A Treasury Fire Sale Won't Prevent Default
Veronique de Rugy takes issue with my recent blogpost arguing that there isn't enough money to pay off America's debts without a default. She claims that she is not being disingenuous on the debt. “ I have always said that the U.S. shouldn’t default on its debt” she says. In the same piece, she notes at the end:
We should fear a default. But it’s not the default that Secretary Geithner has been warning the country about. It is the one that happens some time down the road if Congress never cleans its financial house.
See that? de Rugy thinks we should fear a default, just the one that might occur in the future, say the year 2025 (when Paul Ryan claims that entitlements will consume 100% of the budget) as opposed to the year 2011.
I would argue she is being disingenuous because we should fear a default that will happen if the Congress remains deadlocked. Paul Ryan, a politician de Rugy admires, continually justifies the need for his budget because of the “predictability” of the entitlement crisis. By the same logic, a crisis that is predictable because we know it will occur in 2011 if nothing is done to change the status quo, is demanding of our attention.
So problem #1 is that de Rugy downplays the risk of a default in 2011 because she thinks a default in the future is a more immediate danger then a default in 2011.
Problem #2 is that de Rugy claims I argue something that I do not:
We do not argue that it would be easy or painless to sell assets. But it is also incorrect to argue, as he does, that all of the assets on that list are off limits.
I did not say that, my exact wording was:
While de Rugy’s point about selling off US assets is actually a strong>fair one<, there is no way selling off assets in a crisis moment makes sense, especially in the next few weeks or months.
I link to one of David Frum’s CNN columns where he argues that it would not be a bad idea to sell off some assets such as the Hoover Dam or the Tennessee Valley Authority. So no, for the record I don’t think assets are off-limits.
But this leads to Problem #3. Does de Rugy think that the Treasury can or should plan a massive garage sale within the next ten weeks of all it’s assets? What if we get to late July and there is still no deal on the debt ceiling, does she think that a sale can be done in a week?
de Rugy notes that her paper “only lists financial assets rather [than] all of the things that Treasury could sell (such as lands and building)” To give a few real world examples of the prolonged process that it takes to sell government land and buildings, it was announced in 2005 that the Walter Reed Army Medical Center would be closed and sold in five years. Six years later, in 2011, I see that they are still trying to settle zoning issues and the purchase price for the facility. From doing a quick google search, I find out that military housing privatization can take between 8 and 14 months. The Bureau of Land Management says that it can take “a year or longer” to sell land. And does de Rugy think that if the markets know that the US is in a crisis and selling off assets to avoid a default, that the government would get anywhere near the best possible price for what they selling?
So I suspect that selling our assets off on short notice will likely not occur with the turn around needed to have this be a viable option.
Some of the other items on her list either don’t make the cut to be large enough to fill the gap (it turns out TARP won't pay for the military) or they are retirement funds and trust funds.
If there is one thing I’ve learned from listening to Paul Ryan, it's that it is important to make sure that people near retirement who have planned their lives around receiving benefits are able to receive them. This is why his plan has a firewall to keep Medicare the same for anyone older than 55. (Cynics may suggest that this is because the GOP has an older electorate, but let's take him at his word.)
I assume that most politicians would prefer to keep the Military Retirement Fund, which she lists, as off limits for what the Treasury can raid in 2011. Think of the campaigns ads that could be run (“Congressman X allowed the retirement funds of our nation’s heroes to be depleted...”).
Perhaps some of these retirement funds are more equal than others and she can list which ones should be targeted first? Or maybe we should have Pat Toomey and Tom McClintock make the list? Either way, even de Rugy has writen that raiding the retirements of our soldiers can only drag this out until September.
For Problem #4, we return to Problem #1, where de Rugy again makes a false equivalence. de Rugy argues:
forcing the Treasury to sell assets in order to pay the government’s bill may be undesirable, and brought about by a series of repeated and unbelievably irresponsible decisions by our leaders for years — yet it would be just as irresponsible to continue to pass debt-limit increases without putting in place a credible plan to reduce future government spending and put the nation back on fiscal track so that Treasury can eventually pay off the nation’s debt.
No. Once again, it is not “just” as irresponsible. If we increased the debt limit without structural changes then there would be 100% certainty that the United States would be able to meet all it’s debt obligations and there would be no default in 2011. As opposed to the de Rugy plan where the risk of default is the ominous cloud that hangs over the entire discussion during 2011.
de Rugy want’s to see the country “change the path that it is on.” This is a good goal. What is not a good goal is pretending that the threat of default in the year 2011 is less of a crisis than a default down the road for a crisis that hasn’t arrived yet.
de Rugy states “ the U.S. shouldn’t default.” If this is what she believes, then she should writes op-eds stating that, and telling lawmakers not to entertain the risk of default, as several of them have decided to do. (Such as Paul Ryan, who's said that default would be OK for a few days.)
During the debate over the Government shutdown, Boehner told his caucus that while they would drive a hard bargain, a shutdown was something the GOP wanted to avoid. It is not discouraging that Republicans are trying to drive a hard bargain on the debt ceiling (my own perception is that the Senate and White House have allowed themselves to be seen as pliable and able to get concessions) it is just discouraging that they can't seem to remember the lesson they learned during the government shutdown: that they are trying to avoid a doomsday scenario, not test one out "for a day or two or three".
Unfortunately, by advertising that “there is a world between reaching the debt ceiling and defaulting”, by pointing out that the Treasury has retirement funds it can raid, and by imaging that Geithner can auction off land and assets in a week, de Rugy is not helping the cause of those would want to avoid default.
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UPDATE: The paragraph referring to "good goals" contained a double-negative which misconstrued it's meaning. It has been corrected.