Saying it is understandable that the average american has difficulty wrapping their head around what the debt limit is. You would think that the u. S. , one of the strongest economic powers, you would not think they would be threatening to default on debt annually or every two years. We have a situation where the federal government has a limit imposed by congress on the amount of money that it borrows. Because we have annual deficits, we are not taking in the much money from taxes as were spending, we have to increase our debt over time, and that means we have to borrow. But because we have the debt limit, limitation on how much we can borrow, we are reaching a point where the Treasury Department cannot borrow the additional money it needs to pay all the bills and also service the outstanding debt that we have. That is a problem. So what the Treasury Department is doing right now is using extraordinary measures to buy a little time for congress to extend the debt limit. Congress often takes this to the deadline come and right now we expect that what we call the time of the government will no longer be able to make all its obligations in full and on time, we expect that to come between midoctober and midnovember, so we could just be weeks away from a really catastrophic event. Host extraordinary measures being deployed, that debt limit reached on august 1. When it comes to that, how do you calculate it . What factors . Guest we have been doing work on the Federal Debt limit since 2011, and the then fed chairman was visiting and we were working with him closely on the model he developed to help uS Project when the debt limit would hit. It is much more difficult than a lot of people forecasted, because we are trying to estimate hundreds of millions of payments that come in and out of the government each month. That is not easy, especially when response to covid is causing all sorts of variation, both in terms of spending going out on things like Unemployment Insurance benefits or small business loans and on the revenue side, the Tax Side of the equation, where the companies are in stages of recovery, and we do not know how strong revenues will be going forward. So we try to look over all the payments and figure out how big the hole is and when the federal government has run out of room to borrow. So there is no cash on hand, cash reserves to pay the bills. At that point, we would reach that point with the government will have to find some way to find some obligations, but that would be unprecedented. Host walk us through a scenario where the X Date is reached and there would not be by packs or results from congress. Guest the story is all about risk. We have never been any situation in modern history were the u. S. Is not able to pay all its bills. I have to emphasize that. There is an incredible amount of uncertainty because we have never been there before. We posted a blog to try to walk through some of the implications, especially for the average american. The first is that out of the hundreds of millions of payments i mentioned earlier, many will not be made on time. So if you are expecting a check from the federal government, that could be in the form of a Child Tax Credit payment, the monthly payments now going out, Unemployment Insurance benefits, could be some type of business loan, they could all be interrupted if we go past the X Date. The federal government would either be picking and choosing which payments go out the door or more likely delaying all payments except Interest And Principal on the Federal Debt, until congress resolves the issue. So there could be missed payments for people that are expecting them. The second is the effect on interest rates, because investors, seeing the u. S. Is not paying its bills, might start insisting on higher interest rates, and that could have ramifications throughout the economy because interest rates on everything from mortgages to car loans, many other things, are based on u. S. Treasury rates. That can mean higher interest rates over the coming months and years even if we got into a situation where the u. S. Was not paying all of its bills. Host shai akabas here to talk about issues of economic matters and deadlines to watch out for. 202 7488000 from eastern and central time zones. 202 7488001 for mountain and pacific time zones. You can text us to 202 7488002. Mr. Akabas, we saw a letter go from the Treasury Department, Speaker Pelosi, when it comes to the matter, and it reflects some of what you said about the debt being reinstated, those extraordinary measures, and also adding that the Treasury Department is not able to provide a specific estimate of how long it will last. Then saying, the likely outcome of cash and extraordinary measures being exhausted in the month of october. That was a portion of the letter, and we saw a response from pete Speaker Pelosi last week. I want to play that for you and then get your response. [video clip] the constitution says full Faith And Credit at the u. S. Is not to be in doubt, should not be. I do not know how we got this custom of having to deal with it each year, because it is controversial. Donald trump, the administration, amassed over 7 trillion in debt, and that is what this Debt Ceiling Lift iS Paying for. So we are paying the credit card, the trump credit card, with what we would do to lift the Debt Ceiling. And when President Trump waS President , we, democrats, supported the Debt Ceiling, because it is the responsible thing to do. I would hope that the republicans would act in a similarly responsible way. Never go back when President Obama waS President and republicans were insisting on not lifting the Debt Ceiling, eventually we did, but they were saying we were not going to. Even the threat of not lifting it lowered our credit rating. Totally irresponsible. So hopefully we do not get in a situation like that. We will have several options. We will