The Club PUBlication 01/16/2023

House Republicans prepare emergency plan for breaching debt limit The plan, previously unreported, was part of the private deal reached this month to resolve the standoff between House conservatives and Rep. Kevin McCarthy (R-Calif.) over the election of House speaker.  

By Jeff Stein , Leigh Ann Caldwell and Theodoric Meyer 
Washington Post
 
JANUARY 13, 2023 — 8:59PM

Rep. Kevin McCarthy (R-Calif.), paced in the House Chamber during voting for speaker of the House.

House Republicans are preparing a plan telling the Treasury Department what to do if Congress and the White House don't agree to lift the nation's debt limit later this year, underscoring the brinkmanship newly empowered conservatives will bring to the high-stakes negotiations over averting a U.S. default, according to six people aware of the internal discussions.

The plan, which was previously unreported, was part of the private deal reached this month to resolve the standoff between House conservatives and Rep. Kevin McCarthy (R-Calif.) over the election of House speaker. Rep. Chip Roy (R-Tex.), a leading conservative who helped broker the deal, told The Washington Post that McCarthy agreed to pass a payment prioritization plan by the end of the first quarter of the year.

The emerging contingency plan shows how Republicans are preparing to threaten not to lift the nation's debt ceiling without major spending cuts from the Biden administration. Congress must pass a law raising the current limit of $31.4 trillion or the Treasury Department can't borrow any more, even to pay for spending lawmakers have already authorized. Economists warn that not raising the debt limit could cause the United States to default, sparking a major panic on Wall Street and leading to millions of job losses.

Treasury Secretary Janet L. Yellen said Friday said that the Treasury Department will begin "extraordinary measures" next week to ensure the federal government is able to meet its payment obligations but that it cannot guarantee the United States will make it beyond early June without defaulting. White House press secretary Karine Jean-Pierre reiterated Friday that the administration will not negotiate over the debt ceiling.

Treasury Department aides declined to comment on the GOP plan, and a spokesman for McCarthy did not return requests for comment.

In the preliminary stages of being drafted, the GOP proposal would call on the Biden administration to make only the most critical federal payments if the Treasury Department comes up against the statutory limit on what it can legally borrow. For instance, the plan is almost certain to call on the department to keep making interest payments on the debt, according to four people familiar with the internal deliberations who spoke on the condition of anonymity to describe private conversations. House Republicans' payment prioritization plan may also stipulate that the Treasury Department should continue making payments on Social Security, Medicare and veterans benefits, as well as funding the military, two of the people said.

Such a move would be unprecedented and hugely controversial, and even releasing the plan could turn into a major political liability for the GOP. A hypothetical proposal that protects Social Security, Medicare, veterans benefits and the military would still leave out huge swaths of critical federal expenditures on things such as Medicaid, food safety inspections, border control and air traffic control, to name just a handful of thousands of programs. Democrats are also likely to accuse Republicans of prioritizing payments to U.S. bondholders - which include Chinese banks - over American citizens.

"Any plan to pay bondholders but not fund school lunches or the FAA or food safety or XYZ is just target practice for us," a senior Democratic aide said, speaking on the condition of anonymity to discuss a proposal that hasn't yet been released publicly.

McCarthy and House conservatives intentionally left the details of the prioritization plan unsettled in their initial agreement, with the understanding that it could take weeks for Republicans to decide which federal spending programs must be protected, the two people familiar with the talks said, and amid uncertainty about the best way to draft the legislation.

The idea poses logistical hurdles as well. In 2011 and 2013, when similar debt ceiling crises loomed, Treasury Department officials in the Obama administration said prioritizing payments was not technically possible, given the complexity of the millions of payments the federal government makes each day.

For the plan to be binding on the Treasury Department, it would have to pass not only the House but also the Democratic-controlled Senate, and President Biden would have to sign it into law.

