Transcript: Senate hearing Q&A with Sen. Max Baucus & Treasury Secretary Jack Lew on the debt ceiling – Oct. 10, 2013

Partial transcript of Q&A between Sen. Max Baucus (D-Mont.) and Treasury Secretary Jack Lew on the potential impacts of the failure to raise the debt ceiling. The Senate Finance Committee hearing was held on Oct. 10, 2013:

Sen. Max Baucus (D-Mont.):
…I’d like to focus a little bit on a concept that some suggest there’s a way out of this problem and some suggest it’s feasible and I disagree with and it’s called prioritization. You touched on it. Could you just briefly tell us what decisions you would have to make as Treasury Secretary assuming interests is paid on the debt, you then have to choose which other obligations to be paid. I know you can’t tell us which ones nor should you tell us. Social Security, Medicare, military, farm program and whatnot. But go through the process and describe what the actual legal and administrative problems and consequences would be. And include what total that would be. My understanding is it’s about 70% to 80% of those programs could be paid, if they’re all paid, and also what effect it would have on the Gross Domestic Product. Just walk us through the prioritization difficulties please.

Treasury Secretary Jack Lew:
Mr. Chairman, let me start by saying what I think should be obvious. If we don’t have enough cash to pay all our bills we will be failing to meet our obligations, and under any scenario, we will be defaulting on obligations. There is no plan, other the raising the debt limit, that permits us to meet all of our obligations.

When questions are raised about prioritization, the first question is interest and principal on the debt. Then as you said, Mr. Chairman, what else?

The legal issues regarding interests and principal on the debt are complicated. Let me remind everyone, principal on the debt is not something we pay out of our cash flow of revenues. Principal on the debt is something that is a function of the markets rolling over. So there’s a question of what we can do as a government and how the markets function when the government is failing to pay all of its bills. We’ve never been there, and I think anyone who suggests they know exactly what that means would be projecting after 224 years of the history of paying all of our bills what happens if we stop paying all of our bills.

Mr. Chairman, I don’t know how you could possibly choose between Social Security and veterans’ benefits, between Medicare and food assistance. These are obligations we’ve made. You know, we wouldn’t have the money to necessarily pay our troops in full. We wouldn’t have the money to pay our veterans their benefits in full.

Our systems were not designed to not pay our bills. Our systems were all designed to pay our bills. The legal issues are many. I do not know how you could make the decisions. I do not think the legal authorities are clear at all, and I do not think the administrative process would permit the system to work. We write roughly 80 million checks a month. The systems are automated to pay because for 224 years, the policy of Congress and every President has been we pay our bills. You cannot go into those systems and easily make them pay some things and not other things. They weren’t designed that way because it was never the policy of this government to be in the position that we would have to be in if we couldn’t pay all our bills.

Sen. Max Baucus (D-Mont.):
…The revenue is a little bit sketchy. It’s lumpy. It comes in unanticipated amounts. Could you go over that?

Treasury Secretary Jack Lew:
Well, that’s very much the case, Mr. Chairman. We have estimates and if these estimates are wrong, then there is the real risk of miscalculation. And I would just note that even in the period of time that I have been keeping Congress informed, we’ve seen swings in the normal course of things of $20 billion in terms of our estimate of what the cash on hand would be. And that’s not because anyone did anything wrong. It’s because quarterly cash receipts were not exactly where they were estimated to be.

And I’ll also remind everyone that we’re now in an unusual position with the government shutdown. That is having economic consequences that we’re just beginning to understand. All the revenue projections that we have based our analysis on were based on a world where the government was functioning and where all of the services that relate to government activity were happening. So it didn’t take into account any layoffs that might occur; it didn’t account any reduction in payroll or payroll taxes. So I have to assume that the estimates from before shutdown are likely not to be an accurate predictor of exactly where we are.

Sen. Max Baucus (D-Mont.):
…How do you re-program the computers?

Treasury Secretary Jack Lew:
Well, Mr. Chairman, I have to tell you, I don’t believe there is a way to pick and choose on a broad basis. This system was not designed to be turned off selectively. So anyone who thinks it can be done just doesn’t know the architecture of our multiple payment systems that are very complex. They were designed properly to pay our bills; they were not designed to not pay our bills.

Sen. Max Baucus (D-Mont.):
So prioritization just doesn’t work?

Treasury Secretary Jack Lew:
You know, I think prioritization is just default by another name. It’s just saying we’ll default on some subset of our obligations. But we are still – by definition, if we don’t have enough money to pay all of our bills, we will be in default of our obligations.

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2 Comments on “Transcript: Senate hearing Q&A with Sen. Max Baucus & Treasury Secretary Jack Lew on the debt ceiling – Oct. 10, 2013

  1. Pingback: Debt Ceiling: Treasury Secretary Jack Lew says government default will hurt seniors the most | What The Folly?!

  2. Pingback: Debt Ceiling: Short-term Treasury yields nearly triples due to debt limit brinksmanship | What The Folly?!

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