WASHINGTON – The GOP-controlled House voted Thursday to make sure U.S. bondholders and people on Social Security get paid if the government hits its borrowing limit.
The move comes as Republicans grapple with the hot-potato issue of raising the government’s borrowing limit later this year, one of the few must-do items on a dysfunctional Washington’s agenda this year. The legislation is a nonstarter with Democrats controlling the rest of Washington and is likely to be an afterthought when the debt limit debate turn serious this summer or fall.
The idea behind Thursday’s legislation, passed on a near party-line 221-207 vote, is to lessen the consequences of a U.S. default on its debt obligations if Congress and President Barack Obama can’t find a way to lift the government’s borrowing limit later this year.
Democrats opposing the legislation said it would guarantee a downgrade of the debt by suggesting the nation would be willing to pay some of its bills and not others. They’ve dubbed it the “Pay China First Act,” saying it prioritizes payments to foreign investors over funding important domestic programs, including benefits for veterans and soldiers, Medicare and companies that do business with the government.
“Our constituents don’t have the luxury of waking up one morning and saying, ‘You know what? I’m only going to make my mortgage payment. I’m not going to make my car payment. I’m not going to make my credit card payments,'” said Rep. Chris Van Hollen, D-Md. “If they did that, what would happen? They would lose their creditworthiness. For the United States of America to say, ‘We’re going to pay some bills but not all’ would have hugely damaging impacts on the economy.”
GOP supporters countered that the most damaging thing for the government’s credit rating would be to fail to pay bondholders.
“It is imperative that credit markets are supremely confident that their loans are secure,” said the bill’s sponsor, Rep. Tom McClintock, R-Calif.
The measure comes as Washington looks ahead to another showdown over must-pass legislation to increase the government’s borrowing cap. The government has reached its current debt limit of $16.4 trillion, but Congress moved in January to allow the Treasury Department to borrow enough money to meet its obligations. That unique authority expires May 18, but the government retains the ability to juggle its books to buy several more months’ worth of time before facing default.
GOP leaders had hoped to spark a debt confrontation in July. However, the government’s finances are doing better than expected, and the latest estimates show that the debt limit won’t have to be raised until October. On Thursday, mortgage giant Fannie Mae announced it would make a $59 billion dividend payment to Treasury by the end of June, a development that solidified earlier estimates that the government wouldn’t hit the default point until October.
The White House says that Obama won’t negotiate with Republicans demanding spending cuts as a condition of raising the borrowing cap. Two years ago, arduous talks between Obama and Republicans produced a hard-fought debt limit increase, but only after delays pushed the government uncomfortably close to default, leading to a downgrade in the U.S. credit rating.
“”The era of anybody using the potential of default or tarnishing the full faith and credit of the United States as budget tactic or negotiating tool has to be over,” White House economic adviser Gene Sperling told reporters Thursday. “He’s made clear that he’s simply not going to negotiate on the debt limit, that it is the responsibility of the United States Congress to authorize payments of debt that have already been obligated.”
The new legislation directs the Treasury Department to borrow money to pay bondholders and make sure Social Security is solvent. This additional borrowing authority would give Treasury the capacity to issue enough new debt to stave off the default date for another month or two, according to calculations by the Bipartisan Policy Center think-tank in Washington.
The White House has promised to veto the measure in the unlikely event that the Democratic-led Senate approves it. Even some senior Republicans are only lukewarm supporters at best, and GOP leaders shunned the measure in two prior debt showdowns with Obama.
“If the U.S. government legally commits to paying someone a benefit, or agrees to pay a firm for a good or a service, the U.S. government should fulfil that agreement in a timely fashion,” said former Bush administration economic adviser Keith Hennessey. “To do otherwise is taking the first step to becoming a banana republic.”
In promising a veto, the White House said in a statement: “This bill would threaten the full faith and credit of the United States, cost American jobs, hurt businesses of all sizes, and do damage to the economy. It would cause the nation to default on payments for Medicare, veterans, national security and many other critical priorities. This legislation is unwise, unworkable and unacceptably risky.”
The GOP legislation is most strongly supported by rigidly conservative House Republicans like McClintock, Steve Scalise of Louisiana and Scott Garrett of New Jersey. The idea for such GOP conservatives is that it’s more important to make sure the government doesn’t default on the “sovereign debt” owed to creditors than make payments on other obligations.
“Paying sovereign debt is not the same thing as borrowing money so that this institution and this town can continue to spend money,” said Rep. Jeb Hensarling, R-Texas.
Democrats jumped on an interview with House Speaker John Boehner, R-Ohio, likening the measure to a bankruptcy proceeding.
“Those who have loaned us money, like in any other proceeding, if you will, court proceeding, the bond holders usually get paid first. Same thing here,” Boehner told Bloomberg Television.
“This bill means that the United States of America will voluntarily act like a bankrupt corporation and pay China before we pay our troops. How sad,” said No. 2 House Democrat Steny Hoyer of Maryland.