In the Two Minute Drill, we explain complex issues in politics in 500 words or less (roughly the amount of words it takes the average adult two minutes to read on a monitor). Politics just isn’t always that complicated. Without the fluff and partisan bias, even the most complex of our political differences can be explained succinctly. This week: taking a look at “extraordinary measures” and debt issuance suspension periods. This is The Two Minute Drill for March 20, 2015.
After a suspension of more than one year, the statutory debt limit was reinstated on Monday, March 16, 2015, at a level near $18.1 trillion. Technically, this means that the Treasury Department has no more room to borrow under standard operating procedures, as doing so would cause a breach of the debt ceiling. For Treasury to continue borrowing, Congress is required to act, either through extending the current debt ceiling suspension or a raising the statutory debt limit. It’s now March 20 and Congress has failed to act, but the debt ceiling has not been breached and no default has occurred. How is that possible? Because Treasury is able to take “so-called extraordinary measures to allow continued borrowing for a limited time.” What are these “extraordinary measures”? And when would these measures run out?
The Explanation (500 or Bust)
The Constitution grants Congress the power to borrow money on the credit of the United States, and thus mandates that Congress exercise control over federal debt. Since 1917, Congress has set an overall limit, or debt ceiling, to the amount that Treasury can borrow. This statutory debt limit applies to almost all federal debt – only approximately 0.5% of total debt is excluded from debt limit coverage.
To avoid breaching the statutory debt ceiling, Congress has authorized the Treasury Secretary to invoke a “debt issuance suspension period,” which triggers the availability of extraordinary measures. These extraordinary measures are special strategies to handle cash and debt management, and permit Treasury to extend its borrowing capacity. Actions taken in the past include suspending sales of nonmarketable debt, postponing or downsizing marketable debt auctions, and withholding receipts that would be transferred to certain government trust funds. These actions, however, are meant to be temporary. And in many cases, Treasury is mandated to make those funds whole after the resolution of a debt limit episode.
The amount of time that extraordinary measures allow Treasury to extend its borrowing capacity depends on a number of factors: (1) the pace of deficit spending; (2) the timing of cash receipts and outlays; and (3) other technical factors. However, because Treasury cash flow projections are subject to significant uncertainties, it is often difficult to predict how long extraordinary measures would enable the federal government to meet its financial obligations. Cash flow projections require analyses of federal spending patterns, the pace of federal debt redemptions and refinancings, and the inflow of receipts, each of which is subject to uncertainties.
Despite these uncertainties, Treasury’s estimates are often remarkably accurate. In 2012, the U.S. Treasury Inspector General reported that “the margin of error in these estimates at a 98 percent confidence level is plus or minus $18 billion for one week into the future and plus or minus $30 billion for two weeks into the future.” In the current situation, the Congressional Budget Office projects that Treasury’s measures “would probably be exhausted and the Treasury would probably run out of cash in October or November “ 2015.
The ability of Treasury to utilize “extraordinary measures” is not without cost, however. The Government Accountability Office has repeatedly noted that debt limit episodes generate severe strains for Treasury staff, particularly when its room for maneuver is severely restricted. As time continues to pass without a debt limit increase, the Treasury Secretary faces increasingly difficult choices in how to comply simultaneously with the debt limit and the mandate to pay federal obligations in a timely fashion. This creates uncertainty and leads to higher interest rates during debt limit episodes. As a result, debt-ceiling battles typically cost taxpayers billions. The 2012 debt-ceiling crisis, for example, will cost taxpayers $18.9 billion over 10 years.
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The Five Best Things We’ve Read This Week
Here are the five most interesting articles we read this week:
- Schock Factor. “You know Aaron Schock. We all know Aaron Schock. The Republican from Illinois, who said yesterday he would resign from Congress effective March 31, is the kind of guy who has it all. Looks. Money. Success. A six-pack. Schock’s veneer was so resplendent that when Daily Caller asked him what vices he could possibly have, he seemed genuinely stumped, offering the most harmless of answers: magazines.” From Terrence McCoy in WaPo: The Self-Destructive Mania of Rep. Aaron Schock.
- Commission Statement. “In other words, if all of the managers of the 2,862 funds hadn’t bothered to try to pick stocks at all – if they had merely flipped coins – they would, as a group, probably have produced better numbers.” From Jeff Sommer in NYT: How Many Mutual Funds Routinely Route the Market? Zero.
- Twelve Steps Back. “Nowhere in the field of medicine is treatment less grounded in modern science.” From Gabrielle Glaser in The Atlantic: The Irrationality of Alcoholics Anonymous.
- For Your Health. “Counties where residents’ tweets included words related to hostility, aggression, hate, and, fatigue . . . had significantly higher rates of death from atherosclerotic heart disease, including heart attacks and strokes. Conversely, where people’s tweets reflected more positive emotions and engagement, heart disease was less common.” From Maria Konnikova in The New Yorker: What Your Tweets Say About You.
- Math Games. “I have a Bachelor’s and Master’s in mathematics, all with a 4.0, and numerous published papers in major mathematical journals. I am a mathematical researcher in my spare time, continuing to do research in the areas of numerical linear algebra, multigrid methods, spectral graph theory and machine learning.” This is a fascinating article from John Urschel, who obviously has a good head on his shoulders. He also plays in the NFL. Here, Urschel explains why, knowing the risks, he continues to play the game.
And in case you missed it, check out The Weekly Column. This past week took a look at non-medical exemptions to vaccine mandates. Read the Column for March 17, 2015 – States Should Eliminate Non-Medical Exemptions to School Vaccine Mandates.