The end of Federal Debt Limit brinksmanship is upon us. Extraordinary measures have been in effect for some time. America is now driving with the “empty light” on and about to blow past the last gas station exit. The near-term costs of a default on our national debt are calculable.  The long-term costs of a breach in the “full faith and credit of the United States,” are not. TCS Senior Policy Analyst, Josh Sewell joins the podcast to discuss the facts, process, history, and options facing American Taxpayers.

Episode 44: Transcript

Announcer:

Welcome to Budget Watchdog All Federal. The podcast dedicated to making sense of the budget, spending, and tax issues facing the nation. Cut through the partisan rhetoric and talking points for the facts about what’s being talked about, bandied about, and pushed in Washington. Brought to you by Taxpayers for Common Sense. And now, the host of Budget Watchdog AF, TCS President, Steve Ellis.

Steve Ellis:

Welcome to All American Taxpayers Seeking Common Sense. You’ve made it to the right place. For over 25 years, TCS that’s Taxpayers For Common Sense, has served as an independent, nonpartisan budget watchdog group based in Washington DC. We believe in fiscal policy for America that is based on facts. We believe in transparency and accountability because no matter where you are in the political spectrum, no one wants to see their tax dollars wasted.

It’s Tuesday, April 25th, 2023 and podcast listeners, today we’re going to put our cards on the table. The end of the game, that’s a foot in Washington DC on the issue of the federal debt limit, is upon us. Extraordinary measures have been in effect for some time. America’s driving with the empty light on and we’re about to blow past the last gas station exit. This is serious. The near term cost of a default on our national debt are calculable. The long-term cost of a breach in the full faith and credit of the United States are not. Joining me at the poker table for a conversation about the facts, process, history and options facing American taxpayers is TCS Senior Policy Analyst, Josh Sewell.

Josh Sewell:

Hey Steve, glad to be here.

Steve Ellis:

Glad you’re here too. In January, Josh, the US government ran up against its legal borrowing limit of $31.381 trillion, and just if you’re counting, remember that last little 0.001, that’s a billion dollars. So just keep that in mind. And the Treasury Department began implementing extraordinary measures to avoid missing payments on its bills. Let’s start with that. What are these extraordinary measures?

Josh Sewell:

To put it simply, these are steps that the treasury takes to stave off a default. So it’s kind of this, the check is in the mail, kind of steps, I like to think about it. So you’re shifting funds around basically. And so specifically right now we’re temporarily suspending contributions into the civil service and postal service retirement accounts, and they’re cashing out certain bonds that they have in there. And they also suspend daily reinvestment in this thing called the G fund, which is the government’s money market account in its newer retirement account. So basically it’s a lot of these weird little shifts where the government is scrambling to pay its bills and just not run out of money.

Steve Ellis:

And what we know from past as prologue is, all this is going to be restored after they eventually lift the debt limit. So it’s not like we’re saving any money, we’re just avoiding spending now and then we’ll spend it again on the other side of this.

Josh Sewell:

Yeah, exactly. Every time we’ve come up to the debt limit and have had to take these extraordinary measures, those accounts are restored later. We’re not doing things that save money, we’re just doing things that cause some extra work and cause some heartburn for folks like us and federal workers and other folks.

Steve Ellis:

Yeah, it’s just basically a shell game at this point. So we just had taxes filed and people paying estimated taxes. Does that actually play into this as well, Josh?

Josh Sewell:

It does. And probably a negative thing right now in the sense that since we’re running up against the debt limit, the federal government can’t really issue a bunch of new debt, so they can’t take on debt to pay for the existing obligations we have. So what they’re doing instead is starting to become a cash on hand. So money that comes in is the money that will go out. And so when it comes to people filing their taxes, that filing deadline just happened. And I’ll admit, I was one of those people who waited till the last minute. I sent the IRS my check. So my little bit of money I had to pay in, which wasn’t a little bit for me this year, could stave off the date that we come and actually run out of money basically because there’s this wave of cash that comes into the treasury. Except this year that wave isn’t quite as high as it was expected to be and as and it has been in past years.

Steve Ellis:

Got it. Yeah, my check went in the mail April 17th, uncle Sam, if you’re listening. But so what you’re really speaking to Uncle Sam, which he’s living hand to mouth basically at this point, which is not a way to operate a federal government.

Josh Sewell:

No, it’s not. And it’s frankly, it’s mind-boggling in some respects for me. I mean, we’ve been working on this issue for a long time. We have a massive economy, we have a massive budget, and I would agree with many folks that we are spending more than we should, but this debt limit fight is not about what are we spending tomorrow, it’s a fight about… It’s not a fight. It shouldn’t be a fight. The debt is about stuff we’ve already decided to spend. These are past decisions. The debt service that we’re having to do, the debt limit is all about decisions that were made in the past. Mistakes were made perhaps, but this is not about making decisions now that are going to cause us to spend more money. The debt limit is just about things that were already decided by Congress and the President and the one before them and the one before them.

Steve Ellis:

And it’s not just spending, it’s also foregone revenue and tax cuts and things along those lines.

