U.S. Treasury Secretary Jacob J. Lew spoke yesterday at the Bipartisan Policy Center (BPC), where he reiterated his view on the critical need to increase the debt limit in a timely manner to ensure the U.S. government can continue financing its existing obligations. Otherwise, he said, “delaying action can cause harm to our economy, rattle financial markets and hurt taxpayers.”
Secretary Lew stated that under Treasury Department projections, extraordinary measures will run out by the end of the month. BPC recently estimated that the X Date – the first day on which Treasury does not have enough cash to pay all bills in full and on time and would be forced to default on some of its obligations – will occur between February 28 and March 25, with a high probability for the X Date to occur on or before March 14.
Secretary Lew emphasized that extraordinary measures would not last as long as the last time Treasury employed them. Lew also cautioned Congress that, “it would be a mistake to wait until the eleventh hour to get this done.”
Secretary Lew’s keynote remarks were followed by a panel moderated by Sudeep Reddy of The Wall Street Journal that discussed pros and cons of the debt limit.
Lawrence B. Lindsey, former Director of the National Economic Council and former Assistant to President George W. Bush on Economic Policy, argued that the debt ceiling is useful because it forces Congress to affirmatively confront spending that is otherwise on autopilot. He said that the debt limit was an “inelegant” way to force such negotiations, but that, “absent [the debt limit], we have a complete runaway spending process.”
In contrast, Rudolph G. Penner, former Director of the Congressional Budget Office and currently an Institute Fellow at the Urban Institute, argued that “the real place to negotiate over spending and tax matters … is when you are debating the budget resolution.” Penner added that historically, “having a separate debt limit…hasn’t brought about fundamental reforms in entitlements.”’
Tony Fratto, former Assistant Secretary of Treasury for Public Affairs, said that while the debt ceiling has served a purpose in the past – giving Congress a reason to talk about longer-term debt issues – recent confrontations have been more serious: “The costs became too high and far exceeded the rhetorical benefit of it.”
The discussion was enriched by the comments of Amanda Sayegh, Economic Minister-Counsellor with the Australian Government, who discussed Australia’s experience with instating a debt limit and repealing it shortly thereafter. Australia did not have a debt limit at all until 2008. The limit was repealed in 2013 because members of the Australian parliament disagreed about the proper level for the new limit. As part of the compromise agreement, the law repealing the limit added increased transparency and reporting requirements for governmental debt.
The panel also focused on how markets were affected by last year’s debt limit showdown.
Paul Sheard, Chief Global Economist and Head of Global Economics and Research at Standard & Poor’s Ratings Services, explained that confrontations over the debt limit have global implications and that market participants would not look favorably on a default that prioritized some payments over others: “I think you really don’t want to put the word ‘default’ and ‘U.S. fiscal policy’ in the same sentence.” When addressing the question of what would happen if the United States were to actually default, he said “no one actually knows, but we don’t want to go there.”
Conversely, Mr. Lindsey pushed to “give some credit to the American economy and the American markets … the best two quarters we’ve had in years are the 3rd and 4th of last year – the ones that were supposedly so devastated by this [government shutdown and debt limit debate]. I am certainly not an advocate of going over the cliff … but let’s realize we have a very robust system.”
Alex Gold served as a policy analyst for BPC’s Economic Policy Project.