The Debt Ceiling Could Hit Sooner Than Anyone Thinks

Default would be a disaster. So why does no one know when it’d happen?

No one truly enjoys a debt limit fight.
National Journal
Patrick Reis and Matt Berman
Patrick Reis Matt Berman
Aug. 27, 2013, 2 a.m.

The debt ceil­ing is a time bomb with a faulty timer: All of Wash­ing­ton sees it tick­ing to­ward de­fault, but nobody knows ex­actly when it will ex­plode.

In a let­ter to House Speak­er John Boehner, Treas­ury Sec­ret­ary Jac­ob Lew pro­jec­ted that the de­part­ment’s “ex­traordin­ary meas­ures” cur­rently be­ing taken to avoid de­fault will be “ex­hausted in the middle of Oc­to­ber.” From there, Lew writes, the United States would have only whatever cash Treas­ury has on hand, es­tim­ated to be about $50 bil­lion. Lew calls that po­ten­tial situ­ation “un­ac­cept­able.”

But Lew, like every­one else, is just work­ing off his de­part­ment’s best guess.

Treas­ury doesn’t get to pick a date for de­fault. Rather, the de­part­ment is sub­ject to the ebb and flow of gov­ern­ment rev­en­ues and ex­pendit­ures. And those fig­ures are any­thing but pre­dict­able, be­cause how much the gov­ern­ment owes its cred­it­ors on a giv­en day — and how much cash it has to pay them — is based on a host of volat­ile eco­nom­ic, leg­al, and polit­ic­al factors.

“It’s very dif­fi­cult to tell, par­tic­u­larly this far out,” when ex­actly Treas­ury would have to de­fault on its debts, said Steve Bell of the Bi­par­tis­an Policy Cen­ter. “Oc­to­ber is an ex­tremely lumpy month. Some days, there’s cash com­ing in; oth­er days, there’s cash go­ing out.”

And that un­pre­dict­ab­il­ity makes an ac­ci­dent­al de­fault all the more likely, Bell said, even if neither side wants it to hap­pen.

“That’s the danger. It’s not that some­body plans to do this,” he said. “It’s that this is the time when it’s very, very easy for mis­takes to get made.”

Bell, a former top Re­pub­lic­an staffer on the Sen­ate Budget Com­mit­tee, cited a host of ex­tern­al factors that could shift Treas­ury’s de­fault date. Chief among them: an un­ex­pec­ted mil­it­ary ac­tion that would cost bil­lions daily, such as the one many are call­ing on the Obama ad­min­is­tra­tion to un­der­take in Syr­ia.

An­oth­er big ques­tion is wheth­er Treas­ury can delay cer­tain in­ter­gov­ern­ment­al pay­ments — such as con­tri­bu­tions to the Medi­care and So­cial Se­cur­ity trust funds — without run­ning afoul of leg­al chal­lenges. That is an open ques­tion, Bell said. “I don’t know, and I just don’t think any­body knows,” he said. “It has nev­er been tested be­fore.”

Even the stand­ard daily vari­ation in the num­ber of bills Treas­ury deals with could change the equa­tion, Bell said. “They do five [mil­lion] to 10 mil­lion trans­ac­tions a day. A lot are big ones from De­fense; a lot are tiny from repair­men. They are clumpy, and you put a few to­geth­er, all of a sud­den you’re talk­ing about” $4 bil­lion to $6 bil­lion.

The “middle Oc­to­ber” dead­line came about un­der ar­ti­fi­cial cir­cum­stances to be­gin with. In the be­gin­ning of this year, fa­cing the “fisc­al cliff,” Con­gress made a deal to put off a deal on the debt lim­it un­til May 19. At that point, Lew told Con­gress he was be­gin­ning the “stand­ard set of ex­traordin­ary meas­ures” to keep the gov­ern­ment fun­ded. It’s those meas­ures that will run out some­time this fall.

In the sum­mer of 2011, the U.S. al­most found out ex­actly what hap­pens when Treas­ury hits the ceil­ing. Look­ing at an early-Au­gust dead­line, Con­gress was able to come to a deal to avert a de­fault crisis only at the last minute. So what would have happened if that had fallen through? Un­able to bor­row money, by Au­gust, the Treas­ury De­part­ment would have been un­able to pay al­most half of its 80 mil­lion monthly pay­ments. Based on how the de­part­ment de­cided to pri­or­it­ize pay­ments, that could have in­cluded checks to the 29 mil­lion So­cial Se­cur­ity re­cip­i­ents that were due to go out on Aug. 3. By that date, Treas­ury would have already had an es­tim­ated cash de­fi­cit of about $20 bil­lion.

And it’s not as if all of the hor­rors of 2011 were aver­ted. Ac­cord­ing to a Gov­ern­ment Ac­count­ab­il­ity Of­fice re­port, just the delay in com­ing to a debt-lim­it deal alone res­ul­ted in a $1.3 bil­lion in­crease in Treas­ury’s bor­row­ing costs for fisc­al 2011.

As squishy as the dead­line date is, it’s really just a product of the mal­le­able law that birthed it. Con­gress cre­ated the debt lim­it in 1939 in the run-up to World War II, largely as a means of giv­ing Treas­ury a high­er bor­row­ing lim­it with more flex­ib­il­ity to help the war ef­fort — a sur­pris­ing ori­gin for a law that has be­come Con­gress’s prin­cip­al point of lever­age for ex­tract­ing spend­ing cuts from the Obama ad­min­is­tra­tion.

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