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What Happens if Lawmakers Don’t Reach Debt-Ceiling Deal by Deadline?

July 12, 2011 at 12:00 AM EDT
Debt-ceiling negotiations crept along Tuesday as both sides agreed on the need for action, but not on the fundamentals of a deal. Gwen Ifill discusses the specifics of what would happen if negotiators don't reach an agreement by the Aug. 2 deadline with Jay Powell of the Bipartisan Policy Center.
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TRANSCRIPT

GWEN IFILL: Debt ceiling negotiations crept along at snail’s pace today, as both sides agreed on the need for action, without actually agreeing on how to get there.

With no deal in sight, the political barbs grew sharper today. On the Senate floor, Republican Leader Mitch McConnell delivered a blistering critique of President Obama’s leadership.

SEN. MITCH MCCONNELL, R-Ky. minority leader: The president has presented us with three choices, smoke and mirrors, tax hikes or default. Republicans choose none of the above. I had hoped to do good, but I refuse to do harm.

GWEN IFILL: House Speaker John Boehner also faulted the president.

REP. JOHN BOEHNER, R-Ohio speaker of the House: Where’s the president’s plan? When is he going to lay his cards on the table? This debt ceiling increase is his problem. And I think it’s time for him to lead by putting his plan on the table, something that the Congress can pass.

GWEN IFILL: And White House Press Secretary Jay Carney accused Republicans of shirking their own responsibilities.

JAY CARNEY, White House press secretary: The need for the United States to take action so that it fulfills its obligations and pays its debts, as it has in the entirety of its existence, is not a Democratic problem. It’s not a Republican problem. It’s an American problem.

By fits and starts, the process continues to move forward because, despite elevated rhetoric, the fact is everyone recognizes — everyone who has been in that room and who will be in that room again this afternoon recognizes that there is no alternative here to taking action and dealing with the problems before us.

GWEN IFILL: The president also sought to raise the stakes, telling CBS News’ Scott Pelley that Social Security recipients could pay the price of a failed deal.

SCOTT PELLEY, CBS News: Can you guarantee as president those checks will go out on August the 3rd?

PRESIDENT BARACK OBAMA: I cannot guarantee those that checks go out on Aug. 3 if we haven’t resolved this issue, because there may simply not be the money in the coffers.

GWEN IFILL: But the public attack and counterattack didn’t prevent negotiators from returning to the White House for the fourth time in six days to try, they said, to resolve their differences.

Senate Republicans, meanwhile, are floating a backup plan should the talks fail. The proposal would in effect give the president unilateral authority to raise the debt ceiling without guaranteed spending cuts attached.

SEN. MITCH MCCONNELL: In these endless discussions, seemingly endless discussions that have gone on, we have become increasingly pessimistic that we will be able to reach an agreement with the only person in America who can sign something into law, and that’s the president of the United States.

This is not my first choice. My first choice is to get an agreement with the president to significantly reduce spending. And we’re going to continue to talk to them about that in the hopes that we can get there.

GWEN IFILL: Senate Majority Leader Harry Reid said he would read the plan first before weighing in.

SEN. HARRY REID, D-Nev. majority leader: I’m not about to trash his proposal. It’s something that I have — I will look at. I will look at it intently, and I think any new ideas, I’m willing to look at.

GWEN IFILL: It remains unclear how House Republicans, who have insisted on the spending cuts, would respond.

Meanwhile, a Washington Post/Pew Research Center poll found a growing number of Americans, 42 percent, now see a greater risk in a potential default. But 47 percent said their main concern is that raising the debt ceiling would lead to more spending and even more debt.

So what happens if negotiators don’t reach a deal? According to a report by the Bipartisan Policy Center, in August alone, federal spending would immediately be cut by 44 percent. The Treasury Department would be forced to roll over $500 billion in debt. And the U.S. credit rating could very well be downgraded.

Here to discuss that report is Jay Powell, who served as undersecretary of treasury under President George H.W. Bush and is now a visiting scholar at the Bipartisan Policy Center.

Welcome.

JAY POWELL, Bipartisan Policy Center: Thank you. Good to be here.

GWEN IFILL: Can we start with what the president said today, that, on Aug. 3, Social Security checks might not go out? Is that — is it that dire?

JAY POWELL: Well, if we don’t raise the debt ceiling by Aug. 2, then, on Aug. 3, the federal government will come to work and will be short 44 cents on the dollar for the rest of August and will not be able to make a great number of very important payments. So, what — the president’s statement is correct on its face.

GWEN IFILL: People — we just saw how public opinion is slowly shifting on this, because people, first of all, said, hey, we should pay our debts, and now they’re saying maybe we shouldn’t default.

But what is the distinction between what we’re seeing here? Is government default really an option?

JAY POWELL: Well, there’s sort of a labeling game going on here. So let me divide it into two things.

GWEN IFILL: OK.

JAY POWELL: The first is an actual debt default. And we — and our work suggests and my background and work at the Treasury suggests that that’s an unlikely event. There’s always going to be enough money to pay interest on the debt. And it’s probably very unlikely that there would be an actual debt default.

But we’re going to default. If we don’t raise the debt ceiling by Aug. 2, we’re going to default on lots and lots of very important payments. In fact, if you take interest off the table, which will always be paid first to avoid a default, you have got to cut 50 percent of other spending. And those will all be defaults on congressionally mandated spending.