Josh Sewell:

Great point.

Steve Ellis:

So the next big thing is the identification of the so-called X date, the date when the extraordinary measures will be exhausted and the government might actually default if the limit on federal borrowing is not lifted. Does defining the X date signal to the ratings agencies like Moody’s that it might already be too late?

Josh Sewell:

Possibly. The X date as it sounds, it would be the date where we can no longer pay our bills. And so of course we can pay some of the bills because revenue will still be coming in through people filing estimated or paying their estimated taxes and through tariffs and other means like that. But somewhere between 60-70% of your revenue may be sufficient to cover expected costs, but that means there’s a bunch of bills that won’t be paid. So people are going to charge us a higher interest rate to loan to us is what it basically comes down to. So there’s an absolute real cost.

Steve Ellis:

And so the thing is that even if Moody’s downgrades us, I mean it’s really what is the long term effect and the fact that we’re going to have to spend more money, we’re going to have to pay people more to buy our debt, and that ain’t going to go away. There’s no cleaning up Uncle Sam’s FICO score. It’s going to be a permanent blemish on our fiscal record. And we’ve benefited certainly since World War II of being the reserve currency of choice for the world, which allows us to borrow this money so that we continue to live within deficit spending at a relatively cheap rate and just a small change in that because we’re spending so much on net interest is going to cost us dearly.

So let me back up though a bit of history here, Josh, if you please. These negotiations often grow heated and go down to the wire, but there have been roughly 80 deals to raise or suspend the borrowing cap since the 1960s, including three during the previous administration. What are the most likely outcomes right now?

Josh Sewell:

Well really there’s three outcomes. You can either suspend the debt limit, you can actually raise the debt limit, or we default. And so in past I think it’s been consensus that default was off the table. I don’t know if that that’s off the table right now, which is terrifying for many of us. But if I’d say the last couple of debt limit deals have involved suspending the limit. So essentially we just, even though we’ve blown past it technically, we just pretend like it’s not there and we say we will suspend the debt limit until a particular future date.

Steve Ellis:

And then at that date, whatever the debt is essentially the new debt limit, which then basically kicks into extraordinary measures.

Josh Sewell:

Yeah, and it’s a way of being for the debt limit before you’re against it, I guess, or being against it before you’re for it. The other alternative is to actually raise it and say the challenge in raising instead of suspending is that Congress would then have to specify an amount and/or a date. And so that’s a real challenge because you can just guess the campaign ads that people are going to be running next year or I guess the campaign has already started for some folks, is that, “You’ve decided to raise our debt by X amount of money,” when in reality, again, we’re just acknowledging the fact that we’ve already had this debt and we’re going to pay for it.

Steve Ellis:

You’re listening to Budget Watchdog All Federal, the podcast dedicated to making sense of the budget, spending and tax issues facing the nation. I’m your host, TCS president Steve Ellis, and we continue now with Josh Sewell.

So Josh, let’s circle back to the phrase that is most key to understanding the gravity of the situation, the full faith and credit of the United States. If the debt limit situation lands on option three, default, will American taxpayers ever recover from the real costs of being known as what President Biden termed, “A deadbeat nation.”

Josh Sewell:

Ever recover? That’s a tough question. There will always be costs. I think we can be confident in that because if we default on our debt, it’s going to cost us significantly. Exactly how much we don’t know. But it’s going to be billions of dollars every year just to service our existing debt. We’re going to be charged higher interest rates because people won’t believe we’re going to pay. And so like in anything, if people lack faith in your ability to pay, you get charged a higher interest rate. So there will be a long-lasting blemish on our record and we’ve never defaulted. Other smaller nations have and it has not gone well for them. And so we can be confident that there’s going to be significant costs. We just don’t know exactly how significant and how long because this is unprecedented, unchartered territory.

Steve Ellis:

And clearly as we get closer and closer to the brink, it’s just going to be more and more risky. And not only that, it is going to encourage people who buy our debt to try to hedge and to look in investing, buying more Euros or more Yuan from China. And so even a small change in who is buying our debt or how much of our debt they buy is going to have a cost, right?

Josh Sewell:

Yeah, exactly. And to be clear, we are definitely not fans of deficit spending. We are not fans of Congress and the President, this one and previous ones and potentially future ones, avoiding making tough decisions. But these decisions to take on the debt that we’re talking about, were already made. And so we need to just… And we’ve had a big debate about this, but I think it’s time for us to just say the debt limit is not serving the function that it should serve. It’s not helping us reign in our deficits. So let’s lift it. Let’s get rid of it, let’s figure that out and then let’s make those tough decisions out in the open, have the debates and figure out how we can pay for the stuff that we feel like we must have.

Steve Ellis:

You’re right, Josh. It’s not lost on me that earlier this year TCS made the unprecedented decision in our more almost 30 year history, we decided that the debt limit… The lawmakers cannot be trusted, the policymakers cannot be trusted with the debt limit, that they can’t be trusted to actually agree to pay the debts that we’ve already incurred. So therefore once we get past this debt limit imbroglio, let’s get rid of it. Because it’s just too dangerous to the full faith and credit of the US Treasury.

