07.14.11

The Government’s Backup Plan for Default

Nobody wants to push America into default, but the ongoing stalemate has some White House officials preparing for Aug. 3, and the worst.

In front of the cameras, President Obama and his top spokesmen have said they’re confident negotiators will reach a debt-ceiling deal by the Aug. 2 deadline.  

But considering the perilous state of daily negotiations, which adjourned Wednesday in a stalemate after a terse exchange between Obama and House Majority Leader Eric Cantor, a top Republican negotiator, the White House isn’t leaving to chance the possibility of not reaching a deal by next month. 

White House officials are reticent to disclose details of the government’s backup option if differences aren’t ironed out over the next two weeks. Some even deny a plan exists, since the postdefault landscape would be so dire that it would be unreasonable to think of operating the government at its usual pace. “There is no alternative to raising the debt limit,” says Colleen Murray, a Treasury spokeswoman. 

But in the interest of being prepared, two administration officials told THE DAILY BEAST that the Office of Management and Budget and the Treasury Department have begun discussing an early contingency plan to keep parts of the government running in case no agreement passes Congress in time. 

“You have to prepare for that as a matter of due diligence,” Press Secretary Jay Carney told reporters Wednesday, adding that the process of deciding how to fund the government would be “heinous.” 

The government is the nation’s biggest funder, making more than 1 billion payments each year. “I have to pay 80 million checks a month to Americans,” Treasury Secretary Tim Geithner said on Sunday’s Face the Nation. Most of those checks cover Social Security payments (54.2 million checks), followed by benefits for veterans (4.1 million) and federal retirees (2.6 million). Medicare and Medicaid beneficiaries and government contractors collectively take in about 4 million checks every 30 days. 

But on Aug. 3, the government’s bank account would be partially depleted, leaving Geithner without the money he says he needs to continue funding all current programs—and leading, according to an analysis by the Bipartisan Policy Center, to “chaos.” The situation would require Treasury to only use money it is taking in through tax revenue to fund the government, the equivalent of living paycheck to paycheck. But the disparity between the government’s income and spending would leave nearly a $135 billion shortfall in August alone, according to estimates by the BPC

The scene would resemble what was threatened in the would-be government shutdown of early April, which threatened to shutter federal agencies until funding was restored. Except in this case, a default would restrict Washington from keeping parts of the government open, however essential they were. 

One obvious solution would be to print more money, an option that Bernanke and other Fed officials have not publicly discussed. But printing hundreds of billions of dollars in the span of several months would set off intense inflation that would quickly undercut the economic recovery. 

The situation would require Treasury to only use money it is taking in through tax revenue to fund the government, the equivalent of living paycheck to paycheck.

Instead, OMB’s jockeying would help Obama make difficult decisions about which government programs are worth keeping open and which can be temporarily shut down. In an interview with CBS on Tuesday, Obama said he couldn’t guarantee the Social Security Administration would continue to mail out checks. Officials have also discussed the possibility of unemployment benefits, student loans, and the military being partially or completely scaled back without enough government income to fund them. 

No combination would be particularly helpful, or politically advantageous. “The important point is that it doesn’t matter who gets paid and who doesn’t,” says Chad Stone, chief economist with the Center for Budget and Policy Priorities. “The fact that some people don’t get paid is one of the most important things people will look to.” 

Few analysts think the final talks will end without a deal before the deadline. But as the drop-dead date nears, the warning signs of default have become more ominous. The venerable credit rating agency Moody’s warned the U.S. government Wednesday that its credit may be downgraded if no ceiling increase is passed. Fed Chairman Ben Bernanke told lawmakers the same day that a default would be calamitous and send “shock waves through the entire financial system.” That’s the reason for these emergency preparations.