For months I've heard the grown-ups say that the national debt ceiling must be raised or all hell will break lose. As dire as the warnings have been, they have flown over the heads of most Americans as scare tactics and the usual inside-the-Beltway drama — especially since no one has been specific about what that kind of hell might look like. Or so I thought. Two must-read documents spell out the damage (and that isn't even a strong enough word) to the American economy and taxpayers if the United States fails to pay its creditors for the first time in its history.
First, read Treasury Secretary Timothy F. Geithner’s Jan. 6 letter to Senate Majority Leader Harry Reid (D-Nev.) detailing when the debt limit would be reached and the consequences of default. Then, for more detail on "the potential effects on government operations" take a look at the Feb. 11 report on reaching the debt limit from the Congressional Research Service (CRS). Once you do, you’ll see why I'm a little freaked out by all this.
As late as last week, Speaker John Boehner (Ohio) and Senate Minority Leader Mitch McConnell (Ky.), were linking the need for spending cuts in the continuing resolution for 2011 and the proposed 2012 budget to the need to raise the national debt limit. But the Geithner letter explained pretty clearly why tying spending cuts to raising the debt ceiling, now at $14.29 trillion, does nothing to abate the nation’s red-ink-streaked trajectory.
It is important to emphasize that changing the debt limit does not alter or increase the obligations we have as a nation; it simply permits the Treasury to fund those obligations Congress has already established.
In fact, even if Congress were immediately to adopt the deep cuts in discretionary spending of the magnitude suggested by some Members of Congress, such as reverting to Fiscal Year 2008 spending levels, the need to increase the debt limit would be delayed by no more than two weeks. The limit would still need to be raised to make it possible for the government to avoid default and to meet the other obligations established by Congress.
Also, don't equate a government shutdown with failure to raise the debt limit. The former would be the result of Congress failing to appropriate money to fund government operations. Something that won’t happen until at least April 8 when the latest continuing resolution expires. The latter would prevent Treasury from borrowing money to pay the bills generated by those government operations. An unprecedented move whose consequences, Geithner warned, could be “potentially much more harmful than the effects of the financial crisis of 2008 and 2009.” No one would be untouched.
Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply. Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.
Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasuries and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of investors here and around the world to invest in the United States.
In addition, “Payments on a broad range of benefits . . . would be discontinued, limited, or adversely affected,” Geithner wrote. Included on the list were military salaries and benefits, Social Security and Medicare benefits, Medicaid payments to states and all tax refunds. You can see his full list on page 4. The CRS report goes into detail why this would be necessary.
As of the writing of the CRS report, the government needed an additional $738 billion (above the $14.29 trillion limit) to pay the obligations in the remainder of the current 2011 budget. That is, between April and September 30, 2011. If the debt ceiling is not raised, the government would have to come up with that money. And, according to the CRS report, doing so won’t be pretty.
. . . the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 (April through September 30, 2011) in order to avoid increasing the debt limit.
Oh, and don’t think the fun stops when fiscal year 2012 begins on Oct. 1, 2011. If the debt limit is not raised, CRS warns, “Additional spending cuts and/or revenue increases would be required, under current policy, in FY2012 and beyond to avoid” going over the current debt ceiling.
Since Geithner wrote that letter, the time when the limit would be reached has been moved from between March 31 and May 16 to between April 15 and May 31. The amount of “headroom” has closed from $335 billion below the current limit to $108 billion, as of March 15.
Time is running out — to raise the limit; to not undermine the confidence in and creditworthiness of the United States, to have a serious discussion about the long-term policies needed to avoid going to the brink once again.
“Congress has to do it,” Geithner told a House appropriations subcommittee last Wednesday. “There's no alternative.”
There really isn't.