make them well known to you as we go forward. Host mr. Akabas, what is the likelihood then republicans and democrats will come to some type of resolve to this issue . Guest let me just say, there is a lot in there that is important. One point is that the speaker is right, the debt that we owe today is not the result of future spending we might do or spending that were doing right now. It is debt we already incurred. We need to increase the debt limit tumor reflecting Spending And Tax decisions that have already been made. For example, the relief that waS Passed on a bipartisan basis to respond to the coronavirus, that has added a significant amount of data over the last 18 months, and that is the amount we should talk about whether we should be accommodating. So spending that has happened in the past, not spending that congress would approve right now or in the future. Yount that beyond that, the concerning point at the moment is that the two parties are not talking to one another. There are not any serious negotiations going on about how congress will extend the debt limit, even though we are merely weeks away from a possible X Date. They are messaging how they think the debt limit should be extended, democrats calling for republicans to join them and achieve at least 60 votes in the u. S. Senate, which is what it would take to extend the debt limit on a regular order basis. And then republicans are saying democrats should do this on their own, because they could, in theory, do it to the process of reconciliation, which is how they are pushing a major Budget Package simultaneously paired republicans are arguing that because democrats are doing the Spending Package themselves, they should also pass the Federal Debt limit in that package on a Party Line basis. So it is really not a matter at thiS Point of what the two sides are asking for in exchange for getting at debt limit increase, it is just each side pointing a finger at the other and saying they should do with the way they want to do it. That is concerning, because that means negotiations have not even really started yet about how this will materialize. Host there was a recent interview that the senate minority leader, mitch mcconnell, ordered with issues on the Debt Ceiling, saying america must never default and the Debt Ceiling needs to be raised. The issue is who should do it. Under these circumstances, it is their obligation to do it and they have the votes to do it, and they will do it. Guest this is the first time we have seen in the recent history where one party was in control of the house, senate, and the presidency, and actually moving a Reconciliation Bill at the same time as the federal limit, with the real potential that they could increase it on their own. This sort of happened in 2017, but there was not this sort of discussion about one party potentially increasing it on their own. Now that this has been pointed out, it really is a game of chicken with both sides staring each other down and calling for the other side to take their preferred action. We do not know what will happen in that situation, but it is quite disconcerting. It harkens back to 2011 when we had a really serious run in with the Federal Debt limit, the first time in my era where it became such a political hot button issue. In that year, we came to the brink. The organization as a downgraded u. S. Federal debt from its highest credit rating, aaa, and what could happen this time is other rating agencies could follow suit. That might not sound like a huge problem to the average person, but what it means is that it could materially affect how investors view our debt, and that could raise interest rates and could spread throughout the economy and into all types of consumer functions. So it is something the average american should be watching and concerned about. Host a viewer on twitter makes this statement, congress ties its own hands to limit its selfimposed, nothing to do with the ability of america, sovereign monetary nation, being able to pay its debt. America cannot run out of money. Guest that is generally correct, especially in this moment. It is not a matter of when we can pay our debt, it is whether we choose to. When the S P downgraded us in the 2011, they said just that, it is not that there is reduced economic or financial ability of the United States to make good on its debts, that is not why were downgrading you, it is because of the political brinksmanship. If anything, that has only gotten worse over the last decade. The viewer is correct that it is not a matter of whether we can pay our debt, it is whether we will choose to. Host another viewer follows up on the same vein, saying the debt limit is a waste of time, adding should be abolished and that it never haS Prevented outofcontrol spending. Guest another interesting point, which is that over the past 10 years, the debt limit agreements that have been reached have more often been used to increase the debt than they have reduced the debt. What usually happens us both parties get more of the spending they prefer. Historically, the debt limit has served as sort of a break were congress has looked at the issue of fiscal policy and made agreements to help control the size of the text over time. That really is not happening. So it is not serving the initial purpose it was set out for, and it is imposing lots and lots of risk. At the bipartisan Policy Center, we agree there needs to be reform here. We need to derisk the debt limit and have a different process so we do not put full Faith And Credit of the u. S. On the line each time we come up against the debt limit. We have proposed reforming the process by which the debt limit is considered so it would basically go through an expedited basis where the president could request an extension of the debt limit from congress, and the only way it would not happen is if congress overwhelmingly opposed. But with the president s request, he would need to submit a Debt Reduction Proposal to congress, kickstarting a Structure Process to debate actual Debt Reduction Proposal and Rank Spending cuts and tax increases, the real thing needed to get our fiscal house in order. Because we do have a major fiscal problem and the years ahead. Our debt right now it is over 100 of gdp, more than the size of our economy. That is a challenge we need to address. But the debt limit in its current form is not helping us address that challenge. Host 202 7488000 for the eastern and central time zones. 