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.