If you’ve followed U.S. economic news in recent weeks, you probably know about the standoff in Congress over the debt ceiling — the cap on borrowing to pay for expenses the federal government has already incurred.
Last week, Treasury Secretary Janet Yellen sent a letter to Congressional leaders estimating that by Oct. 18 the nation would be unable to meet its debt obligations. “At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” Yellen writes. It was the first time the department offered a somewhat firm date for default, but it’s still an estimate.
The federal government regularly spends more than it brings in. The last time there was a federal budget surplus: 2001. Both Democrats and Republicans enacted policies and programs over the ensuing two decades that increased the federal deficit. One thing the Treasury Department does to pay for excess spending is to issue bills and bonds — it borrows money from individuals, corporations, state and local governments and foreign governments. Congress controls the amount the federal government can borrow. If lawmakers don’t adjust the debt ceiling, the nation won’t be able to pay its creditors.
In reading the huge volume of recent news coverage on the debt ceiling, I found myself consistently asking a few key technical questions. The Treasury Department, for example, has been taking what economists call “extraordinary measures” since August to keep the nation solvent. What, specifically, are those extraordinary measures?
Another question: Why has the date the federal government will default on its debts seemed so undefined? And, perhaps most importantly, what exactly are the stakes for Americans? Could the stock market crash? Could retirement savings be wiped out? Could interest rates skyrocket for loans small businesses rely on for operating cash?
For journalists, this is not just a story about dysfunctional politics and economic ramifications. This is a story with potential consequences across multiple beats at the local, state and federal government levels.
To gain some clarity, I reached out to someone with deep, personal experience managing the country’s finances: Jack Lew, who served as Treasury secretary from February 2013 to January 2017.
Former U.S. Treasury Secretary Jack Lew. (Brookings / Flickr / Creative Commons)
Lew played a key role in the 2013 debt ceiling scare, sending his own letter to Congress in late September informing lawmakers the Treasury Department would exhaust its ability to pay the nation’s debt by Oct. 17. President Barack Obama had in February signed a law suspending the debt limit through May 19. It was the first time the debt ceiling had been suspended, rather than raised. Obama eventually signed a law — on Oct. 17 — that suspended the debt limit through the next February. The debt limit was again suspended that month, through March 2015.
Lew also led the Office of Management and Budget from 1998 to 2001 and for three decades served and advised presidents and members of Congress. He is now a visiting professor of international and public affairs at Columbia University.
“Some forecasts predict macroeconomic consequences as severe as a 4% decline in real GDP and the loss of six million jobs,” Lew told me by email. “I am not in a position to either endorse or second-guess the results of such models, but I certainly do not want to find out how bad the damage would be — because there certainly would be adverse consequences.”
Here are five more key takeaways Lew offered:
- There are two actions Congress can take: suspending or raising the debt limit. Suspension removes the borrowing cap for a period of time. Raising the debt ceiling increases the borrowing cap to a specific, fixed amount.
- Since 1960, Congress has raised or suspended the debt ceiling 78 times — 49 times during a Republican presidential administration and 29 times under a Democrat.
- Financial obligations related to the COVID-19 pandemic, like the Paycheck Protection Program, have made the nation’s balance sheet of spending and revenue even more difficult to estimate than usual. “Between the endemic complexities of running the Treasury of the world’s largest economy and the idiosyncrasies of a once-in-a-century crisis, there is little predictable about the current context,” Lew explained.
- There are ways to take the politics out of the nation’s debt. For example, the Gephardt Rule, named for former Missouri Rep. Dick Gephardt, made it so that when Congress passed a budget, the debt ceiling would rise to the amount needed to pay for the new budget. The rule took effect in 1979 but was repealed in 2011.
- If the federal government defaults, the fallout would be widespread and unpredictable, and could include a U.S. credit rating downgrade, higher interest rates in the short term, and a stock market crash.