So Josh sitting in our perch here on Pennsylvania Avenue and the Capitol just a few blocks away, this isn’t the first time we’ve seen a fight like this. I mean, we’ve seen this knockdown drag out fight before. What was the most notable one, in your mind?

Josh Sewell:

The most notable one was back in 2011, I guess it was. It feels in some ways it feels like yesterday. In other ways it feels like 40 years ago. Was when the Republicans had taken over the House and President Obama was the president and debts started mattering again. And we had a massive knockdown drag out fight about this. And we came really close, within weeks, within days of defaulting. So that was the last time. And it definitely did produce some results.

Steve Ellis:

Yeah, the budget control act was one, but it seems like, let’s face it, the vast majority of lawmakers that are in Congress right now weren’t in Congress then, or at least a significant amount of them. And so they don’t even really remember that type of fight. And a lot of them, well, not a lot of them, but some of them have never had to raise the debt limit before. And it’s something where I feel like there’s a lot of these policymakers that haven’t looked over the chasm and actually realized what would happen to the full faith and credit of the US.

Josh Sewell:

Yeah, we’re on our third speaker since then, two Republicans and one Democrat. But I do think it seems to be a different breed of lawmaker here and not just clearly with Republicans, they seem to be more adamant about certain things than they used to be. But even the Democrats, you’re right that many of them weren’t here last time and so don’t… it’s a like a lack of familiarity with the issue, it seems like, or just a different take on it. But it’s a dangerous game to be playing with that full faith and credit.

I welcome a hard conversations about how to get spending in line with our revenue. We need to have this hard conversation about how get revenue in line with our spending. I mean, there are two sides of that ledger, and there are some proposals that are out there now. But frankly, whether it’s the president’s budget or it’s the House Republican proposal that as of this taping hasn’t yet been voted on, we’ll see if it makes it through the House or not. Neither of them are that serious, in my opinion, in the sense of they avoid the toughest decisions.

Steve Ellis:

Taxpayers For Common Sense wants to have a budget conversation and to have this discussion about how to get our revenues and our spending and alignment just like, or more in alignment, basically reduce the deficit as a percentage of GDP so we can kind of grow ourselves out of this crisis that we’re in, but it’s not the time to have that discussion. It’s basically raise the debt limit and let’s sit down at the table. And not just about spending in revenues generally, but also about the major entitlement programs that in just a few years time, particularly Medicare, but social security’s not far behind that, that we’re going to see benefit cuts, absent other changes to increase the revenue to those programs.

Josh Sewell:

And I think the great point that you just made there is that you raise the debt limit, you eliminate the debt limit, those fiscal pressures, they’re still going to be there. The debt limit is not the pressure anymore, it’s the debt itself and that debt is there. And that external pressure of, we’re going to lose benefits in these programs if we don’t make changes. We’re going to have to make real cuts in these places because we just won’t have the money to pay for it. That’s there. So I think the debt limit has outlived its usefulness, but the debt and deficit are still an issue. And I’m an optimist. It may not sound like it on this podcast, but still an optimist that we can solve these things frankly because we have to. And so we will if we work at it.

Steve Ellis:

And the thing is that the interest that we pay and that essentially as you do these games and you run the risk of spooking the buyers of our bonds that essentially we’re going to have interest, which is already going up. I mean, it’s not like we’re going to all of a sudden have a surplus and we’re going to start paying down the debt. We’re still going to be paying interest on that $31 trillion. And so that figure, according to the congressional budget office, the nonpartisan scorekeeper, is going to exceed defense spending, which we were talking about as approaching a trillion dollars, by the end of this decade.

Josh Sewell:

Yeah, it’s crazy. So I think it’s time to tone down the rhetoric, deescalate some things a little bit, and just think about who and what is actually important here. And we owe it to taxpayers, we owe it to ourselves to actually sit down and come up with some real solutions. And frankly, I get politics. I’ve been around here long enough, I understand that. But in the end, there are solutions. We can come together and we can make some of the tough choices and we just have to do it.

Steve Ellis:

That’s exactly right, Josh. It is. And the thing is, we haven’t always had a debt limit. It wasn’t until Congress decided they didn’t want to keep approving every request from the president and in World War I and we had to increase spending. And so that’s when the debt limit was created. So clearly the country lasted more than a hundred years without a debt limit and clearly could last without it. And as you’ve said, it’s just essentially approving spending decisions that Congress has already made.

Josh Sewell:

So let’s make some better decisions.

Steve Ellis:

Yes. And we need cooler heads to prevail. Well, there you have it, podcast listeners. Cards on the table. The stakes with a debt limit default are as high as they can get from an economic perspective, and taxpayers are all in.

This is the frequency, mark it on your dial, subscribe and share and know this, Taxpayers For Common Sense has your back America. We read the bills, monitor the earmarks, and highlight those wasteful programs that poorly spend our money and shift long-term risk to taxpayers. We’ll be back with a new episode soon. I hope you’ll meet us right here to learn more.