The Honorable Michael B. Enzi
The Honorable John Cornyn

The Honorable John Thune

The Honorable Richard Burr

The Honorable Johnny Isakson
The Honorable Rob Portman

The Honorable Patrick J. Toomey


DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

SECRETARY OF THE TREASURY

October 4, 2013

The Honorable Orrin G. Hatch
Ranking Member

Committee on Finance

United States Senate
Washington, DC 20510

Dear Senator Hatch:

I am writing in response to your recent letter regarding the debt limit and the nation’s fiscal
policies. As we discussed during our meeting on September 18, it is imperative that Congress
act immediately to extend the nation’s borrowing authority so we can honor all of the country’s
past commitments. The President remains willing to negotiate over the future direction of fiscal
policy, but he will not negotiate over whether the United States should pay its bills.

Your letter asks me to detail how long or how great of a debt limit increase the Administration is
seeking. Only Congress can authorize an increase in the nation’s borrowing authority, and
therefore Congress must choose how long to extend the debt limit. A longer period of certainty
would help protect our economy from future political brinksmanship. If Congress fails to meet
its responsibility, however, it could be catastrophic for the financial markets, the ongoing
economic recovery, and the jobs and savings of millions of Americans. I have a responsibility to
be transparent with the American people about these risks. And I think it would be a grave
mistake to discount or dismiss them. For these reasons, I have repeatedly urged Congress to take
action immediately.

Your letter also makes a number of factual assertions about the history of the debt limit, its role
in prior budget negotiations, and our current fiscal situation. I respectfully disagree with these
assertions for the reasons described below.

Origins of the Debt Limit

Article I of the Constitution exclusively grants Congress — not the Executive Branch — the power
of the purse and the power to “borrow money on the credit of the United States.” Beginning in
1789 and for approximately 130 years thereafter, Congress generally had to act each and every
time before Treasury borrowed money. If that practice existed today, Congress would have to
approve each individual Treasury auction of bonds, bills, or notes. Since World War I, however,
Congress has provided Treasury with increased flexibility to manage the federal debt in an
efficient and cost-effective manner.


Through a series of steps, Congress enacted a more regularized and less politically difficult
process for authorizing the issuance of debt to pay existing obligations. In 1917, Congress
granted Treasury broad authority to borrow. This eliminated the need for Congress to approve
each individual debt issuance, but Congress also began enacting specific limits for different
categories of borrowing, such as bonds and certificates of indebtedness. Between 1938 and
1940, Congress further simplified the process and provided even greater flexibility to Treasury.
It replaced the separate borrowing limits with one single combined limit that covered nearly all
public debt. Although Congress continued to make changes over the following decades, this was
the beginning of the modern debt limit.

The Debt Limit and Budget Negotiations

Since World War II, Congress has routinely raised the debt limit through standalone legislation
signed by both Democratic and Republican Presidents. Since President Reagan was inaugurated
in 1981, Congress has enacted 45 different pieces of legislation to raise, extend, or revise the
definition of the debt limit. During President Reagan’s two terms alone, Congress raised the
debt limit 18 times, even though Democrats controlled the House of Representatives for the
duration of his presidency. In emphasizing the need to raise the debt limit, President Reagan
wrote to Congress in 1983 that the “full consequences of a default — or even the serious prospect
of default — by the United States are impossible to predict and awesome to contemplate.”

Your letter suggests that the debt limit has traditionally been used as a tool to address budgetary
and fiscal issues. This is not historically accurate. According to the Center on Budget and
Policy Priorities, between 1981 and 2011, policymakers enacted nine bipartisan deficit reduction
packages. Only three of those legislative packages also included debt limit increases:

e The Gramm-Rudman-Hollings budget compromises in 1985 and 1986;
e The Budget Enforcement Act in 1990; and
e The Balanced Budget Act in 1997.

In each of these three instances, the debate was driven by fiscal policy and how to achieve deficit
reduction in a responsible, balanced manner. Neither political party thought that defaulting on
our debt was a serious, credible option. In 1985, the need to raise the debt limit served as a
deadline for budget negotiations. In 1990, Congress and the President worked together to avoid
across-the-board cuts from the original Gramm-Rudman sequestration, which were universally
viewed as the wrong way to reduce the deficit. In 1997, Congress added a debt limit increase at
the end of negotiations, after the parties agreed on a deal to reduce the deficit responsibly and
grow the economy. I participated personally in many of these negotiations, and I do not recall
anyone ever seriously suggesting that the United States should fail to pay its bills.


The summer of 2011 was different. Certain Members of Congress argued that default was an
acceptable outcome if they were unable to achieve their legislative objectives. Rather than enter
into a good-faith compromise on fiscal issues, these Members argued that the United States
should voluntarily fail to pay its bills if their position was not accepted. Our economy paid a
significant price for these irresponsible and protracted threats. Business and consumer
confidence dropped; financial markets were jarred; and ultimately, for the first time in history,
the AAA credit rating of the United States was downgraded. Using the full faith and credit of
the United States as a bargaining chip is not an opportunity, as your letter suggests. It is reckless
and irresponsible.

Current Fiscal Policy and Reform Proposals

Your letter emphasizes the importance of addressing our significant, long-term fiscal imbalance.
Although I share the same goal, the facts cited in your letter are incomplete and misleading. As
your letter correctly notes, the government’s response to the 2008 financial crisis and ensuing
recession led to increases in both federal deficits as a share of GDP and debt held by the public.
Of course, those increases were also driven by two wars and the impact of fiscal policy decisions
made by the previous Administration. Nonetheless, by the end of this year, we expect the deficit
will have fallen by more than 50 percent since the President took office. The Congressional
Budget Office (CBO) projects that the deficit will drop to 4.2 percent of GDP in 2013, as a result
of a stronger economy and the deficit reduction that the President has already signed into law.
CBO further projects that deficits will drop to 2.1 percent of GDP by 2023.

Despite this progress, I agree that we need to work together to achieve long-term fiscal reform.
The President has been clear that he remains willing to negotiate on broad fiscal policy. He has
repeatedly proposed a comprehensive and balanced package of deficit reduction proposals that
contain the “real, structural fixes” to entitlement programs that your letter references. For
example, the President’s most recent federal budget proposes chained CPI and Medicare means-
testing for higher income seniors, as well as reforms to the tax code that generate modest
revenues. The President has been — and continues to be — prepared to support balanced
legislative action that would reduce our deficits and reform our entitlement programs.

Thank you for your letter. I strongly agree that the United States government must pay its
obligations. Therefore, I respectfully urge Congress to extend the nation’s borrowing authority
immediately. Separately, the Administration remains committed to working with Congress to
achieve meaningful and balanced long-term deficit reduction.

Sincerely,
Jacob J. Lew
ce: The Honorable Charles Grassley

The Honorable Michael Crapo
The Honorable Pat Roberts