Lew’s emailed comments are lightly edited for style — The Journalist’s Resource follows Associated Press style. Keep reading to gain a deeper understanding of the inner workings of the debt ceiling crisis.
Clark Merrefield: There are two options on the table: suspending or raising the debt ceiling. What’s the difference?
Jack Lew: Under the Constitution, Congress has the power to pay debts and borrow money on behalf of the United States, and until World War I, Congress approved each debt offering on a case-by-case basis. To make the process more efficient with the growth of federal borrowing, the debt limit was adopted as a mechanism to delegate individual borrowing decisions to the executive branch, where Treasury has the authority to execute on borrowing activities so long as there is room under the debt ceiling.
The debt limit and suspension are two alternate ways for Congress to provide that headroom for Treasury to borrow. While raising the debt limit provides additional authority by increasing the statutory maximum amount of debt that can be incurred, suspending the debt limit does so by waiving the maximum limit during a defined period of time.
For instance, the previous debt ceiling of $22 trillion was suspended in August 2019 until Aug. 1 of this year, at which point the ceiling was restored. Accounting for borrowing during the period of suspension, this leaves the current limit at $28.5 trillion.
Either raising or suspending the debt limit would be a responsible and appropriate path to avoid default and ensure our commitments are fully funded. Since raising the debt limit authorizes a specific amount of borrowing that is permitted, and suspending the debt limit does not, as the size of the federal debt has grown, suspension developed as a way for Congress to delegate the borrowing authority without having to vote on a specific and very large number of how much debt can be added.
What neither mechanism does, however, is authorize new spending commitments. Raising or suspending the debt limit simply enables the government to borrow to pay for obligations previously incurred by Congresses and presidents from both parties. In this instance, the vast majority of commitments occurred before the current administration took office.
Without sufficient borrowing capacity, it is impossible for the federal government to make payment on all existing obligations, and failure to pay would be default. The right time for a fiscal policy negotiation is when those commitments are made, not when the need arises to borrow to pay for past commitments.
CM: Since early August, the Treasury Department has been invoking so-called “extraordinary measures” to keep the nation solvent. What specific steps has the department been taking to ensure the country can pay its debts?
JL: Since the 1990s, when political battles raised the risk of default to a higher level, Treasury has used a variety of technical devices to extend the period of borrowing without actually forcing a default, allowing time for resolution to occur. These measures were initially highly controversial but have now become a well understood and technical basket of financial tools.
For instance, Treasury can redirect funds by suspending new investments of some government funds such as the Exchange Stabilization Fund, delaying the issuance of certain new securities which count against the debt limit.
Likewise, it can suspend the daily reinvestment of Treasury securities held by the “G Fund” — the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan — which Treasury would later make whole.
While extraordinary measures are less than ideal, they are now a well-accepted way of extending the time for Congress to act before a default. Unfortunately, over successive debt limit impasses, extraordinary measures have gone from a measure of last resort to a matter of course that is baked into the timeline of brinksmanship politics. What was once an emergency buffer to be used only in grave circumstances at the end of a negotiation has instead become the starting point for posturing and discussions in Congress. As a result, there is truly no margin for error, and the likelihood of an unthinkable outcome stemming from an accident or poorly managed negotiation is higher than ever before.
CM: The Treasury Department has indicated those measures will only be available through the end of October. Why is there not a firmer deadline as to when the federal government will be unable to meet its debt obligations?
JL: Even under the best circumstances, forecasting flows in and out of Treasury is very difficult, and the pandemic has made the task even more challenging. Treasury’s daily cash needs can range from several billion to over $150 billion, depending on the timing of Treasury maturities as well as payments to beneficiaries, contractors and employees.
Some payments are regular and predictable, such as those to Social Security beneficiaries and Medicare Advantage and Part D plans. Others, like interest payments on Treasury bills, are predictable but vary in size from period to period. And some programmatic payments — namely, those related to unprecedented fiscal rescue and support programs created in response to the COVID crisis — lack any regular schedule. Treasury’s responsibility for disbursing large pools of grant and loan funding through programs like Economic Injury Disaster Loans and the Paycheck Protection Program adds to the uncertainty of outflows.
