Debt Limit, Or Is It?

This afternoon, the Government Accountability Office issued a detailed report of what happened when the debt limit was not increased in time to avoid Treasury market disruptions between 1995 and 2010 and on what Treasury can do once it reaches the limit to avoid default.

“After controlling for other factors that could have affected the yield spread, such as economic uncertainty and liquidity in the bill market, we estimated that the debt limit added a premium of about 4 basis points during the debt limit event period in 2009–2010. Applying this premium to all 3-month Treasury bills issued during this period, we estimate that Treasury paid $78 million in additional borrowing costs as a result of the debt limit.” [Page 24]

On January 6, Treasury announced it would hit the debt limit no later than May 16, but it modified that to May 31, 2011 on February 2. It will issue another update during the first week of March.

Then there’s the question of how much leeway Treasury may have to postpone exceeding the debt limit. “As of August 31, 2010, the extraordinary actions available to Treasury could provide about $147.5 billion in additional borrowing capacity without a DISP and an additional $7.7 billion per month based on the length of the DISP declared.” [Page 10] Treasury could also run down its cash on hand and cash at the Fed. Altogether that might give Treasury an extra month or two.

Congress is planning to start consideration of the debt limit in mid-May or early June. It has to originate in the House, and it’s likely to be accompanied by spending cuts and balanced budget amendments that will be rejected by the Senate. Just as with funding the government beyond midnight, March 4, it will be difficult to find enough middle ground to pass both houses of Congress. If a deal gets cut on funding the government, then that path would be trod again on the debt limit. If a series of short-term continuing resolutions fund the government without any deal, then I would look for similar short-term debt limit extensions, like we had in the 1980s. GAO cited that history in this letter to Senator Pat Moynihan (D-NY). This CRS report did too.

A long list of officials and leaders of both parties have disavowed default. It would saddle us with higher interest rates for decades. Senator Pat Toomey (R-PA) has offered S.163 to require Treasury to pay interest and principal before any other expense, but Treasury correctly stated that any failure by the federal government to meet its obligations would have the same effect.

Why do we have a debt limit? Congress wouldn’t pass the Second Liberty Bond Act of 1917 to fund the First World War without it. Ever since, it has levered all manner of extraneous spending increases, tax cuts, and special interest amendments without having the slightest downward impact on federal spending. As the first two sentences of today’s GAO report say, “The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability top pay obligations already incurred.” If you really want to control spending, control spending.

One day in the early 1980s, on the Senate floor, Senate Budget Chair Pete Domenici (R-NM) asked me to inform another senator as to the interest cost to the American taxpayers of debating his amendment and postponing passage of the debt limit until the next day. “Senator, he’s not going to listen to me, but I’ll go anyway.” I don’t remember the amount, but it was in the tens of millions of dollars. I approached the senator and said, “Senator, Senator Domenici asked me to tell you that debating your amendment and delaying the passage of the debt limit to until tomorrow will cost the taxpayers this much.” He looked at me like I was a cockroach, and said he would offer his amendment anyway. He was offended that I would even suggest he shouldn’t offer his amendment. He was elected, and I wasn’t, and the taxpayers paid. His amendment did not pass.

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