202 7488001 in the mountain and pacific time zones. Many of you some of you have been tweeting us and Posting And Texting us. You can also do that. James in mission, texas, you are on with shai akabas. Caller yes, good morning. Two quick points. One, i have always been taught if someone comes to you because they have a Debt Problem and asks to borrow money, their problem is spending, so you want to address that first, which is what congress has done for many years so dont you think it is odd that the limit right now as far as the debt, needing to extend, but they also looking at a 3. 5 trillion Spending Package. If we cannot pay what we already owe, why the heck are they spending more money . Seems to be the best thing to do, dont do it, let us all suffer now so that our children and grand children in the future can actually have a good life. Dont you think that is something we ought to consider . Host james in mission, texas. Guest james makes some interesting points, and i do agree that we need to be really careful about what we are committing to in the future because of this large Debt Problem we have. In my view, it is really important that any large package moving forward needs to be paid for. Because we cannot afford to be making thiS Problem worse. There are reasonable arguments on both sides about what programs we need to be spending more on, what we do not need to be, but whatever we decide to do, it should be paid for so we are not putting our future on it. But it is really different from the current moment where we are debating whether or not the federal government should be extended. So we need to make sure that we make good on our debts and we do not start missing obligations as a United States government, which could impose significant pain on everybody. And then have these debates about what should be done with regards to spending our Tax Policy moving forward. Tying the two together in general becomes very dangerous, because it puts at risk the or it calls into question the idea of whether we are going to make good on the payments that we already owe, while debating the payments were going to spend in the future. I agree with the premise, which is we need to get our fiscal policy under control, and that means not incurring new, unpaid for spending. But we need to understand that the debt limit in its current moment is very distinct from those decisions about what were going to do with Spending And Tax. Host the announcement of the Reconciliation Bill, some criticized the debt limit was not put into that process. Is that a good practice . You spoke about test practices as far as how to treat that. Could that be a best practice . Guest it is an Option Congress has on the table. In order for a Reconciliation Bill to pass, you need the same party to have a majority in the senate, house, and the presidency. Not absolutely, but that is the only Rake Reconciliation in the modern era really works. The process is used to move Party Line preferences or tax preferences. That is in theory a way it can be done, but it has never really been done like that. It has always been a bipartisan vote to extend the debt limit. It does not mean one or the other is right. But we do not have time for the two parties to argue about who will do this, we just need to make sure it gets done. I am mostly here to be helping congress with the information we provide, not looking at political preferences for how it should be done. But it is important that they see that this is fast approaching and the risks are growing closer. Host can congress assist decide to suspend the debt limit . Guest yeah, that is what has been happening recently. We need to pass it and have it signed by the president , but that is not really a question. Instead of increasing the debt limit to a certain amount, we have been suspending it for a certain period of time. Operationally, fairly similar, so instead of increasing it by lets say to truly dollars, which is what we would expect to be incurring, we would just say would not be in effect over that time, then well come back into effect. Those two are operationally very similar, but i would expect that when they address it this time, they most likely suspend it. But if they do it through the reconciliation process, it would allow democrats to do it on their own, legal scholars are pointing out that it iS Probably only possible for them to actually increase it. So we might see an increase in that 28. 