On the receipts side of the ledger, Treasury regularly receives tax revenues from millions of individuals and businesses, including significant quarterly payments on Sept. 15 and final payments for individuals who filed extensions by Oct. 15.
As the economic whiplash caused by COVID-19 continues to reverberate throughout household and corporate balance sheets and spending patterns, it will likely be reflected in atypical tax receipts, especially as so many households experienced significant changes in employment, income and wealth during the crisis. And with COVID-related reductions of in-person work periods at IRS facilities, there is a new level of uncertainty about when all payments are processed.
Between the endemic complexities of running the Treasury of the world’s largest economy and the idiosyncrasies of a once-in-a-century crisis, there is little predictable about the current context. To further complicate matters, the very fact that the debt limit is approaching provides yet another variable to consider, as debt limit fears may cause interest payments on short-term Treasury bills to spike, as they did during the 2013 impasse.
The uncertainty of the date at which we will hit the debt limit underlines the need to arrive at a solution as quickly as possible. The risk of a terrible accident is very real, and with American families and businesses still reeling from the economic effects of a global pandemic, delaying resolution is particularly dangerous.
CM: What was the most important thing you learned from your experience as Treasury secretary during the 2013 debt ceiling crisis?
JL: I spent far more time managing debt limit crises and thinking about the debt limit than I would have cared to, and it does not make for happy memories. I will never forget sitting in the Oval Office first as Office of Management and Budget director in 2011 and then as Treasury secretary during the 2013 impasse discussing unthinkable scenarios with the president and watching global market movements around the clock. During the 2013 negotiations, the 2011 downgrade of the U.S. credit rating, the first in our history, was still a fresh and painful lesson that I was determined to avoid repeating.
After exhaustive meetings and studying the issue from every conceivable angle with deeply expert staff, I came away from the 2011 and 2013 experiences with two key convictions:
1) The best way — the only way — to address approaching the debt limit is to promptly raise or suspend it.
2) Our system needs a better way, because the current approach in the context of a toxic political environment creates a real and unnecessary risk of catastrophic consequences.
In 2013, we discussed every conceivable option for addressing the debt limit. Some of the more extreme ideas were circulated in press reports at the time and are again being raised in the current context. I need not go into them, but what I will say is that my team and the president kept coming back to the same, simple answer — there is no magical power to avoid default, and Congress needs to raise or suspend the debt limit. We were convinced that the full faith and credit of the United States should never be a matter that is open to negotiation.
One notion that we dismissed at the time has been resurfaced of late — that Treasury could prioritize payments to somehow contain damage in the event the limit is reached. Every president and every secretary of the Treasury has dismissed prioritization and for good reason — it is unworkable, would result in defaults on our obligations and would jeopardize crucial taxpayer benefits. For more than two centuries, our country has paid all of its bills, in full and on time, and no Treasury secretary should allow that record to be broken.
Beyond the imperative to promptly raise the debt limit well before it approaches, my experience with debt limit politics — not just in 2011 and 2013, but during three decades in public service in the executive branch and as Congressional policy adviser — convinced me that there must be a better way for our nation.
Most other advanced democracies abandoned the idea of a debt limit and no longer operate by such rules. Instead, most have created budget practices that tie together policy and debt impacts in a more intuitive and transparent manner. It is hard to defend the existence of the debt limit, which only creates downside risk in our system, and I have long advocated changing it to eliminate or greatly reduce the risk that legislative brinksmanship could lead to a disastrous default.
There are better alternatives. Long before I was secretary of the Treasury, as an aide to House Speaker Thomas P. O’Neill, Jr., in 1979, I worked with Congressman Richard Gephardt, who was then a junior member of the Ways and Means Committee, to design the “Gephardt Rule,” which provided that whenever the House passed a budget resolution it would automatically trigger a debt limit adjustment to the level specified in that budget. That sensible approach was later repealed.
