Understanding the Debt Ceiling
0. Just like any other organization, the Federal Government is subject to laws of economics, probability and mathematics that it can’t change.
1. Every organization, including the Federal Government has a cash flow, related to but different from an annual summation of revenues and expenditures. For example, your local bridge club may have $600 in revenues and $600 in expenditures for the year, but if the revenue comes in at a rate of $50 per month and $300 has to be paid for the big event in February, the bridge club needs to find a way to get extra revenue up front.
2. Of course, if you have $600 in revenues and $800 in expenses each year, your organization has more than just a cash flow problem; it has a structural imbalance in its budget. Eventually, the organization will run out of money to pay for anything. If no one is watching carefully, the structural imbalance will show up as a cash-flow problem in the bridge club’s day-to-day operations, even though the problem is bigger than just the cash-flow issue.
3. On August 2, 2011, according to all reasonable estimates, the Federal Government’s cash flow will go negative, i.e. there won’t be enough money in the U.S. Treasury to cover the government’s debts. A group called the Bipartisan Policy Center, which was founded by a respectable mix of graybeards and who seem to be doing reliable and understandable work, has published a day-by-day analysis by major line item of what is expected to come in and what is scheduled to be paid out in August.
4. The anticipated August cash-flow crunch does not mean that the Federal government will immediately default on its loans. Working from BPC numbers, the government is expected to have $172.4 billion in cash available in August after the 2nd, while interest payments on debt will amount to about $29 billion. In total, the Federal government is expected to have enough money to pay only 56% of what it owes in August. Raising the debt-ceiling would allow the government to borrow the money to cover the immediate cash-flow problem. For how long would be determined by how high the limit is raised.
5. If the debt ceiling is not raised, we are into uncharted territory. Does the Federal government pay off bills in some kind of “order that they come in” until the money runs out, or does Congress or the executive branch make decisions about who gets paid?
6. If you examine the historical numbers in the bipartisan report (pg. 13), you see that the cash-flow deficit (minus borrowed or other up-front money) in this particular August is not significantly different from previous recent Augusts. This means that if the only thing that happens in the next couple of weeks is a raising of the debt ceiling, government will just keep paying out more than its takes in, until the same cash-crunch as a symptom of a structural imbalance recurs, but with an even larger debt. Borrowing forever and never paying it off cannot be infinitely sustained, even by the government; see point 0 as to why. Raising the debt ceiling in isolation, aka the David Cicilline Providence plan of keep-borrowing-then-run-away, is not a viable solution.
7. According to the BPC’s numbers and various news reports, the $111 billion dollars in spending cuts in the “cut, cap and balance” plan passed by the House (but rejected today by the Senate) – even if it all could be implemented in a single month, which is doubtful — would patch less than one month of the government’s current cash flow problem (score one for commenter jgardner03). However, the fact that big spending cuts would be needed to bring the budget into balance is not a reason to say nothing should be cut.
8. Here’s the outline of a possible solution I would tend towards at the moment: Raise the debt ceiling enough to cover the next six-months of cash flow for the government, in conjunction with the $111 billion “cut” in spending and implementation of the GDP-based spending “cap” passed by the House. Then, over the next six months, Congress would work on a program to start hitting the spending caps, and to pass a balanced budget amendment. No further increase in the debt ceiling would be on the table, unless one or maybe both of the preceding were passed by Congress.