4 trillion limit. Host this is shai akabas of the bipartisan policy institute, talking about deadlines and the debt limit. There is much analysis at their website when it comes to that. Bipartisanpolicy. Org if you want to read the analysis there. Mr. Akabas, a question, a larger extent that when it comes to a scenario, if there is a default, what happens to the Dollar Status as the World Reserve Currency . Guest that is a huge question mark. It is one of the big risks we have been discussing. Nobody really knows. The economy in the u. S. Has never been in a position where it is not paying its bills or it is defaulting on its debt. Over time, that could lead to a migration away from the dollar as a reserve currency. It is the basis for a significant share of transactions throughout the global economy, and that could increase the demand for dollars. So if we were to give that up for really no good reason, it would be a selfinflicted wound on the United States. Host sylvia in alexandria, virginia, good morning. Caller good morning. Thank you. I was just wondering here, with the politics going on in the u. S. , we have, like in texas, restricting when you can have an abortion, yet the ideal that they want to give money to help people raise their children, that is what President Biden is trying to direct some of the funds to, dont you think that if we encourage people to give them money to help them survive with children, because i have raised three kids and i know you never have enough, it is always something, and you usually go into debt to raise her children. So i am thinking, why are we fighting one another so much . We have one side that, you know, raising our debt to help to kind of raise the standard of living in our country, not a bad thing, and it might help people in their philosophies as far as what they want, as far as they are against abortion. Well, if you can afford your child, you may not abort the child. Host ok, we will leave it there. Mr. Akabas . Guest i will pick up on the point that we do really need to increase the amount that we are working with one another in the country and the government, and certainly that is the philosophy behind the bipartisan Policy Center. We were to provide education, facilitate opportunities for bringing the two parties together around policy. One of the things that we do are these congressional trips where we take a member of congress, a democrat and republican, and we have them visit each others district. It may sound quaint, but, frankly, those relationships have been deteriorating over time. Not much camaraderie between members of congress, as there was many years ago. So were trying to help facilitate that type of dialogue and hopefully lead to a better future where they are working with one another, by and large, instead of at each others throats. Obviously, there will continue to be differences on substance. We recognize and appreciate that. But when it comes to the demeanor by which the two parties are interacting, we think there is a lot of room for improvement, and that is why we are working with both parties, not only on the policy but also on building those relationships. Host debt limit aside, another key date come in so to speak, is what happens when it comes to september 30 and the fiscal year , and if issues are not resolved. Can you set up what could happen as far as the funding of the federal government, and what happens after september 30 . Guest much of the federal Government Spending is discretionary, which means it is approved on an annual basis. About a third or a little bit more than that of the federal governments spending each year, things like the defense department, a significant portion of that, as well as many other programs throughout the federal government, including pay for all federal employees, for example. That expires at the end of the fiscal year, september 30, unless congress acts to approve spending for the next year, which is how most budgets work. So were only a few weeks away from that deadline, and we have not yet gotten close to an agreement about what the federal government is going to be spending and what it will be spending on in the next year. This is not unfamiliar. We often get to thiS Point because congress is not good at meeting deadlines for approving spending, and we have had government shutdowns. We had a long one a couple years ago were many federal employees did not return to Work And Government services slowed down, national parks slowed down for a. Of for a period of time. But there are a number of issues imposed with a partial government shutdown, inconveniences, and it can really hurt the person i can federal employee who may not be getting paid for that period of time. It is very different from reaching the breaching the federal deficit, which could have global economic ramifications. Both are serious, but one has much, much or distinct risk and potential consequences than the other, and one is much more familiar territory. We have been up against this Funding Deadline before with the potential government shutdown. I expect congress to pass a continuing resolution, which is to continue last years spending for an additional period of time so congress can work out the coming year spending. That is not a best practice. AS People who have run an organization no, spending on last yearS Programs is not really the best way to do things for the coming year. You want new priorities and new programs. But we will likely see that for at least a few months. Host mr. Akabas, there is anything you will know about regular order, about spending bills coming out of committee being passed on the floor. What happened to that process . Guest it is really broken. Any number of reasons for it. One is the political bickering we have seen over the past couple of decades that has made it even more difficult for average rankandfile members of congress to work with one another. The other is discretionary spending has become so large and with so many programs that it is difficult to work that out on a relatively short timeline, only four to six months to figure out what everything the federal government and the discretionary category should be spending on. A challenge. So these have not been passed on time in many years. We almost always have these continuing resolutions. It is a broken Budget Process we have today, and we need to look at ways to fix that going forward so we do not have this routine situation where we are not able to look into the next year and agree on what were are going to be able to fund. One option is biannual budgeting, and that would mean congress only does this every two years. It could be two years ahead and adjustments could be made as we go along, but we would not have to go through this central process. It