On Tuesday afternoon, Constitution Daily spoke with Shai Akabas from the Bipartisan Policy Center about what the default date really means in the debt-ceiling drama, and why the government would have a tough time prioritizing its bills if it defaulted.
Akabas is a Senior Policy Analyst with the BPC’s Economic Policy Project, which keeps a close eye on all debt-ceiling issues. The BPC also produces its own independent estimates of the window for a possible default on the U.S. debt obligations called the X Date. The X Date shows the date on which the United States may be unable to meet all its financial obligations in full and on time.
We also asked Akabas about sequester concerns the Project expressed in a research report issued earlier this week.
Constitution Daily: Your research earlier this week on the long-term implications of the sequester seemed to draw a lot of attention. Do you think the sequester as a driver of economic conditions has been put on the back burner during the past few weeks, or even months, in the public budget debate?
Akabas: The sequester has definitely been put on the back burner. In the negotiations that you have seen with the debt limit and shutdown, some people have proposed making changes to it. It sounds like that won’t be part of the final agreement that is still to be hashed out. The Bipartisan Policy Center just released a report on the impacts of the defense sequester last week. We feel that is a really important issue. That, unlike the current debate, is an issue that will be ongoing beyond the shutdown. It is an issue that affects how government operates for the foreseeable future. We think that it should be high on the Congress and administration’s priority list.
Constitution Daily: Congress seems to be locked in on a debt-ceiling extension to mid-January or early February. What would be the effects of a sequester that is locked in at a spending rate of $967 billion on January 15?
Akabas: In January, the discretionary sequester cuts are scheduled to take effect, and being at the $988 billion 0r $986 billion level, you already have some of the sequester cuts baked into the cake. You are going off the post-sequester levels from last year. The sequester in January on discretionary programs, for a variety of technical factors, would hit defense by an additional $20 billion. On a cumulative basis, you are seeing drastically reduced levels of discretionary spending from what the Budget Control Act caps were, which is a restrained level, but a significantly higher restrained level than what the sequester takes us to.
Constitution Daily: The BPC currently has the X Date for the possible start of a default on October 22. Is that really the date that we should pay attention to, or will markets jump in to force the issue if Congress can’t reach a deal this week?
Akabas: BPC has the X Date actually at sometime between October 22 and November 1. That’s when we see potential for the X Date arriving as jumping into the potential range. It could come earlier. We framed the dates between October 22 and November 1 as a confidence interval. There is uncertainty around these projections as to when revenues come in and what the daily cash flows looks like for the federal government. We believe the market reaction could start in advance of that. On October 17, the Treasury Department says they will exhaust borrowing authority, which means they will be out of extraordinary measures and they will have no additional capacity to borrow from the public, in case of an unforeseen circumstance or unexpected events. What that means is that they are in a tenuous situation where they’ve never been before in the modern era, where the U.S. government, the biggest economic entity on the planet, essentially doesn’t have the ability to borrow additional funds. You are already seeing investors, in terms of short-term treasury bill rates, and a little bit in the equity markets, reacting to the negotiations. As we continue down this path without a resolution, that will only grow. But when it hits the fan per se, it’s hard to tell whether that is on October 22, October 17, or some point in between. I think the fluctuations and gyrations of the markets will increase in general until it is resolved, as opposed to a period of calm.
Constitution Daily: There were reports today that some House GOP members didn’t have an issue with “tip-toeing” around an October 17 deadline on a debt deal. Is that playing with fire, as others have asserted, or is that October 17 deadline flexible?
Akabas: The way that we have been discussing it is that the further that the date goes beyond a resolution the greater the risks become. There’s not any one date we can point to that we know is going to be an explosive date, where the economy is going to blow up and such and such is going to happen. As we continue moving forward the risks grow. Secretary Lew put October 17 in his letter because it is an important and serious guidepost along the way in these negotiations; at that point he said we will have exhausted borrowing authority. The odds of some type of error or an unforeseen mistake that Treasury makes at that stage goes up significantly. Taking a chance with the American economy is something he feels should be pointed out and shouldn’t be done. He has not tried to estimate an exact X Date nor have we, for reasons that center around the fact that no one can know when it is.
Constitution Daily: Also, is prioritization of the debt a realistic option if Congress goes beyond the point where a technical default occurs?
Akabas: That’s a great question and one I’m not sure that anybody outside of possibly the Treasury Department can answer. The information that we have largely goes off an inspector general’s report from last year that looks at the 2011 debt limit event and what Treasury officials thought was likely if we passed the X Date or the point where we couldn’t pay all our obligations in full or in time. We see two notable barriers to prioritization and there are probably others. One is just a practical one. Treasury’s computers are set up to pays the bills, and not to pay just certain bills. Some adjustment to the system needs to be made. I’m not technically confident enough to know what that would be, but from what I understand, it would be a pretty significant change. The second one is that there are legal questions about whether it would be permissible to pay certain people and not pay others. If you are paying a Social Security beneficiary but not making a veterans benefit payment, does the veteran have a legal claim to hold against the federal government for paying certain people and not others when there was some cash on hand? We don’t have any constitutional grounding to answer these questions, so we are just posing them as potential issues that the treasury secretary and his legal advisers are considering. But between those two issues it appears to us there are certainly problems going down the prioritization route.
Constitution Daily: Based on the comments and feedback you’ve heard, what is the most common misconception about the debt ceiling situation?
Akabas: One is that October 17 is the X Date and that is the date we will default on our obligations. That is likely not the case. It will come a couple of days or a couple of weeks after that. There is a lot of uncertainty. People have been saying that if we cross that time, the U.S. will default and the world will go into chaos. That’s not making an accurate portrayal of the situation. It is very serious and we will have exhausted all borrowing authority. It is very different and distinct from having defaulted on your obligations and your debt. The second misconception is that just because we have more revenue coming in than spending going out, means that we can make all of our interest payments and service our debt and not have any problem in terms of an actual default on U.S. government debt obligations. From a very narrow sense that is true. We have more revenue than we do interest payments. But it first assumes that the Treasury has the legal and practical ability to prioritize those payments above all other obligations of the U.S government and even if they find that they do, it requires a competent execution of that. In 1979, in a situation like this but before the X Date, somebody in the backroom of Treasury made a mistake and we actually defaulted on a limited amount of debt for a short period of time and it had huge ramifications in the financial markets. The idea that the U.S. government can, as we’ve seen in the last few weeks [with the health care website problems], can set up a debt prioritization scheme in a matter of weeks, and being assured they can execute that without a hitch, is putting a certain reliance in government that many of the people who have made the claim that revenues exceed interest payments don’t believe in—that we should have that much faith in the government executing its responsibilities in an infallible manner. These are some of the statements out there that required broader context.
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