Alan Krueger, who served as Assistant Secretary for Economic Policy and Chief Economist of the U.S. Department of the Treasury 2009-2010, was interviewed by Yu Chen for this post on the debt limit.
Yu Chen (YC): Do you think the debt ceiling will get raised?
Alan Krueger (AK): There are some things like raising the debt ceiling that simply have to be done.
For instance, the only thing that prompted the administration to put health care reform briefly on hold was working with Congress to raise the debt ceiling at the end of 2009 and beginning of 2010. This was one thing that I had the opportunity to work on that didn't get much attention at the time -- or since. I remember Secretary Timothy Geithner said at one point, "The American people don't realize that one of our significant achievements was raising the debt ceiling without incident."
We are approaching the debt ceiling again. The debt ceiling is a funny animal. Congress tells Treasury to spend money on various programs, and it authorizes the collection of a certain amount of tax revenue, expecting Treasury to borrow to make up for any shortfall of revenues over spending. Yet, it also sets a limit on how much debt the government can accumulate. The Treasury isn't borrowing money because it wants to; it is borrowing because Congress chose to spend more money than it chose to collect. If Congress wants to limit the debt, it should vote to cut spending and/or raise revenues -- and it can do that independently of voting to raise the debt ceiling. So, in my view, the debt ceiling is an unnecessary constraint that can cause severe damage to the financial reputation of the United States and health of the world economy if it is not raised in an orderly way that is congruent with past spending and taxing decisions.
I'm 90% confident that, despite all the attendant drama, the debt ceiling will go up without incident. And I suspect the debt ceiling might go up in steps rather than all at once, as it did last time. But I do think that Congress will do the right thing - the absolutely necessary thing -- and avoid a fiscal meltdown by raising the debt ceiling. Of course, there may be some strings attached.
Some Congressmen have said things like, "We don't believe that August is the real deadline. The Treasury Department will have some opportunity to juggle the books and move things around."
YC: But the Treasury doesn't play games with the debt ceiling.
If it came to it -- and I very much hope this is never tested -- I think Treasury will pull out all stops to avoid defaulting on the debt. It could, for example, repo or sell the government's gold supply or other assets to raise money to service the debt for a time.
However, you reach a point where you're legally required to default on some obligation, whether it's an obligation to pay interest on Treasury bills, to pay the military or to pay social security benefits. If the debt ceiling is not raised, Treasury will soon need to default on some obligation and radically reduce spending. Given the amount of borrowing the government is doing, failing to raise the debt ceiling would require a widespread reduction in spending, and if we reach that point, I think it's going to cause severe trauma for the economy -- not just now, but for years to come. I think a default on our obligations would raise our borrowing costs and saddle the next generation with even more debt and a heavier burden as a result.
YC: How did you play a role?
AK: The Treasury Secretary is required to notify Congress 90 days in advance of when he expects to hit the debt ceiling. They used to always send up a letter that said, "We're going to hit it on such and such day, plus or minus one week." I asked, "Where did the plus or minus one week come from?"
Treasury has an office that makes projections of how much the government will need to borrow in the future, called the Office of Debt Projections, which is staffed by career employees. They do the same thing for every administration -- they project how much money the government is expected to borrow each day for months into the future. We're a lot less certain about how much we will need to borrow now than we were three or four years ago, because the deficit has increased so much. Our borrowing needs are determined by many factors that are harder and harder to forecast: interest rates vary, tax revenues vary and spending rates vary from day to day. All of these factors affect borrowing needs.
When a specific date for hitting the debt ceiling was reported at one of our meetings with an air of certainty in the fall of 2009, Tim Geithner asked, "How do you know for sure? Can't you calculate some type of a range? What's that thing you guys call it; you know, that interval?" I realized he was referring to a confidence interval. I'm not sure anyone else in the Department besides me remembered what a confidence interval was. This is something that I have taught in statistics classes, so I was pleased to put on my professorial hat. I explained what a confidence interval was and gave an example -- a range calculated in such a way that 95% of the time it would contain the true date we were going to hit the debt ceiling.
I took it upon myself, with my staff, to try to calculate some measure of uncertainty for when we were going to hit the debt ceiling. I'm really proud of my staff, because it wasn't so easy to do. When we got the historical projections -- the historical data on what actually happened and past projections of borrowing needs -- we looked at how much error there was and how big the mistakes were to get some idea of the uncertainty that would accompany projections going forward. This calculation was difficult because spending and tax revenue tend to be very lumpy from day to day; some days a lot of money comes in and some days a lot of money goes out.
Now, when the Secretary warns Congress about the debt ceiling, he includes a 99% confidence interval, and when we talked to Congress about this issue, we would bring a chart showing a range of uncertainty around the government's projected borrowing needs. I think this is extremely helpful.
Indeed, I once remarked that I was responsible for bringing the Treasury Department into the 20th century when it comes to statistics... I was also relieved that our confidence interval contained the true date that we would have hit the debt ceiling had Congress not raised the debt limit.
A shrewd Congressman once called the Department and said, "We're going to raise the debt ceiling in steps. We haven't gotten it all worked out, but we're going to give you enough money to get by for X weeks, and it'd be very convenient if we could hit the next ceiling just before the next recess." (Congress often uses an upcoming recess to force it to act.) He then asked, "How much money do we need to make it to such and such holiday?"
When the question reached me, my response was that, I can tell you the date plus or minus two weeks; I can't tell you a specific time. It's kind of folly to think that you can predict with that much certainty.
Sometimes an understanding of statistics doesn't intersect well with the way politicians think about issues, but I think confidence intervals are a useful addition for managing the nation's borrowing needs.
YC: Does the Treasury have any wiggle room once the debt ceiling is reached?
AK: There is some wiggle room, but that is mostly taken into account in the forecasts. Treasury calls it "extraordinary measures" -- things like withdrawing money that the Treasury has deposited at the Federal Reserve or delaying deposits to federal workers' retirement accounts. The problem with taking the extraordinary measures is that more and more, they put the government at risk (e.g., the money deposited at the Fed gives the Fed some room to maneuver), or diminish the effectiveness of government programs. I already mentioned that there may be some new extraordinary measures that go beyond the previous canon that are not included in the forecast, such as repoing or selling assets, that can make it possible to pay for our bills a little while longer.
Eventually, the government runs out of extraordinary measures. Unless there are some tricks that I'm not aware of, if the debt ceiling is not raised by August 2nd, the government will soon need to make some painful decisions that would likely irreversibly harm the country's fiscal reputation and ability to borrow cheaply in capital markets, and that could throw the world economy back into a deep recession or a second Great Depression.