Nobody From Nowhere (@i8dc)

Occasional Common Sense

What Actually Happens With No Debt Ceiling Relief?

leave a comment »

The Bipartisan Policy Center (BPC) released a study this week describing what it thinks would happen if the arbitrary debt ceiling isn’t raised before August 3, the day it says the government will no longer be able to pay current obligations without borrowing in excess of the debt ceiling.  The BPC report has lots of useful data, including estimates of inflows and outflows for every weekday from August 3 to August 15.

BPC uses historical cash balance data to estimate that sometime during the week starting on August 2 (the date stated by Treasury Secretary Geithner earlier this year), the government will no longer be able to meet all of its obligations without further borrowing, and will be forced to reduce spending.

BPC reports that the government will be able to pay only 56% of its obligations.  True, but because debt service, Social Security, and Medicare must be fully funded, the situation for the rest of the government is, amazingly, even more dire.

First, debt service must come first.  It’s mandated by the 14th Admendment to the Constitution.  Repaying the debts of the United States is the only current expenditure specifically mandated by the Constitution; all others are required by statute. [Incidentally, if it were on track to cause the United States to default on its debt, the debt ceiling would most certainly be unconstitutional.]

Secondly, BPC makes the common error that Social Security and Medicare are on equal footing with other government spending.  Social Security and Medicare are owed money by the federal government (the so-called “trust funds”).  Currently running deficits, these programs draw down their trust funds to close the gap between current revenues and current expenses.  In a debt-limited situation, the government could sell Treasuries to pay Social Security recipients; increasing the public debt while equivalently decreasing the trust fund.  The net result to the gross debt would be a wash.

So that makes things different.  Here’s how it goes, using BPC’s numbers for August 3-31 (billions):





Social Security Benefits






Defense Vendor Payments


Unemployment Insurance Payments


Military Active Duty Pay


Veterans Affairs Programs


IRS Refunds


Food/Nutrition Services + TANF


Federal Salaries + Benefits


Small Business Administration


Education Department


Housing and Urban Development Programs


Other Spending (Justice, Labor< GSA, Commerce, NASA, HHS, Energy, EPA, Interior, Fed. Transit Administration, FHA, AID, etc.)


Total Outflows


* Estimate based on historical data

Revenue is $172.4B.  Removing debt service ($29B), Social Security (~$47B of current revenue) and Medicare (~$26B), we’re left with $70.4 billion in revenue, which can fund about  35.3% of all other government spending in August.

Tough choices, indeed:

  • Are we going to ask our servicemen and women to go without pay?
  • Are we going to stop providing medical care to the poor?
  • Will we stop paying contractors providing equipment to our forces overseas?
  • Are we going to stop ensuring that poor children receive decent nutrition?
  • Will we close the FBI?
  • Are we going to stop supporting our wounded veterans?
  • Will we continue to fund air traffic control?
  • Food safety inspections?
  • Federal courts?
  • Prisons?

These are not idle questions.  Funding government programs at 35% of their already legislated levels is not a recipe for good governance.  It’s also a recipe for an immediate sharp increase in unemployment and a recession.


Written by David Clayton

June 30, 2011 at 5:44 pm

Posted in Punditry

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: