We have a new date for the debt-ceiling limit. According to Treasury Secretary Jack Lew, things will get uncomfortable starting around Oct. 17.
That's according to a new letter Lew sent to House Speaker John Boehner. By Oct. 17, the Treasury Department will have exhausted all its options and will no longer have enough money on hand to meet all of its coming financial obligations. Either Congress lifts the debt ceiling then or... the federal government will have to default on some of its bills in the weeks ahead.
"We estimate that, at [Oct. 17], Treasury would have only approximately $30 billion to meet our country's commitments," Lew wrote. "This amount would be far short of net expenditures on certain days, which can be as high as $60 billion."
At the moment, default is a distinct possibility. House Republicans have argued that any hike of the debt ceiling should include certain conditions attached, such as a one-year delay of Obamacare's individual mandate. The White House sharply opposes attaching any conditions to a hike and has said it won't negotiate on this matter.
So what, exactly, happens on Oct. 17?
Technically, the United States hit its $16.699 trillion debt limit way back on May 19. Since then, the Treasury Department has been taking a slew of “extraordinary measures”—such as tapping exchange-rate funds — to make sure the government has enough money to meet all of its obligations, from paying bondholders to sending out Social Security checks.
Those extraordinary measures run out Oct. 17, says Lew. From that point on, the federal government will only bring in enough tax revenue to pay about 68 percent of its bills for the rest of the month, according to a recent analysis by the Bipartisan Policy Center — and Treasury won’t be able to borrow or scrounge up more money to make up the difference.
The first default won't necessarily happen right on Oct. 17 — but it would likely happen soon thereafter. The government is facing $42 billion in Social Security and Medicare payments on Nov. 1, for instance, and won't be able to meet those without new borrowing.
(Note that this all assumes Congress strikes a deal to keep funding the government's discretionary programs past Sept. 30. If Congress fails to pass another continuing resolution and the federal government shuts down, that might scramble the dates a bit, though likely not by much.)
Why Obama probably can't pick and choose which bills to pay
So who gets paid if we breach the ceiling? That's unclear. During the last debt ceiling fight in 2011, some Republicans suggested that Treasury should keep funding the crucial stuff and let the rest of the government shut down. “We should pass a bill out of the House,” said Sen. Pat Toomey (R-Pa.), “saying there will be certain priorities attached to certain things, namely payment of debt services and payment of our military.”
This option is known as “prioritization.” It’s the idea that the government can selectively pay some of its bills so that the nation doesn't default on, say, its payments to bondholders — a scary scenario that could roil the world's financial markets. Prioritization may sound appealing. But there’s also good reason to think it wouldn't work.
Consider how the U.S. government actually pays its bills. Each and every day, computers at the Treasury Department receive more than 2 million invoices from various agencies. The Department of Labor might say, for example, that it owes a contractor $3 million to fix up a building in Denver. The Treasury computers make sure the figures are correct and then authorize the payment. This is all done automatically, dozens of times per second.
The Bipartisan Policy Center report, written by Shai Akabas and Brian Collins, argued that prioritization is infeasible. "It would involve sorting and choosing from nearly 100 million monthly payments," they write. There's no good way to stop paying the Education Department while making sure soldiers get paid. It's not clear that the Treasury Department even has the technical capacity to do this, let alone the legal authority.
The Obama administration, for its part, has maintained that it simply can't prioritize payments. "Any plan to prioritize some payments over others is simply default by another name," Lew wrote in his letter to Boehner. "There is no way of knowing the damage any prioritization plan would have on our economy and financial markets."
Other (unlikely) options for the debt ceiling
That leaves a few other possibilities if we breach the debt ceiling. First, Treasury could try to buy time by merely delaying payments — agency officials deemed this the least-bad approach back in 2011. If Treasury was facing $10 billion in obligations on Monday, but only $7 billion in revenue came in, the agency could wait until it had the full $10 billion on hand before paying Monday’s bills in full. The problem is that during the delay, Tuesday’s bills are piling up. Then Wednesday’s. This tactic would quickly become unsustainable.
Second, the White House’s Office of Management and Budget could try to stem the rush of invoices coming out of government agencies. Technically, the OMB has latitude to tell federal agencies that they can’t spend funds allotted them until later in the year — a power known as “apportionment.” The hitch is that this process can take weeks to have a meaningful impact, as former OMB official Barry Anderson told me back in January. And OMB can only slow the rate of agency spending; it can’t stop it altogether.
Third, the Obama administration could try to find some extraordinary way to get around the debt ceiling. Last fall, two legal scholars, Neil Buchanan and Michael Dorf, wrote a paper (pdf) arguing that Obama would be caught in a constitutional dilemma here. Congress has mandated that he spend money on certain programs, but they've also mandated that he can't borrow any more to pay for it. The least bad constitutional option, they say, is for Obama to ignore the debt ceiling and unilaterally issue new bonds.
Other Democrats have suggested that Obama can declare the ceiling unconstitutional under the 14th Amendment. Others have suggested that he should mint a platinum coin to fund the government (yes, really).
The problem with these schemes? Administration officials have explicitly ruled out these moves. Lew has insisted there are only two ways the debt ceiling fight can go: Either Congress lifts the debt ceiling, or the U.S. government will default on some of its payments. Obama is "not going to be negotiating over the debt limit," Lew told CNBC in August. "Congress has already authorized funding, committed us to make expenditures. We're now in a place where the only question is, will we pay the bills that the United States has incurred?"
What would be the economic consequences of default?
That's hard to forecast precisely. Let's say the Obama administration couldn't get around the debt ceiling and the U.S. government could suddenly only spend as much as it received in taxes. Then outlays would have to fall immediately by 32 percent in October. That would be a huge, sudden shot of austerity and could put a big dent in the economy.
It's also unclear what would happen if the U.S. government defaulted on a bond payment. Back in January, Michael Feroli, the chief economist of JP Morgan, told me that this scenario "would be like the financial market equivalent of that Hieronymus Bosch painting of hell." The global financial markets are structured around the notion that U.S. Treasuries are the safest asset in the world. If that assumption were ever called into question, havoc would ensue.
By contrast, Paul Krugman argues that the risk of default would likely send the U.S. dollar plunging. But, he writes, it's much less clear how a debt-ceiling fiasco would affect interest rates, especially if the Federal Reserve steps in to buy up Treasuries.
How much does the debt ceiling need to be raised by?
The Bipartisan Policy Center report estimates that Congress would need to raise the debt ceiling by around $1.1 trillion to allow the government to meet all of its obligations through the end of 2014.
Note: This is a revised an updated version of this earlier post.