As we continue our dubious honor of being the only developed country that routinely runs out of money, I am reminded of the end of Charlie and the Chocolate Factory where the elevator races towards the top and Charlie’s not really sure what’s going to happen when they get there. Like someone crouching on the top of that rising elevator, we are staring solidly at the debt ceiling and wondering how smushed we are going to get when we hit it. In a few weeks we will again dance on the ceiling as another potential government shutdown looms without a spending bill or a new kick-the-can measure.
What is a “debt ceiling”? Let’s start with some basics. In our case, it’s the top of that elevator shaft labeled $31.4 trillion dollars, the amount of money the US essentially “owes,” which is different from the budget, something we also routinely have trouble putting together. Legally, the administration can only spend a dollar if it has that dollar. In a way that is unique to our government, it could be a promise of that dollar (like anticipated tax revenue, something that could be harder and harder to find if tax rates are cut and tax fraud continues unabated) or it can be a borrowed dollar (by borrowing from the US Treasury). The debt ceiling doesn’t actually restrict spending, rather, it restricts the borrowing that supports that spending.
The debt ceiling is the legal limit that the country can borrow so think of it as a giant credit card with a spending limit. In theory, when we pass a debt limit, a variety of restrictive measures are scheduled to kick in and implement cuts to a vast and varied number of spending categories. To avoid this, the US Treasury can use a couple of temporary patches and “buy” (pun intended) us some time. In this case, Treasury Secretary Yellen has pushed off having our credit card cancelled a number of times.
She and her team did this by making some moves behind the scenes so the majority of us won’t feel anything. For example, one strategy is to stop making payments into the pension and health care benefits for federal employees with the “cross my heart” promise to make up those contributions once the money starts flowing again. In this case, the Post Office is once again taking it on the chin since their healthcare benefit fund funding is being suspended. And, while that seems like a straightforward solution, as we talked about last week, whenever you delay paying for something, the price when you do pay the bill will usually be higher – by how much remains to be seen.
We’ve certainly been here before, having raised, extended, and/or redefined the debt limit 78 times since 1960 (which is shockingly frequently for any of you doing that math). We need to turn back the clock to 2011, however, to find a situation comparable to our current situation. There was a Congressional stand-off as we approached the ceiling which resulted in our country’s rating being downgraded for the first time ever and an excess borrowing cost of nearly $19 billion dollars. With a whopping two days to spare, a deal was negotiated and the situation resolved. For some perspective, at that time, our debt ceiling was $16 trillion dollars so we’re talking seriously different numbers now with a balance due of $31.4 trillion ($93,900 for each and every one of us). Looking at our current Congressional make-up, we are experiencing similar dynamics and perhaps even more so since several of our elected officials seem to have a bit of a struggle with reality (either their own or that of the average American).
What happens if we can’t come up with a solution between now and mid-November (scant weeks from now)? That’s when we start to see some real-life impact. The news media is going to go all “cuts to Social Security” since that makes for sexy headlines but let’s talk something a little more mundane – weather. The bulk of our weather forecasts, including those used for air travel, are supplied by the Federal government and would be on the block if mandatory cuts were enacted. It won’t matter how old Southwest’s computers are since the air traffic controllers won’t be able to direct air traffic. For something a little closer to home, doctors who provide services under the Medicare program will have to wait even longer than they already do to get paid (the average wait is now nearly 90 days).
Will the worst come to pass – probably not. It’s remarkably bad politics to let a country collapse. On the other hand, will both parties drag it to the deadline – probably. It’s remarkably good publicity to let a country almost collapse and blame it on someone else. And, if there’s one thing we’ve learned the hard way, our government officials loves the limelight.