Planet Money - Jay & Shai's debt ceiling adventure

Episode Date: February 18, 2023

Every year, the U.S. government spends more money than it takes in. In order to fund all that spending, the country takes on debt. Congress has the power to limit how much debt the U.S. takes on. Right now, the debt limit is $31.4 trillion dollars. Once we reach that limit, Congress has a few options so that the government keeps paying its bills: Raise the debt limit, suspend it, or eliminate it entirely. That debate and negotiations are back this season. One thing that is in short supply, but very important for these negotiations, is good information. Shai Akabas, of the Bipartisan Policy Center, knows this well. Right now, he and his team are working on figuring out when exactly the U.S. government could run out of money to pay its obligations — what they've dubbed: the "X Date." Shai is determined to help prevent the U.S. government from blowing past the X Date without a solution. But this year's debt-ceiling negotiations are not going very well. Which is daunting, because if lawmakers don't figure something out, the ramifications for the global economy could be huge. So, how did Shai become the go-to expert at the go-to think tank for debt ceiling information? It started in 2011, back when he and current Chair of the Federal Reserve Jay Powell, armed with a powerpoint and the pressure of a deadline, helped stave off economic disaster. Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Every year, the U.S. government spends more money than it takes in. And in order to fund all that spending, the country borrows a lot of money. It takes on debt. Congress has the power to limit how much debt the U.S. takes on. Right now, that debt limit is $31.4 trillion. And for the government to keep paying its bills, Congress has a few options. It could raise the debt limit, suspend the debt limit, or eliminate it entirely.

And now it's go time. It's debt ceiling season. Republicans and Democrats are at it again. And one thing that's in short supply but very important for these negotiations, is good information. It's important to any negotiation, but one where the balance of the economy is at stake? Yeah, seems extra so. Which is why a couple of days ago... Oh, people are starting to show up. Oh wait, they're hiding. I went to hang out with Shai Akavis. Hello. Hi. Shai has a very important role to play in these negotiations. He's got a reputation important role to play in these negotiations.

He's got a reputation on both sides of the political aisle for telling it as it is about the debt limit. Not that he likes to brag about his expertise. Being an expert in the debt limit is a little like being an expert on termites. Nobody is really excited to hear the news you have to share, but they do need to know it. Oh boy. Okay, so you're the termite expert guy. And we're back for another inspection. Shai is the director of economic policy here at the Bipartisan Policy Center, which is a think tank

just a few blocks away from the White House. And in a few minutes, Shai and his team are going to get their hands on a document, this data dump. They've been preparing for the arrival of this for weeks, for years, really. Okay, and is this a big deal?

Is it Christmas? Is it your birthday? Is it Valentine's Day? It's like a big office birthday. An office birthday. So it's kind of like we're all getting cake. We sing. In the form of data and punching that into our computers.

Shai and his team are sitting together at the end of this long conference table, laptops and seltzers at the ready. OK, so it's like an office. It's like a bad office party. It's like a bad office party. No balloons, no streamers. OK. The document Shai and his team are waiting for is an economic forecast from the Congressional Budget Office. It's looking at the next 10 years of the federal debt and deficits and many other things, and it's crucial for Shai's team. It's going to come out any second now.

Arianna Fano keeps refreshing CBO's website. So she's refreshing. You're getting real insight into what my job looks like. Your job looks like a lot of refreshing? A lot of refreshing. A minute to go. With this data, Shai and his team will be able to get to work, figure out when exactly the U.S. government could default on its obligations,

when it could run out of money. One time the government did technically default on its obligations for less than a day, but the U.S. has never really blown past the debt ceiling. And Shai is determined to make sure it never happens ever. But first, they need the document. Is that it? It's up! Hello and welcome to Planet Money. I'm Amanda Aronchik.

And I'm Nick Fountain. This year's debt ceiling negotiations are not going very well. Which is scary, because if lawmakers don't figure something out, the ramifications could be huge. The global economy could kind of spin out. Today on the show, the story of the first really contentious, down-to-the-wire, debt-ceiling negotiations. It's the story of how two people, armed with a PowerPoint and the pressure of a deadline, helped stave off economic disaster. What did they learn from it, and why they think this time might be worse. So it seemed kind of fun and exciting,

and now it's showed up and you guys seem like you're working. That is the typical pattern here. A lot of typing and thinking. Typing and thinking. All right. If it feels like we've been here before, that's because we have. Congress has adjusted or raised the debt ceiling 78 times since 1960. But of those times, one stands out as being the most hectic, the most acrimonious, the most detrimental to the health of our economy.

The debt ceiling crisis of 2011. Now, we are going to talk about the current fight later. But first, the story of the 2011 debt ceiling battle through the eyes of Shai Akavis at the Bipartisan Policy Center. Back then, he had just started as an entry-level staffer. And you're never going to believe who the other new guy was. Current chair of the Federal Reserve, Jay Powell. The Jay Powell? The Jay Powell.

