Debt ceiling: Here’s why Janet Yellen doesn’t think prioritizing payments would avoid a debacle



At some point later this year, the US will not be able to pay all of its obligations on time and in full unless Congress acts to address the debt ceiling.

While talks between House Republicans and the White House remain stalled, some GOP lawmakers are looking at prioritizing certain payments in hopes of avoiding – or at least minimizing – the serious consequences of the US defaulting on its debt.

The idea isn’t new. It’s been floated before in past debt ceiling dramas, though it has never had to be implemented because Congress has always addressed the borrowing cap in time.

But in this round, the heightened political polarization in Washington, DC, may drive the nation closer to the edge of default than has been the case in years.

The US hit its $31.4 trillion debt ceiling in January, forcing the Treasury Department to take extraordinary measures to allow the federal government to continue paying its bills in full and on time. A default could come over the summer or in early September, according to various analyses.

Treasury Secretary Janet Yellen has repeatedly stressed the importance that Congress come together to address the borrowing cap as soon as possible. That warning, however, has not swayed President Joe Biden and House Republicans, who remain in a standoff over whether to include spending cuts in a debt ceiling measure.

Prioritizing payments to cover only certain obligations would not avoid a US debt default, Yellen has told lawmakers in recent hearings.

“Prioritization is effectively a default by just another name,” Yellen told senators at a committee hearing last week.

The US has a strong credit rating because of its commitment to be responsible in paying bills that it has already incurred, she said, noting that at least one credit rating agency has said that failure to pay any bill would call the nation’s credit rating into question.

Yellen made it clear that she does not agree with prioritization.

“It’s simply a recipe for economic and financial catastrophe to think we can pay some of our bills and not all of them,” she said.

She also said she cannot assure that the idea is feasible, adding there’s a reason why Treasury secretaries of both parties have rejected prioritization in the past.

“The government, on average, makes millions of payments each day, and our systems are built to pay all of our bills on time and not to pick and choose which bills to pay,” she said. “It would be an exceptionally risky, untested and radical departure from normal payment practices of agencies across the federal government.”

The GOP-led House Ways and Means Committee earlier this month passed the Default Prevention Act, which would modify Treasury’s authority when the US hits its borrowing cap to allow it to issue debt to pay principal and interest on the public debt, as well as Social Security and Medicare benefits.

It also directs Treasury to pay obligations related to the Department of Defense, military pay and family benefits and veterans programs before all others.

And it would prohibit Treasury from paying for government travel, compensation for the president, vice president and executive branch appointees, pay for members of Congress and compensation for federal employees who work on behalf of unions, unless all other obligations of the federal government were already met.

The committee does not consider this a prioritization bill since it allows Treasury to open new lines of credit to continue making payments on the debt, Social Security and Medicare, a spokesperson said. It seeks to avoid defaulting on obligations to creditors, which would inflame the financial markets.

But if the US does not meet all of its obligations on time, it would still be considered a default, said William English, finance professor at the Yale School of Management and former director of the Federal Reserve Board’s division of monetary affairs.

“There would still be a lot of people and entities not being paid. So in that sense, it’s still a default,” he said. “I think the credit rating agencies would still be upset.”

“So it’s not putting an end to default,” he continued. “It’s setting a bunch of priorities for spending that were not the priorities that Congress itself set when they passed spending bills.”

Source : CNN