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.
White House and Congressional Leaders: No Default on US Debt
Stocks stymied without a debt deal
U.S. mulls options on debt ceiling, time runs short
Coburn: Unlikely I'll back McConnell debt plan
No deal as clock ticks to debt deadline
Cut, Cap And Political Balancing Act: The 2012 Field On The Debt Ceiling
Governors May Tell Congress to Make Debt-Limit Deal With Obama
Whether scare tactics or not, hearing that people may not receive the only income they have coming this August 3rd and essentially in the same breath hearing that wealthy people will be allowed to continue paying in less (relative to their income) than people who make no where near the same amount, just doesn't fit into a common sense, fair plan.
Everyone should remind themselves, "There but by the grace of God go I."
Stop falling for scare tacticts!
Blaming the unemployed for unemployment is, well, not very intelligent. Especially when you know (if you have been paying attention) that there are 6 unemployed people for every job opening. In fact, it is easier to gain admission into Harvard than it is to obtain a minimum wage job at McDonald's.
Wars in Iraq, Afghanistan, Pakistan, Libya, and Somalia -- combined with tax cuts for the rich and tax subsidies for multi-billion dollar corporations -- plus offshoring of jobs -- that is what has "sucked" our tax coffers dry.
There are more doctors in Canada than there are in the USA. In fact, USA has a very low ratio of doctors per capita -- compared to the rest of the industrialized world. Also, hospitals are closing in the USA. Pay attention.
No nation on the face of the earth wants the for-profit health care system that USA has -- which is also the most expensive -- by far -- of any other health care in the world. Wise up.
Both democrats an republicans are at fault, none above the other...
They ALL get campaign money from the mega-corporations, and mega-banks and the cartel known as the Federal Reserve orders both parties to their demands!
A dispassionate view of the history of debt limits, the recent budgets of both parties, and the current public proclamations of both parties shows that the current crisis is mostly the fault of Republicans. Moreover, if the Republican leaders cannot get their own party to act intelligently and for the good of the country, they may be responsible for horrible economic distress in the US and throughout the world.
I will just say this Congress and the Executive Branch are fault!
STOP polarizing this issue...
Yup, keeping spending money they do not have and driving this nation deeper into the abyss!
It has to STOP! Raising the debt ceiling only benefits the elite, mega-corporations and the banks as well as the well-of politicians!
They make threats today because if they lose from no debt ceiling raise, they will ofcourse send their loses to the taxpayers also known as austerity!
The top 5 U.S. corporations made billions upon billions in profits and payed NO, if a tiny bit of federal taxes yet had enough millions to spend on political parties!
The system is corrupt and only feeds itself!
Its time for the little children to go back to sleep.
Good night.
Adding to our woes, Europe is falling apart and thus corporations expecting increased sales from that part of the world will be disappointed. That is why you are seeing GDP downgrades and thus lower profits forecast. The US is sputtering and Europe is as well. That is because we are all over-leveraged and have been for many decades.
The EU is asking their members to cut spending. The US needs to follow that advice before our debt to GDP hits Greece levels.
It is a perfect storm. Baby boomers retiring, a steep recession and thus loss of wealth for those spenders, increasing debt int payments due to our rising gross public debt, and frankly nothing in the horizon that will be a catalyst to spur solid economic growth until the de-leveraging is further along.
Question:
Why doesn't the "intellectual" Left see what we see?
Better off with ordinary types who know how to produce something of value ?
Just say "No" to more of whatever is bad, like DEBT ?
If the answer is not SIMPLE and EASY to UNDERSTAND then do not do it ?
Mother would have made a Great President !
Better off with intelligent, educated females.
BTW, Obama served in the US senate during that time when we overspent. He thus voted NO to raise the debt ceiling in 2006 for the same reasons the current junior republicans want to vote NO now.
So is SS solvent or not? It doesn't appear so. Why are we paying SS benefits out of general funds if in fact we have a SS trust fund? Democrats are lying to the public when they insist that the fund has trillions in it. In fact it is empty. It was used to buy bonds to fund spending. In order to pay seniors we are FORCED to pay SS out of funds received by those currently paying into the SS system. If the outlays exceed the monthly funding then bonds must be redeemed which is a cost since more debt must be secured. So really, the SS contributions by workers was just another source of revenue to use to increase spending.
Medicare is bankrupt. The outlays far exceed the money received each month. With more baby boomers retiring look for the X and Y generation to see tax hikes in medicare taxation to pay for seniors NOW.
Raising the marginal tax rate to 39 percent, raising dividends to 15 percent, and capital gains to 20 percent will hit all economic classes. Seniors depend on fixed income and selling their investments to survive. Many regular working folks sign up with their company to buy stock at a discount. Raising taxes on anybody means less discretionary money to spend. The problem is more taxation doesn't mean quality spending.
It is a spending problem first, because spending should be calculated on revenues expected. We can pretty much determine spending levels, but revenue can only be projected. So the most control we have is on the spending side.
If the country were in the midst of an existential war a la World War II, and Congress refused to raise the debt ceiling after the US had already exceeded it and needed to borrow, like today.
What then?
Japan, well that is on the other side...
But we would have lost a lot of cred at the negotiating table with Stalin. The US could claim a big role in the victory in western Europe. But not so much if the Red Army captures Berlin on its own. Further, the US was a manufacturing giant with ability to borrow and turn out streams of munitions. If the gov't went to the table as a cash-poor USA, Stalin would likely have been more agressive in his demands for territory, especially in Germany.
Thats how I see it anyway.