might help smooth eggs over and give a little additional time. Not sure that is the entire answer, but it could be part of what we do to fix thiS Process. Host dorothy, you are on with our guest. Good morning. Dorothy in north carolina. Caller yes, good morning. I want to give Ron Paul and Donald Trump some credit for one thing, but first i want to make this comment. We do not owe anything to anybody really. This money is being printed by a printing press. That is why they can print so much pizza who do we really owe . The printing press. We do not really owe anybody money. If congress got rid of student loans and other debt, nothing would happen. The money iS Printed. Rand paul was right when he said we should use the gold standard. We dont. That is why we do not owe anybody. Donald trump should have called bankruptcy. Nothing would have happened, because we dont owe nobody. We dont we owe china 1 trillion, that is it. Host ok, dorothy. Thank you. Guest the vast majority of the money we owe people is actually owed to the public, whether that is china, another foreign country, domestic investors, or anybody else. I own some u. S. Securities. A lot of average americans, in their retirement accounts are in their per folios, own some type of u. S. Trade. If it was not paid but, it would cause quite a bit of economic destruction. Consequences for not only individuals but obviously the macroeconomy if the u. S. Were just to say we are not going to pay back the people we owe. The biggest consequence might be the people who are thinking about lending us money in the future are going to say, why would i do that, because youre not paying anybody back, so this would be an enormous threat to our wellbeing and the entire global economy. There are certainly questions about how the u. S. Currency works and how much money we should be printing or how much money the federal reserve should be buying up in securities, sort of like the government owing itself money. But in terms of most of the debt we have outstanding, that is real money that is owed to real investors. If we were not to pay that back, there would be great consequence. Host candace in colorado springs. Caller i am calling in regards to the senate and the congress eating paid. Getting paid. Why dont they take a Pay Cut . They do not work a full year. Only 180 days. It is ridiculous. In all honesty, they get all these fringe benefits, and it is asinine when i think about it. It is not fair. Host ok. Guest most members of congress that im familiar with do work pretty hard, but im not really here to defend members of congress in terms of what they get paid. There an interesting proposal that would withhold pay from members of congress of congress cannot pass its appropriations or its annual spending on time. It is called, no budget, no pay. It is interesting, but the criticism of that proposal is that it would unduly hurt lawmakers who can least afford it. So if you are a lawmaker that has lots of wealth and have no need for that paycheck in the short term, you could withstand that and hold your position in the debate, whereas members of congress who really rely on that and do not have a lot of wealth would be put most at risk and need to accommodate the other side. That is not a position we want congress to be in, but it is an interesting proposal to think about how we can put the pressure on congress, apply pressure to make sure that they are doing the job and passing spending on time. And coming together to surmount the differences on these issues, so other ideas along the same lines have been to require that Congress Stay in session, to have a roll call each day or something, when they are not annual appropriationS Put into place for that year. That type of pressure is certainly appropriate to make sure numbers are not going to their home districts or come on occasion, even on vacation when they have not done their job for the year and pass appropriations. Host you talk about pressure on congress. How much does the white house have an influence as far aS Putting pressures on members of congress to get this done . Guest the white house plays a big role, actively involved in the debates, both on the debt limit and not Government Spending. The Treasury Department is responsible for protecting the full Faith And Credit of the United States. Secretary Janet Yellen has been the one sending these letters to congress, updating them on the status of the debt limit, and the potential consequences. They need to be playing an active role, and they are. I think that will continue on the debt limit and Government Spending. Ultimately, this needs to be legislation from congress. It needs to originate in congress. It is not actions the executive branch can take on its own. Host steve in baltimore, maryland. Your next. Caller yes, mr. Akabas, i could not agree more that this is a legislative Branch Issue that we continue to spend ourselves into oblivion, and it does not matter which party. There is a basic equation of the private sector versus the government, and when we have more people working in the government than we do in the private sector, that creates an imbalance, and that and balance you are seeing, because the revenues were taking in just cannot cover these ballooning facets. In this has been going on since the day i have been born. I have never seen the deficit ever decrease. It always increases. Lets get to the point. The point is the legislative branch. The legislative branch of the United States of america is going to turn the United States of america into the next great third world country. Thank you. Guest so the caller makes some interesting points. We had the bipartisan Policy Center have worked on a federal budget stimulator. It is called federal balancing act. You can type it into google. It tries to show everybody what the government is spending on and what it is taking in in texas. And it in taxes