GWEN IFILL: Explain to people who follow this sporadically, just know there’s another standoff in Washington, exactly what this prolonged debate is all about.

JAY POWELL: Well, the debt ceiling is kind of an odd provision of law that’s off the stage for years at a time, and then it comes on the stage and everything depends on it.

What this really is about is allowing the executive branch to have the money to carry out Congress’ spending orders. In our system of government, Congress decides how much to spend and what to spend it on and orders the executive branch to do that. The executive branch is supposed to do that. The executive branch has no independent role to decide which of Congress’ laws to obey and which not.

In this situation, the executive branch, the administration will be unable to pay about half of our non-interest bills for the rest of August if the debt ceiling is not raised. And it’s an unprecedented event. We have never defaulted on our obligations like that. And the cuts are very, very deep and will affect lots of lots of people around the country if it happens.

GWEN IFILL: And around the world perhaps?

JAY POWELL: Yes. There’s a great likelihood that there would be significant market turmoil. You can imagine turmoil in the stock market. You would certainly imagine higher interest rates as we attempt to sell $500 billion in new debt so that we can pay off our old debt.

You can also imagine that a cut of in excess of 10 percent of GDP — that’s what this spending cut is. It’s that’s big. Ten percent of August GDP is going to have significant effects on our economy. And that will ripple throughout the global economy as well.

GWEN IFILL: There is — there has been debate at least on another — let me put this, this way. There are some Republicans who believe that it would not be that big a deal to default, that it has happened before, that it happened over the short term in the 1970s, and that if, if you just pay the interest, the rest of it will catch up.

What do you say to that?

JAY POWELL: Well, there are a couple of strains of that out there.

First, there are some who believe that the Treasury Department has a secret bag of tricks and they can make this all go away. And it’s just not true. The administration has been very, very transparent. And the measures that are taken in this situation are quite well-known to insiders in this field.

And they have been used. And they’re going to run out of cash on Aug. 2. So, that’s not going to happen. So, I say to them that those who say it’s not a big deal need to take a look at our study, which they can find on the website of the Bipartisan Policy Center.

You can pay the social safety net, for example. You can pay all of those programs, Social Security, Medicare, Medicaid, food stamps, things like that. If you do that, protect all of the old, the sick and the poor, then you haven’t got a dollar for national defense, not a dollar. You also haven’t got a dollar for the Justice Department. So there’s no law enforcement. You don’t have federal prisons. You don’t have the FBI.

You haven’t got the Bureau of Alcohol, Tobacco and Firearms. And you don’t have Pell Grants for students who are going to be going to college. It’s August. They’re going to be getting their Pell Grants. So the level of disruption, I think, is — the more we show this study to people, the more they understand it’s not an argument against cutting spending or for cutting spending.

It’s just the facts are what they are. And people are kind of coming around to that.

GWEN IFILL: When you say people, when you go to Capitol Hill and talk to congressional leaders, who actually get to vote on this, are they persuaded?

JAY POWELL: Well, I think the congressional leaders — as the press secretary said, the congressional leaders understand this to a person, and that includes the Democrats and the Republicans in the House and the Senate.

There isn’t one in that group that doesn’t understand this very well. When you get down into the rank and file, it was very different a month ago. But — so we go in and we present this. We don’t give political advice. We don’t give tactical advice. We just present the facts.

And it’s accepted in that spirit. And I like to think that that voice is a useful one in this debate, to tell people that the facts are what they are, and they’re not what we might wish them to be.

GWEN IFILL: Is there any concern that anyone watching this debate will — whether it’s our creditors or just other nations around the country, around the world, will look at us and lose confidence in the U.S. financial state?

JAY POWELL: Very much so. If you’re — half of our debt is held abroad, half of it. So — and we have to sell $500 billion in new debt, as we mentioned.

And so in the middle of this process, they’re going to be looking at us not paying half of our non-debt-related bills, and they’re going to be saying, I don’t understand this. You’re telling me that the debt is good, but you’re not paying Social Security, you’re not paying troops or something. You can’t cut half the spending without cutting many very important and popular programs.

So you would think that it will be a lasting blemish on our otherwise very good record on the credit front.

GWEN IFILL: Is there a — silver bullet sounds like too much to hope for, but is there middle ground for people who say I think we should pay our bills, and I don’t like the idea of raising this debt limit, which is a very popular political stand, and people who say, I don’t like the idea that we continue to spend ourselves into debt?

Is there — other than just temporarily kicking the can down the road, as the president said, is there another solution?

JAY POWELL: Yes. I think that’s the right place to be.

We do absolutely need to get our country back on a sustainable fiscal path. But in the meantime, we have to raise the debt ceiling. Or — I try not to say we have to, but I think our work speaks for itself. It’s absolutely correct. And it’s a good thing that we’re having this conversation.

I give credit to those who are forcing the issue. We need to get government spending under control and get the country on a fiscal path. But you can’t get there by — you will actually increase the deficit by not raising the debt limit.

GWEN IFILL: Jay Powell of the Bipartisan Policy Center, thank you for walking us through the debate.

JAY POWELL: Thank you so much.