Treasury Can't Just Pick and Choose Whom to Pay

A blog about business and economics.
Sept. 27 2013 11:27 AM

Treasury Can't Just Pick and Choose Whom to Pay

NEW YORK - FEBRUARY 24: How does this thing work?

Photo by Stephen Chernin/Getty Images

The Federal Government will run out of cash on around October 17 unless congress extends the Treasury Department's authority to borrow money. If it doesn't, we'll have a legal paradox—there are bills the Treasury is legally required to pay, and there are legal restrictions on the Treasury's ability to get the money to pay them.

One idea that often comes up in this context is that the government could do what a household or a firm experiencing a cash crunch would do—prioritize payments. You can let your utility bills slide for a month or two or three without actually losing service, and you can hope to scrounge up some money during the interim. The problem is that the federal government is literally not set up to do this. Jack Lew doesn't sit around in the evenings logged in to some online bill pay system deciding which checks to send and which not to send. As RBC Capital markets via Cardiff Garcia writes, the system just either runs or it doesn't:

The Treasury’s systems do not clearly mark what scheduled payments are for what reasons, so it is impractical to try to prioritize payments. And clearing systems like Fedwire do not allow defaulted securities to flow, so the system would seize. In order for the clearing systems to work, the Treasury would need to notify the market of a default almost a day before the default happened (to give everyone time to modify payments), and that is not going to happen because the Treasury will not want to declare default while Congress still has time to pass a bill.
Also the Fed does not take defaulted securities as collateral at the discount window, even if those securities are still trading at par.

My view is that in practice the responsible course of action for the executive branch and the Federal Reserve would be to just ignore the law and insist that the debt ceiling doesn't bind (or something) and try to create a constitutional crisis to forestall a financial one. But they in practice can't juggle payments. What's more, they have no more legal authority to prioritize payments than they do to borrow extra money. All administrations find themselves charged with administering programs that they don't support. President Obama can't just refuse to pay out farm subsidies any more than President Mike Lee will be allowed to refuse to pay Social Security benefits.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Two Damn Good, Very Different Movies About Soldiers Returning From War

The XX Factor

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.


Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Trending News Channel
Sept. 19 2014 1:11 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Sept. 20 2014 11:13 AM -30-
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
Brow Beat
Sept. 20 2014 3:21 PM “The More You Know (About Black People)” Uses Very Funny PSAs to Condemn Black Stereotypes
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 20 2014 7:00 AM The Shaggy Sun
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.