There is also the McConnell Provision, signed into law in 2011 as part of the Budget Control Act that ended a difficult standoff, which allows for a debt limit increase to take place unless Congress enacts a joint resolution of disapproval, which the president could then veto — shifting the political responsibility and risk from Congress to the president, who in almost all cases would take a permitted action to avoid default. Under the provision, a debt limit increase was all but guaranteed unless a bipartisan supermajority in both houses voted to disapprove — a most unlikely prospect. Whether through one of those solutions or a new process, it is well past time to remove an unnecessary source of risk and obstruction from our system.
CM: From social security to child tax credit payments, money that many Americans rely on for everyday expenses is potentially on the line if the debt ceiling isn’t suspended or raised. What’s your biggest concern right now?
JL: A default on U.S. government debt would be unthinkable, and the full consequences of such an event are difficult to predict. My first concern would be for immediate economic ramifications. Short-term interest rates would jump, creating higher borrowing costs for Treasury and for millions of families and small business owners. Stock prices could drop precipitously, as they did during the 2011 crisis, potentially wiping out trillions of dollars in household wealth and retirement savings. Treasury could lose the ability to make vital payments like Social Security benefits or paychecks for our armed forces servicemembers.
Further, I fear we could see disruptions in short-term funding markets, and other ripple effects that could jeopardize the nascent recovery and threaten lasting economic pain. Some forecasts predict macroeconomic consequences as severe as a 4% decline in real GDP and the loss of six million jobs. I am not in a position to either endorse or second-guess the results of such models, but I certainly do not want to find out how bad the damage would be — because there certainly would be adverse consequences.
There would also be lasting damage to our national and economic security. For one, in the event of a default, the U.S. could experience another credit rating downgrade. Elevated rates might linger, and future generations could continue to face higher borrowing and debt service costs. Investors around the world could begin to question whether they should still consider Treasury securities to be the risk-free store of value they have long been considered.
The U.S. financial system and U.S. dollar have long been sources of immense strength and power for our nation. Likewise, the unmatched depth and liquidity of the Treasury market is a huge asset that allows us to finance our government and facilitates the [Federal Reserve’s] monetary policy implementation. In a time of growing geopolitical competition, the last thing we should be doing is giving the rest of the world reason to question the soundness of our system, or an excuse to turn away from it.
Even if a default is avoided at the last minute, I am still deeply concerned about Congress waiting too long to act. Every day that we get closer to hitting the debt ceiling, costs accrue to taxpayers. Treasury yields jumped in the two weeks prior to the resolution of the 2013 debt limit negotiations, costing taxpayers millions of dollars in interest directly, as well as imposing elevated borrowing costs for households and businesses. As we approach an uncertain deadline, consumer sentiment and confidence — already somewhat fragile with the uncertainty of the health outlook — could begin to suffer. The U.S. economy has just begun to recover from the pandemic, and a manufactured crisis would threaten the gains our economy has made, as well as the future recovery.
The only responsible path forward is for Congress to move expeditiously to raise or suspend the debt ceiling and protect the full faith and credit of the United States. Even if we avoid default, as I expect and trust we will, I am deeply concerned that dangerous brinksmanship has become the new normal, and that addressing the debt limit is no longer considered a shared responsibility as it was for decades following its enactment.
Since 1960 alone, the debt limit has been raised or suspended 78 times under presidents of both parties. But over the course of my own career, from the vantage point of a congressional aide in the 1970s and 1980s to Cabinet official in the Clinton and Obama Administrations, I have seen the deterioration of debt limit politics and rhetoric. It has escalated beyond any acceptable level of risk, as some in Congress have embraced and mainstreamed the threat of default as a cynical political weapon. It is time for Congress to return to a tradition of shared accountability for this vital national responsibility.
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