While we are also not in the business of making economic forecasts, our analysis is broadly consistent with that of Mr. Zandi.
Using publicly available data, we looked at daily cash flows for the federal government going back several years. Based on this data, the government will run short of cash on August 3. There is little doubt about this time frame. Those who speculate that the date will be much later, or that Treasury has a secret bag of tricks, are simply mistaken.
If we run short of cash, the Treasury Department will be forced to “prioritize” some payments over others. Treasury has no explicit legal authority to do so, nor is the Department’s intended institutional role to “cut” spending by failing to make payments that have been ordered by Congress. But the Treasury may have no choice given the overriding need to avoid an unthinkable bond default.
If Congress does not act by August 2, we project that the government will be unable to pay 44 percent of its bills during the remainder of August. That amounts to a $134 billion one-month spending reduction. As our study illustrates, a 44 percent spending cut will require deep incisions to many important and popular programs. Treasury would have to choose from a universe of bad options, each one more unthinkable than the next.
To provide one example, assume that all safety net payments are made – Social Security, Medicare, Medicaid, food stamps, tuition assistance to low and middle income families, and others – plus payments for interest on the debt. Making just those payments would leave no money to fund the Justice Department, including the FBI, the courts, U.S. Marshalls, and federal prisons. No money for the troops on active duty, or the Defense Department, or the CIA. Or the Labor, Interior, Commerce or Energy Departments. Nor for the EPA, the Federal Highway Administration or any of our 2 million civilian federal employees.
Using different priorities, you can make a different set of payments, but the result will be no more satisfactory or fair.
The $134 billion in unpaid bills would amount to a 10 percent decline in GDP over the month of August. Given the real concerns about falling back into recession, this hit to growth would be very ill timed.
Another often-overlooked fact is that nearly $500 billion in federal debt matures during August. The only way to pay off this debt at maturity and avoid default is to find buyers for an equal amount of new debt and use the proceeds to pay off the existing holders. Some buyers will likely stay on the sidelines to avoid the chaos, particularly since half of our debt is sold abroad. That means higher rates and a bigger deficit -- more bad things for the economy. There is also a risk that we are unable to attract enough buyers, which could mean catastrophic risks and a possible default. We do not think that this last outcome is likely, but neither is it out of the conversation.
A nation in fiscal crisis faces only tough choices, and they get tougher with every year of inaction. Many of our elected representatives are driven by the knowledge that we are on an unsustainable fiscal path and that something must be done about it, and soon. We applaud them for that.
At the same time, all sides should understand the risks they are taking. The first rule, it seems to us, is to do no harm.
Jay Powell, a Visiting Scholar at the Bipartisan Policy Center, served as Under Secretary of the Treasury for Finance under President George H. W. Bush. Steve Bell, Senior Director of the Economic Policy Project at the Bipartisan Policy Center, was Staff Director of the Senate Budget Committee under then Chairman Pete V. Domenici.