A few months ago the deadline for raising the $14.3 trillion debt ceiling to avert a possible default seemed way off in the foggy future. But with only four weeks before the August 2 deadline and the two sides still far apart political nerves are so jangled that even the sluggish Senate will forgo its July 4 week holiday to try to make some progress.
On Friday, Treasury officials confirmed the August 2 deadline in a monthly update that assesses the nation’s borrowing authority. “Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner,” Mary Miller, Assistant Treasury Secretary said in a statement.
Budget and political experts have said for weeks that it would be unthinkable for the White House and Republican congressional leaders to allow a default that could send the markets and the economy back into a tail spin. But President Obama and the GOP appeared light years away from a deal on a major long term deficit reduction package that the Republicans say is essential before they would vote to raise the debt ceiling.
“We want people to understand that passing August 2 without a debt limit increase is a very serious matter it’s unprecedented,” said Jerome (Jay) Powell, a former Republican Under Secretary of the Treasury for Finance and chief author of a new Bipartisan Policy Center study on the debt ceiling. “It does present significant risks to the economy and to the markets. It becomes that much more important that the parties come together.”
Obama is insisting that the overall plan include elimination of some costly tax breaks and loopholes, but House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky., say anything smacking of a tax increase is out of the question, and that the trillions of savings that are essential over the coming decade must come exclusively from cuts in government services and entitlement programs. The White House has proposed approximately $400 billion in higher tax revenues.
“The President does not seem to get it,” McConnell said on the Senate floor earlier this week on the Republican’s hard line that they will not raise taxes.
With the clock ticking, there will be a rush of activity beginning almost immediately with the goal of President Obama, the House and Senate GOP leaders and Senate Majority Leader Harry Reid, D-Nev., reaching agreement on a package of $1.7 trillion or more of deficit reduction over the next ten years and possibly a budget enforcement mechanism, to pave the way for an increase in the debt ceiling.
“The final deal just has to have a plan,” former Republican senator Alan Simpson of Wyoming, co-chairman of the president’s deficit commission, told Reuters in an interview. “The only reason the rating agencies haven’t punched Germany, France and Great Britain is that they have a plan even though they may not like it, it’s a plan. We have no plan whatsoever.”
Obama administration officials warned that negotiators much reach agreement no later than July 22 to give Congress a week or two to draft and pass the enabling legislation. Setting an earlier deadline might help those involved in the talks move toward a temporary fix at the very least and avoid giving the financial system a heart attack.
situation is the graphic demonstration
of dysfunctional American politics.
Treasury Secretary Timothy Geithner, Federal Reserve Board Chairman Ben Bernanke, the president and others say failure to raise the debt ceiling would be catastrophic, with the government unable to meet all its financial obligations, interest rates on U.S. bonds soaring, federal vendors going unpaid and potentially hundreds of thousands of people losing their jobs.
A few budget analysts and experts have suggested that the president has the authority under the Fourteenth Amendment to the Constitution asserting the validity of the public debt to simply disregard the debt limit altogether. Bruce Bartlett, a Fiscal Times columnist and former Reagan White House adviser, and University of Baltimore law professor Garrett Epps have written that the president would have constitutional authority to take extraordinary measures to protect the public credit and prevent a debt default even if it means disregarding the debt limit, which is statutory law subordinate to the Constitution.
“I wish I could say as the deadline approaches the likelihood that Republicans adopt a more realistic stance, but there is scant evidence to support such optimism,” said Henry Aaron, senior fellow of economics studies at the Brookings Institution. “I think we are living in very dangerous times, really quite frightening. The deeper and more dangerous situation is the graphic demonstration of dysfunctional American politics. This is not the way great countries behave.”
To be sure, this is not the first time the government has come this close to a default. Several times throughout the past decade–including 2002, 2003, 2004, 2006 and 2009–the federal government came within weeks of reaching the statutory debt limit. The Treasury took special measures to avoid exceeding the debt ceiling, including redeeming securities held in government funds and suspending payments to federal retirement accounts.
The major credit rating agencies have warned that if the U.S. fails to honor some of its financial obligations Treasury bills would be slashed to a ‘D’ rating and the government’s overall rating would be in severe jeopardy.
Republican presidential candidate Michele Bachmann, Sen. Jim DeMint, R-S.C., and other Republicans insist the Treasury could get by for a while by using available tax revenue to pay interest on the debt and to cover the most important or urgent government expenses.
In a letter to DeMint, Geithner said: “The United States is now required to borrow approximately 40 cents for every dollar of expenditures. Your proposal would require cutting roughly 40 percent of all government payments. These deep cuts would be felt by all Americans, and they would risk throwing the economy back into recession.”
Here are the key dates and events to watch for in the last critical month of negotiations:
- July 5: The Senate reconvenes and will hold its first vote in the afternoon to work on a deficit deal. The House is not in session.
- Week of July 5: The Treasury Department is expected to give an update on when the U.S. government will no longer be able to meet its financial obligations. Some are speculating that the date will be moved to August 9 or 10.
- Week of July 5: Senate Budget Committee Chairman Kent Conrad, D-N.D., will unveil the Democratic budget plan to address the debt and deficit.
- July 22: drop-dead date for debt ceiling deal to be hammered out by the Administration and Congress, to have enough time to draft and pass legislation.
- August 2: Current D-Day for expiration of Treasury’s authority to borrow. The U.S. government will continue to take in revenue after this deadline passes, but it won't be enough to meet all its obligations.
- August. 3: About $23 billion in Social Security payments must be made.
- August 4: Nearly $90 billion in Treasury debt matures, meaning the government must borrow that much to pay off the bondholders.
- August 5: The government is projected to have a running cash deficit of $31 billion.
- August 10: The government is projected to have a running cash deficit of $47 billion.