner, despite his deteriorating budget situation decides to go out to a restaurant anyhow. He sits down and orders his food, but before he eats it he gets an attack of conscience and decides to get up and leave without eating.

Is our homeowner within his rights to do that? Probably, I guess, but surely we can agree that this is hardly admirable behavior, can't we? At the very least our homeowner is an irresponsible prat for not adjusting his spending before he went out and ordered a meal. One might even suggest that perhaps the homeowner should, out of fairness to the restaurateur, suck it up one last time and resolve to do better next time.

I wonder if Toomey would agree that Congressional salaries are among the things that could be "deprioritized" when the debt ceiling is reached. Anybody care to bet on that one?

Sonic Charmer writes:

rpl,

If the Senate voted to spend money on XYZ then surely (prior to having spent it) the Senate can later vote not to spend it in the event they need it for other obligations. Which, I gather, is what the suggestion is (no?).

This is not like ordering food and then running, because the 'food' has not been 'ordered' until the money has been spent. Or, if there are cases where the food has been ordered (i.e. contracts have been signed), then surely the Senate could (and would!) honor that particular spending in any 'prioritization' scenario - precisely because not to do so would be a default. But you can't have it both ways; something is either a legal debt obligation or it isn't.

And if/when it's not, not paying it isn't a 'default' or a 'de facto default' whatever that means. The word 'default' has a specific meaning and it does not include 'deciding not to spend money that you had earlier thought you were gonna'.

Even more to the point, the original claim by Geithner that bondholders will 'treat it as a default' if you decide to tighten your belt on other stuff, in order to pay them, is still bass-ackwards. If someone owes you money, are you pleased or displeased to learn that they are tightening their belt and pledging to prioritize paying you back over all other stuff? This isn't even a hard question.

rpl writes:
Or, if there are cases where the food has been ordered (i.e. contracts have been signed), then surely the Senate could (and would!) honor that particular spending in any 'prioritization' scenario - precisely because not to do so would be a default.
Note that this is not in fact true. Budget rescissions on signed contracts can and do occur, and people occasionally get laid off because of them. Continuing resolutions wreak even further havoc. When it comes to contracts, the government is the ultimate dine and dash artist. Ironically, the commitments it considers most inviolable are the ones that courts have ruled are not in fact contractual obligations: entitlements.

I understand the argument you're making, and I mostly agree with it (which is why I weaseled a little by saying "might"). Still, I think it would be better, all things considered, if the government passed responsible budgets and stuck to them, rather than passing irresponsible budgets and then manufacturing a crisis partway through the year to try to fix it up.

Furthermore, none of this changes the sheer Through the Looking Glass weirdness of a Senate passing a budget that has a deficit and then acting shocked (shocked!) to discover that the deficit will add to the total debt. Just what did Toomey and his colleagues think was going to happen when they passed that budget? It's hard to escape the conclusion that this is all posturing. The Senate will bluster a bit to show it's being hawkish on the budget, and then they'll go ahead and spend the money anyhow, just like they intended to all along.

Even more to the point, the original claim by Geithner that bondholders will 'treat it as a default' if you decide to tighten your belt on other stuff, in order to pay them, is still bass-ackwards.
When a company cuts its dividend, doesn't its share price usually tumble by more than the value of the lost dividends? It turns out that when you take drastic measures to reduce expenses, people sometimes assume that it's an indicator about your financial stability going forward. Why should the US government be immune to such speculations?

In this case, it seems plausible to me that refusing payment because of the debt ceiling (i.e., instead of actually cutting the budget during the budgeting process) might send an adverse signal about the country's political stability. A bondholder might reasonably conclude that he escaped unscathed this time, but that his investment might become the victim of political brinkmanship the next time. Furthermore, even if the treasury is ordered to prioritize interest (and principal?) payments, that might prove impossible if the timing of cash inflows and outflows lines up wrong. By the way, tax return season is fast approaching. Do taxpayers claiming refunds rank ahead of or behind bondholders in the priority?

You seem to think that I'm opposed to cutting the budget, but you're mistaken. I'm all for cutting the budget, but that's not what Toomey is proposing. He is proposing that we pass the same old deficit-ridden budgets and then play chicken with the debt ceiling. To pass this off as "fiscal responsibility" is simply laughable. I don't understand why so many fiscal conservatives are in favor of it.

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