OPINION — Here we go again.
The U.S. government ran up against its debt limit over the weekend — a record $22 trillion. The countdown has begun toward the “X Date,” when the Treasury Department will no longer be able to meet all the country’s financial obligations in full and on time.
We at the Bipartisan Policy Center have narrowed our preliminary estimate and now project the “X Date” to arrive sometime this fall. But it would be a mistake for Congress, financial market participants or frankly any American to breathe easy until this threat to the global economy is defused — preferably once and for all.
This is just the latest episode in a seemingly endless and dangerous cycle. Last week, for the eighth time in the past eight years, the Treasury secretary sent congressional leaders a letter notifying them that the U.S. government had reached its borrowing limit and requesting that the limit be extended. He also explained that the government will be able to continue financing itself for an additional period by deploying so-called extraordinary measures, legally authorized accounting maneuvers that buy some breathing room, but not much.
No one knows with certainty the timing of the “X Date.” It depends on projecting the patterns of hundreds of billions of dollars flowing in and out of federal coffers every month.
But we expect even more uncertainty than usual this year with the debt limit reinstatement landing right in the middle of tax season. This will be the first year to fully reflect the 2017 tax cuts and the recent partial government shutdown (among other factors) delayed payout of some tax refunds. A particularly pessimistic scenario, with significantly lower revenues and high tax refund payouts in the coming weeks, could even lead to an “X Date” in late summer. What we know for sure is that it’s coming.
The original rationale for the debt limit comes from an earlier era when Congress had to pass legislation every time the Treasury needed to borrow money by issuing debt. This eventually became overly burdensome in the early 20th century, so Congress established an overall debt limit to provide the executive branch additional flexibility.
But that solution has run its course, particularly given how Congress determines fiscal policy today. The recurring problem is that lawmakers have committed to spending more on everything from Social Security benefits to Medicare physician payments to SNAP benefits without authorizing enough taxes or borrowing to pay for it. When the debt limit is reached, Congress essentially prohibits Treasury from borrowing to pay the bills — already incurred — that are due.
In the movies, when you refuse to pay your bills for long enough, someone comes after you with a baseball bat, or in real life, a tow truck to haul away your vehicle. Here, if we blow through the “X Date,” it is the full faith and credit of the United States at stake. A U.S. default on its obligations would be unprecedented, so no one can predict the exact fallout. But it would likely affect Americans across the board through their investments, Social Security or other government benefits, and the possibility of a severe economic downturn. Much would be determined by the reactions of our creditors and the ratings agencies.
Lawmakers are once again in a familiar place — waiting until the last minute and haggling over whether other priorities will get attached to legislation that extends the debt limit even as the financial markets look on aghast. This time around, prolonged negotiations seem all too likely, with the austere sequester caps on defense and domestic discretionary funding set to kick back in on Oct. 1, the start of the new fiscal year.
Fortunately, there is a way out. A proposal to defang the debt limit and return attention to the real underlying fiscal problems facing the United States is drawing serious interest on both sides of the aisle. As with any compromise, it would be messy and getting it across the finish line will not be easy. But the window of opportunity is now open, especially as the federal government’s debt keeps rising at alarming rates.
Policymakers have chosen to play with fire over and over on the debt limit, instead of taking a more responsible approach to the country’s finances. Each time, they’ve clung to the belief that nothing will go horribly wrong because it hasn’t in the past. The American people deserve better.
Shai Akabas is director of economic policy at the Bipartisan Policy Center.The Bipartisan Policy Center is a D.C.-based think tank that actively promotes bipartisanship. BPC works to address the key challenges facing the nation through policy solutions that are the product of informed deliberations by former elected and appointed officials, business and labor leaders, and academics and advocates from both ends of the political spectrum. BPC is currently focused on health, energy, national security, the economy, financial regulatory reform, housing, immigration, infrastructure, and governance. Follow BPC on Twitter or Facebook.