A Quick Note on Debt Limit Posturing

When it comes to the debt limit, it is difficult to tell whether some politicians really believe what they are saying. For example, one idea that is being put forward is that hitting the debt limit would not be catastrophic, since the government could make it a priority to pay interest and principal of the public debt before making any other payments. This sounds much simpler than it is.

One thing proponents of this idea are ignoring, willfully or not, is that receipts and outlays are not neatly matched, and that some particular days have large outlays. At the beginning of the month there is a very large withdrawal of Treasury cash to make Social Security payments. For example, on November 3, 2010, the outlay for Social Security was $22.2 billion. This was the bulk of total withdrawals of operating cash of $34.6 billion. The net decrease in operating cash was $27.2 billion. (Data in this post come from issues of the "Daily Treasury Statement.")

Another big withdrawal day, interest on notes and bonds, takes place in the middle of February, May, August, and November. For example, on November 16, interest on the public debt amounted to $21.4 billion. Operating cash increased that day by $27.1 billion, but this was due to issues of new securities of $92.3 billion more than offsetting redemptions of $54.5 billion. If the Treasury were up against the debt limit, it could not have raised cash in this manner.

Now if a big interest payment date is coming up and Treasury is near the debt limit, what is it supposed to do? Should it assume that Congress will not pass the debt limit and hoard cash by not making payments? This would be of doubtful legality, and, in any case, imagine the political firestorm that would result if Treasury did not make Social Security payments. I doubt that Congress would pass a law making it legal for the Administration to conclude that the Congress will be irresponsible and therefore has the right to withhold payments, such as Social Security.

In other words, the Congress will enact debt limit legislation. The current theatrics are an attempt by some in Congress to force concessions from the Administration by seeming to be irresponsible. It is pretty clear that senior politicians, such as John Boehner, do not want to carry this too far. Politically, this has not always worked that well.

In any case, the Congress will have to deal by the end of March with keeping the government funded when the continuing resolution expires, or there will be a government shutdown. The Treasury says that the debt limit will be hit in April or May. We can expect a lot of political posturing, and when it comes to funding the government, perhaps some meaningful decisions.

(An earlier post on the government shutdowns, the debt limit, continuing resolutions, and appropriations can be found here.)


Correction:  The current continuing resolution funds the government only through March 4, not until the end of March.