What If We Don't Make The Debt Ceiling Deadline?

The U.S. Treasury Department's projected deadline to raise the debt ceiling is August 2. If the government fails to reach a deal by then, it runs the risk of default. Robert Siegel talks to Jay Powell, former undersecretary of the Treasury during the first Bush administration and scholar at the Bipartisan Policy Center, about what might happen on August 3.

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ROBERT SIEGEL, host:

If lawmakers fail to reach a deal to raise the debt ceiling by August 2nd, then what actually happens on August 3rd? Well, Jay Powell has been doing analysis for the Bipartisan Policy Center. He was undersecretary of the Treasury during the administration of President George H.W. Bush, and he joins us in the studio.

Hi.

Mr. JAY POWELL (Bipartisan Policy Center): Great to be here.

SIEGEL: First, what happens on August 3rd? Are there specific bills that the U.S. obviously wouldn't pay on that day?

Mr. POWELL: What happens on August 3rd is that the federal government wakes up and has nowhere near enough incoming cash to pay its bills. So, in particular on August 3rd, we project, by our estimates, that there would be about $12 billion of incoming cash, but there will be $32 billion worth of bills to pay, of which 23 billion is in fact a large Social Security payment. So there's a real question whether the government will actually have the cash to pay its bills.

In any case, as you go forward through August, the government will be approximately 44 percent short on the month as a whole.

SIEGEL: In August, actually.

Mr. POWELL: In August.

SIEGEL: That soon. And how much of that would be interest or principal due bondholders? Could the U.S. actually say if you have a federal paper, we'll pay you, but all the seniors and everybody else will have to wait for their money?

Mr. POWELL: A relatively small amount in these terms is interest, and there really would be no problem for the federal government to pay interest on its bonds. And we don't project, based on our work, that there would be a default on our debt obligations, on our bonded indebtedness.

SIEGEL: If, let's say, the Treasury said, well, pay the seniors their Social Security, pay the creditors what they're owed on paper, pay Medicare, what wouldn't be paid in that case?

Mr. POWELL: Well, we did an example in our presentation, and in that example, we've made all the social safety net payments, so it's Medicare, Medicaid, Social Security, food stamps and the like and interest, of course, which will be the first thing paid, and you can do all of that with the incoming cash flows in August.

What you didn't pay, which you weren't able to pay, is a single dollar for defense, including active-duty military pay, including the whole Pentagon and all payments to creditors in the defense area. You couldn't keep the Justice Department. We wouldn't have $1 for the FBI, for the courts, for the prisons. So - and it goes on and on. The Education Department would be closed, and many, many other Cabinet departments. So however you move the chess pieces around here, you lose.

SIEGEL: You know, yesterday, we sent people out with microphones around the country and asked passersby at various public places what do you think about all this. And I remember one man, his remarks stick very much in my memory, that he said I don't want to raise the debt ceiling any further. I don't want to saddle my children and grandchildren with more debt. To him, that's what raising the debt ceiling means.

Would not raising the debt ceiling reduce or increase the country's debt in the long run?

Mr. POWELL: It doesn't affect it one way or the other. It's funny, they - I've looked at the polling data, 70 percent or 60 percent of Americans oppose raising the debt limit.

If you ask them if we don't raise the debt limit and that forces us to cut payments to Social Security or Medicare, Medicaid, it reverses, and overwhelmingly, people want to have the debt ceiling raised.

So the sense of our work is to show everyone what it really means not to raise the debt limit by August 2.

SIEGEL: When you were at the Treasury, by the way, managing public debt, did we come up against the debt ceiling, did it have to be raised at all during that time?

Mr. POWELL: Yes, it did. We didn't have this kind of public battle over it at that point, although there were big public battles both before and after my era. We had kind of private hair-pulling sessions with the Hill, but nothing remotely like what's happening now.

SIEGEL: People pulling out their own hair, or people pulling out other people's hair?

Mr. POWELL: Principally, pulling out my hair.

(Soundbite of laughter)

SIEGEL: OK. Well, I hope you're having a better debt crisis this time.

Mr. POWELL: I am. Does it look real, my hair?

SIEGEL: It does, absolutely. Jay Powell, thank you very much for talking with us.

Mr. POWELL: Thank you. Great to be here.

SIEGEL: Jay Powell, former undersecretary of the Treasury during the first Bush administration, currently a scholar at the Bipartisan Policy Center in Washington, D.C.

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