Seven Reasons Why August 2 Isn't the End of the World

Promoted from the diaries.

Washington is currently borrowing about 43 cents out of every dollar it spends, and is close to maxing out its credit limit.

Current law says Uncle Sam cannot borrow more than $14.3 trillion. A few months back, the Obama Administration demanded that Congress increase the national credit line by $2.5 trillion by May 16, or else, it warned, the United States would default on its debts, causing an “economic Armageddon.”  ($2.5 trillion is just enough to aver the need for another debt hike until after the 2012 election.)


When May 16 came and went, and nothing happened, the Obama team set a new “Armageddon” date: August 2.

Unfortunately, a lot of folks in Washington and Wall Street – including some who should know better — seem to be taking this new deadline at face value.  While it’s true that, at some point, the government will hit the ceiling and have to reduce spending by about 40 percent, exactly when that day will arrive, nobody knows for sure.  And don’t believe anyone who tells you he does know.  “No man knows the day or the hour.”

Maxed Out Day could be August 2. It could be August 22.  Or it could be in September.   The exact date really depends on whether the President is willing to tap certain reserves available to him, or decides to force a political crisis.

I cannot tell you when Maxed Out Day will be.  But I can – and will — prove to you that August 2 doesn’t have to be it. Before I do so, here are three key numbers to remember:

1) We are projected to take in between $170 billion and $200 billion in August, in revenues.

2) We will likely spend about $300 billion in August.

3) Therefore, we face a gap of somewhere between $100 billion and $130 billion.

So what will happen, come the August 2 deadline?

  1. The U.S. will still be able to pay its creditors (i.e., it won’t default).  There’s no reason why the government needs to stop paying its creditors.  Ever.  Debt service payments (interest on the national debt) will only cost $30 billion in August.  As I’ve noted, we will take in $170-200 billion.
  2. Social Security checks will still go out. On July 12, President Obama suggested that, come August 2, he might not be able to send out the 50 million Social Security checks slated to go out in August. But since those checks only cost $50 billion, compared to $170-200 billion coming in, there will obviously be sufficient funds to mail them.
  3. Medicare and Medicaid payments will go out as usual. Experts predict we’ll owe about $50 billion to doctors and hospitals. Well, with $170-200 billion coming in, granny will get her health care, just like always.
  4. Veterans and active-duty military personnel will get paid. Paying our veterans will cost about $3 billion.  Ditto our soldiers in uniform.  That $6 billion is chump change by DC standards.

So that’s a total bill of $136 billion, easily covered by the $170-200 billion we’ll take in.  Of course, we won’t be able to afford everything the government currently spends on.  The Departments of HUD, Transportation, Commerce, Energy, and Education, for example, may have to take a pause while Congress works out a deal with the President.  But is that really “the end of the world”?

Earlier, I mentioned the reserve funds the President can tap.  As the Senate Finance Committee Republican staff helpfully point out:

5. The Treasury Department has $5 billion sitting idle in an account at the Federal Reserve. It can tap this account any time.

6. Treasury has close to $100 billion in mortgage-backed securities it can sell.  It bought these securities during the financial crisis to bail out housing markets.  Just last month, it sold $10.6 billion worth.

Finally, there’s a seventh reason why August 2 needn’t be anything more than another pleasant summer day in America.

7. Congress can pass the Cut Cap Balance Act (H.R.2560). This bill would give President Obama his $2.5 trillion debt increase — in exchange for three things: 1) $111 billion in cuts this coming year, 2) tight spending caps for the coming decade, and 3) congressional approval of a strong Balanced Budget Amendment to the Constitution.  By strong, I mean one that makes it much harder for Congress to spend more than a fixed share of the economy, raise taxes, or add to the debt.

The Cut Cap Balance Act – which the House is slated to vote on today — would make this the last debt ceiling hike, ever.  Unfortunately, President Obama has threatened to veto it.  If he does, whose fault will it be when Maxed Out Day really does arrive?


Dean Clancy is FreedomWorks’ Legislative Counsel and Vice President, Health Care Policy.



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