Debt Ceiling May Come Crashing Down on Treasury
Published in The Fiscal Times on May 6, 2011
On Monday, Treasury Secretary Tim Geithner notified Congress that the public debt limit will become binding within two weeks and Treasury will no longer be able to borrow additional funds. Nevertheless, Congress is taking its time on raising the debt limit, with some lawmakers still saying they will not vote for an increase under any circumstances. This is a clear shirking of their responsibilities, the nation’s finances, and the well-being of every American.
Members of Congress opposed to increasing the debt limit are like people who give their credit cards to a friend, telling them to buy whatever they like. Then they refuse to pay the bill in order to punish their friend for overspending. But their friend still has whatever was bought with the credit card and the only ones being punished are the shareholders of the credit card company, whose profits will be lower because one of its cardholders is fundamentally dishonest.
At the risk of belaboring the obvious, the federal budget deficit didn’t just suddenly arise solely because of actions taken by Democrats over the last two years. As a recent report from Pew makes clear, the bulk of it results from a recession that began in December 2007 and actions taken by Republicans when they were in power: huge tax cuts, two unfunded wars, and new spending programs such as Medicare Part D. Furthermore, Republicans themselves admit that even if their budget plans were enacted in every detail and spending is slashed, the government would still run deficits of more than $5 trillion over the next 10 years; that is what would result from the budget drafted by Rep. Paul Ryan, which all but 4 Republicans in the House voted for on April 15.
For the record, these are the deficits that House Republicans officially support (fiscal years): 2012: $995 billion; 2013: $698 billion; 2014: $489 billion; 2015: $431 billion; 2016: $478 billion; 2017: $407 billion; 2018: $378 billion; 2019: $415 billion; 2020: $405 billion; and 2021: $391 billion.
To vote for $5 trillion in additional deficits – not to mention all of the legislation that got us to today’s deficit – and then oppose allowing the Treasury to borrow funds to cover the lost revenue from tax cuts and the spending Congress enacted into law is nothing but reckless grandstanding.
It’s reckless because failure to raise the debt limit not only threatens a default that could potentially roil the entire world financial system, but would potentially deprive federal workers of their salaries, deny payments to businesses for goods and services sold to the federal government, renege on Social Security benefits to retirees, and shortchange savers who depend on interest income.
It is difficult to explain the vastness and variety of payments the Treasury must make every working day. On Monday, May 2, it paid out $6.4 billion in interest on the debt, $4.5 billion to retired federal workers, $3.7 billion to military retirees, $2.6 billion to house the indigent, and $1.6 billion in federal salaries, among other things. On Tuesday, May 3, the Treasury paid $21.8 billion to Social Security recipients, $1.6 billion to Medicare providers, and $1.6 billion to vendors that sold supplies to the Department of Defense.
Most days, the Treasury does not take in enough in taxes to cover its payments. On Monday, it took in almost $26 billion, but on Tuesday it took in less than $4 billion. Through Tuesday, the Treasury has received a little less than $1.3 trillion in taxes for fiscal year 2011, but has made payments of almost $7 trillion. The reason the payment number is so large is because it includes funds that were paid to Treasury’s lenders, whose securities matured and needed to be paid off.
Redemptions to owners of Treasury securities eat up a vast amount of its cash on a day to day basis. On Monday, it needed $316 billion to redeem various bills, notes and bonds, and on Tuesday it redeemed another $265 billion. Through Tuesday, Treasury has redeemed close to $40 trillion of maturing securities in fiscal year 2011. In almost all cases, these securities were rolled over; in effect, the Treasury simultaneously paid to and borrowed from the same people and institutions.
But of course, because the federal government runs a budget deficit, the Treasury must borrow a little more on most days. On Monday, there was a net increase in Treasury borrowing of $33 billion, on Tuesday the increase was $11 billion. This is how much the national debt increased on those days. As of May 3, the total amount of debt outstanding was $14,280,140,000 and the debt limit is $14,294,000,000.
Obviously, there is little room to spare and beginning today, May 6, the Treasury will start suspending certain payments that can legally be put off. If the debt limit is not raised by May 16, it will suspend other payments. Treasury estimates that by August 2, it will run out of maneuvering room and default on the debt will become unavoidable.
Many conservatives say that as long as it has sufficient monthly cash flow from taxes to pay monthly interest on the debt then the Treasury can just stop making payments to doctors and hospitals that provide Medicare services, stop paying salaries to federal workers, stop paying vendors that provide food and ammunition for our troops in the field, and, above all, stop paying Social Security benefits.
How the Treasury will decide who gets paid and who doesn’t is a complete mystery and a problem that no conservative to my knowledge has given a second’s thought to. There is no law allowing it to prioritize payments except in a couple of very limited cases, which it will begin using shortly. In any event, it is a very bad idea to give the Treasury secretary the unilateral power to decide who and when those who are owed money by the federal government will get it.
Although some people argue that Social Security benefits are not jeopardized as long as there are sufficient assets in the Social Security trust fund, they don’t understand that securities held by the trust fund are not marketable, and if Treasury can’t borrow it won’t have the cash to redeem them. That is why Congress had to pass a special law back in 1996 allowing the debt limit to be increased by the amount needed to pay Social Security benefits during an earlier debt limit impasse.
The real issue with the debt limit isn’t whether the government should run a budget deficit or if the deficit is too large. It’s about cash flow and making sure that the Treasury has enough on a daily basis to pay its bills and neither inconvenience nor break faith with those who sold goods and services to the government, loaned it money, or depend on federal programs for life and health. The word “irresponsible” is inadequate to describe those in Congress who use doubletalk to justify refusing to raise the debt limit.