Wednesday, July 27, 2011

How Serious is the Debt Limit Impasse?

The New York Times has a quite good Q. and A. about the debt limit, which explains the seriousness of the situation and the implications of prioritizing payments. For a sobering look at the implications of not raising the debt limit, also see the presentation of the Bipartisan Policy Center. One of the authors of the Bipartisan Policy Center presentation is Jay Powell, who was Treasury Under Secretary for Domestic Finance in the George H.W. Bush Administration and for whom I used to work.

The Bipartisan Policy Center makes the point that what we are facing if Congress does not act is quite different than government shutdowns due to a failure to enact appropriation legislation. The Center's paper says that during the 1995-1996 shutdown that "mandatory spending continued without interruption" and "disruption of government services was modest." That would not be the case if Treasury does not have enough cash to meet all its obligations.

There would also be problems for state governments, which is why, for example, the conservative Republican governor of Virginia, Bob McDonnell, says he is "exasperated with Washington" over this issue. Virginia's AAA credit rating is at risk because of Virginia's reliance on federal spending.

With regard to state and local governments, the NYT article says: "States, still recovering from the downturn, could be hurt in two ways. First, if the federal payments they rely on for everything from Medicaid to highway construction are interrupted, states that are still recovering from the recession could face serious cash-flow problems. Second, the broader economic disruptions of a default could lower tax collections again as they are still rebounding from the dive they took during the Great Recession."

Arguments that a failure to raise the debt limit before Treasury runs out of enough cash to meet all its obligations is not that big a deal or just like a government shutdown due to a failure to enact appropriation legislation are based on misinformation, ideology, or, perhaps, antipathy to the current Administration.  In some cases, they may be simply spin engaged in  for political purposes.  Congressional leaders know all this, which is why the odds are that something will be worked out.

There is, though, some doubt that August 2 is the date by which the debt limit must be increased. One can understand why Treasury wants to keep the pressure on by sticking to that date, but according to some analysts the actual date could be later. I do not know if their analyses are correct, but I think that the analysts at Nomura, Wells Fargo, and Barclays are saying this because they believe it and not out of any political agenda. If they are correct, Treasury should issue some kind of announcement, embarrassing as that might be, if it wants to be credible. There are a lot of good analysts poring over the Treasury Daily Statement and tracking expenditures and tax receipts.

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