Economic outlook grim if no debt deal reached

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WASHINGTON — Horror stories are flying about the damage that might be wreaked should Congress and President Barack Obama fail to cut a deal by the Aug. 2 deadline to increase America’s borrowing limit. Nearly every American is in harm’s way, either directly or indirectly.

Absent a deal by then, the government would find itself tight on cash and unable to borrow — and have to start deciding which of the 80 million bills due in August it should pay and which it should put off.

Tough decisions would come immediately: On Aug. 3, some $23 billion in Social Security benefit payments are due to be processed. On Aug. 4, the Treasury Department must pay $87 billion to investors to redeem maturing Treasury securities. On Aug. 15, more than $30 billion in interest payments come due.

In addition to those costs, the government normally pays $5 billion to $10 billion daily to defense contractors, Medicare providers, federal employees and others.

Obama has said he can’t guarantee Social Security checks and payments to veterans and the disabled will go out on schedule in the absence of a deal: “There may simply not be the money in the coffers to do it.” He could be challenged on that, however, because some legal and congressional budget experts question whether he can unilaterally decline to pay Social Security benefits if there are still assets in the program’s trust fund.

Regardless of how that issue is resolved, there’s no question that government services, programs and benefits could take an enormous hit.

No one knows exactly what choices Obama and his top officials would make if the crisis comes. The White House Office of Budget and Management is the agency charged with reviewing possible cuts in benefits and payments while the Treasury Department handles cash flow. All have been mum about their crisis plans, apparently to avoid market speculation or panic.

But Treasury Secretary Timothy Geithner has insisted the deadline is real. “There is no credible way to give Congress more time,” he said recently.

One analysis, by the Bipartisan Policy Center, suggests that once the government runs out of cash and lacks the power to further borrow, it would need to slash spending at once by as much as a whopping 44 percent. The U.S. now borrows more than 40 cents for every dollar it spends.

So long as the Treasury has tax revenues coming in, it can still make interest payments to technically avoid default. Some analysts think it would lean that way at first, so as to do less harm to the country’s long-term credit rating. Default would be a “major crisis” that would radiate “shockwaves” through the financial system, Federal Reserve Chairman Ben Bernanke told Congress recently.

But putting a priority on paying interest on maturing debt to avoid a default would simply force spending cuts instead — some of them more likely to hit ordinary people.

Parks and monuments can be temporarily shut. That’s been done before.

But is it worth taxpayers’ money to pay the costs of pursuing a second trial against former baseball star Roger Clemens if the judge who declared a mistrial in his perjury case this week clears the way? And what about clinical trials on new drugs or other scientific research projects? Or completing half-finished highway construction projects?

The government is even weighing the prospect of selling off some of its assets — gold in Fort Knox, buildings, property, even some national parklands — to make ends meet, if absolutely necessary.

Government contractors are likely to be among the early victims, says Paul Light, professor of public policy at New York University. “No new contracts. Delayed payments. Stop work orders. I can’t imagine that Obama would ever touch soldiers’ pay. But you’d get closing of parks, as we’ve seen in Minnesota, the national monuments, freezes on discretionary spending including Medicaid.”

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