Even if it were enacted, a debt prioritization plan could still jeopardize the trustworthiness of the U.S. government, some experts say. The proposal would call for the government to halt payment for as much as 20 percent of money that it has already promised to spend.

Still, many Republican lawmakers have long favored exploring these kinds of measures as a way to mitigate the worst economic consequences of breaching the debt ceiling. Two of the people with knowledge of internal GOP planning said the prioritization plan would force Democrats to acknowledge that it is technically possible for the Treasury Department to continue to pay bondholders even if Congress doesn't raise the debt limit.

One of these people noted that interest payments amount to roughly $500 billion per year, which can be easily met through federal revenue without additional borrowing. Republicans have explored various ways to push prioritized debt payments over the years. Rep. Tom McClintock (R-Calif.) released a bill in 2011, called the Default Prevention Act, that would require the Treasury Department to borrow above the debt limit to ensure that interest on the debt gets paid no matter what.

That version of the plan, however, might not win universal support even among Republicans, some of whom view it as circumventing the intention of the debt limit. McClintock reintroduced the bill this week. More than a half-dozen House Republicans voted against his legislation in 2015. "We agreed to advance a debt prioritization bill through regular order by the end of the first quarter of 2023," Roy said in a text message to The Post. "Now, the contours of that were not specified (there are different versions)." Grover Norquist, founder and president of Americans for Tax Reform, a conservative advocacy group, said GOP lawmakers have stepped up discussions in recent days over a debt prioritization plan.

Then-Sen. Patrick J. Toomey (R-Pa.) proposed a similar idea during the debt ceiling showdowns with the Obama administration in 2011 and 2013. At the time, Treasury Secretary Jack Lew said government computer systems could not be updated to triage tens of millions of payments, arguing that "prioritization is just default by another name."

Republicans said those claims were exaggerated to get them to back off their debt limit threats. "The reason you do this is to say, 'We offered you a bill that prioritized things, and this is what we're getting instead of that,'" Norquist said. "It's being talked about by leadership because it is necessary to be prepared. If you come to an impasse, you want a fallback position." These efforts are expected to prove controversial even among some GOP allies.

Neil Bradley, executive vice president of the U.S. Chamber of Commerce, said the business group opposes prioritizing payments. "Prioritization doesn't work. We had this discussion a decade ago," Bradley said. "If the U.S. government skips its payments to America's seniors or skips its payments to bondholders, both of those things call into question the full faith and credit of the United States government and our commitment to paying our bills. And both of them have pretty catastrophic economic consequences."

Some Republican policy experts have been convinced such efforts would fail. Brian Riedl, a policy analyst at the Manhattan Institute, studied prioritization plans at length while he was a staffer in the offices of then-Sen. Rob Portman (R-Ohio).

Riedl said such a plan would involve lopping off about 20 percent of federal spending immediately, or about $1 trillion, because revenue covers only roughly 80 percent of the $5 trillion the government spends each year.

Huge numbers of people could be hurt immediately, he said, with no good way to pick between options such as forcing hospitals to deal with the cessation of Medicare payments or depriving the Defense Department of funding. "Studying this in 2011 convinced us this would be a really bad idea and something we really did not want to happen," Riedl said. "We didn't end the exercise saying, 'This is feasible and smart.' We said, 'Let's avoid this at all costs because it's going to be a disaster.'"

Michael Strain, an economist at the American Enterprise Institute, a conservative-leaning think tank, said the prioritization plan is a "live option" among some GOP officials and is being discussed quietly. Strain acknowledged that financial markets may not be assuaged by the government meeting only some of its spending obligations but said that could prove better than the alternative of a default on U.S. interest payments. "If we have a budget deficit of 10 percent, we should be able to cover 90 percent of our spending obligations," Strain said. "If the National Park Service or FBI don't make the cut before a deal is signed, that'd obviously be better than paying no bills."

​Other longtime GOP policy hands are more apprehensive. "We will see zillions of ads about this," said Doug Holtz-Eakin, an economic adviser to President George W. Bush.