Powell had worked at the Treasury Department in the 90s and then made a fortune in private equity. And he was looking for a way to get back into public policy. Yeah, so Jay actually came on as effectively a volunteer. An unpaid intern? Effectively an unpaid intern. I mean, I think we paid him a dollar or something. Soon after Jay Powell came in the door, he got a bad feeling about that year's debt ceiling negotiations. Remember, 2011 was a wild time in politics. It was a little more than halfway into President Obama's first term, and Republicans had just clobbered Democrats in the midterms,

Republicans had just clobbered Democrats in the midterms, in part thanks to a new wing of hardcore Republicans who were sick of taxation and government spending. They were called the Tea Party, and they were very into theatrics and costumes. And we do this colonial outfit to remind the current government of the first revolution. And we are in a revolution right now, the American people. They would show up at press conferences

in full Revolutionary War cosplay. Think triangle hats with feathers. One guy playing the role of founding father and declaration signer Button Gwinnett is literally holding a musket. Today, rhino hunting season opens. The Tea Party had won a lot of seats, partly by promising to not raise the debt limit. And Tea Party activist slash revolutionary war guy Button was like, listen, newly elected representatives, we are going to hold you to

that promise. If you vote to raise the debt ceiling, you get a zero for the year from the Tea Party. If you don't vote to raise the debt ceiling, you score 100 and you're a hero. You're a zero or a hero. Jay Powell saw that there was a bunch of bad information going around around the debt ceiling and decided, maybe I can make a difference here. People need to know what the debt ceiling actually is and what blowing through it would actually mean. And so he started strategizing with Shai. Jay realized that the Republican side did not have faith that the Obama administration's Treasury Department

was giving them reliable information. Oh, that's interesting. So Treasury is in the executive branch, and so they are sort of beholden to the president. Yeah. So right or wrong, they were viewed as potentially not an objective source as to the fundamentals of the debt limit and what they were asking Congress to do. Both sides couldn't agree on even this fundamental piece of information, when the U.S. government was going to run out of money. Treasury was putting out an estimated date,

but Republicans figured, of course they'd lie to us about the timing. They're bluffing. They want us to make a deal before we have to. Jay Powell and Chai realized that to build trust in this highly political moment, there needed to be an independent auditor, a third party on all this debt ceiling information.

Someone Republicans would trust. Someone like Powell, who was a Republican and had worked at Treasury. So their first task, phase one of their new mission, figuring out that date, the date when the U.S. would run out of money. What they called the X date. Were there like other names that you guys batted around or was that literally the first shot? No, I think that was the first shot. What we had been using before that point

was just describing it in many words, which is much less artful and hard to convey. The date upon which the federal government will no longer be able to meet all of its obligations. For me, the X-Date name is just so clever. It's like X, the crossing point. And also X, do not enter. And also X, beyond here is variable.

It's unknown. It's like a triple entendre. Uh-huh. But the task of trying to figure out that X date, not so easy. Think about how many ways the government makes money. The Department of Interior sells oil and gas leases. The FCC auctions off airwaves. And then the biggest portion of government revenue, the IRS takes our money in taxes. And tax revenue is unpredictable. The Treasury Department

doesn't know when you're going to pay your taxes or when I'm going to pay my taxes. And those are payments that factor into the X date. Obviously, multiply that by millions and you get the uncertainty that we have in the projections. There's even uncertainty month to month. Shai says people who are likely to get a tax refund often file early in February and March. So those months can be bad for the government's coffers. But April, when most of us pay our taxes, tends to be good for Treasury's balance sheet. And that's just the revenue side. Of course, the U.S. government also has bills to pay. This is going to sound stupid, but I always kind of assumed that people just sent like invoices to the government, like, you know, please pay for these missiles that you

bought within 60 days or whatever. But it doesn't sound like the government works like that. Well, it does for many of its programs, and that's what causes a lot of the uncertainty that goes into our model. But, Chai says, if you are a keen observer, there is a document that can help you start to recognize patterns in government spending. It's called the Daily Treasury Statement. Do you get that in your inbox every morning? I don't, but I have it bookmarked on my internet browsers.

It comes out, I believe, at 4 o'clock every afternoon, if I remember the time. Do you look at it at 4 or 1 every day? I usually do. Shai and Jay Powell look at months of these, trying to map out payments. All right. Looks like we pay something like $1 or $2 billion to military contractors daily. Okay, got that. And it seems like on the third of the month, that's when the big Social Security payment goes out.

That's $23 billion. Type that in. There's a lot of data entry involved. We often get help from our interns on that. Shout out to the interns. Thank you. I've been an intern, and I know how much work that can be. And what does it look like? Is it like a Google calendar, like $30 billion VA health care bill due in 10 minutes?

Do you get the ping on your phone? It's close. It's an Excel spreadsheet. So, you know, it is a very complicated Excel spreadsheet. Shai and Jay Powell ran their model, checked it twice, and got the X date, the day the U.S. could run out of money to pay its bills. Deadline for 2011, drumroll please, August 2nd. The clock was ticking. It was now time for phase two of Cheyenne J's debt ceiling adventure. It was late June, and so they had just 35 days to convince lawmakers that the X date was serious and that they needed to act now. How did these two government outsiders do their convincing? Did they whine and dine the politicians, corner them on the 18th green of the

Chevy Chase Country Club, buy them tickets to the National Symphony? Nah, they drafted up a PowerPoint. PowerPoint power rankings, you and Jay Powell, who wins? I'm not sure either of us are PowerPoint masters. My skills are competent, but I certainly would not put myself in the Jedi category. They put the finishing touches on their PowerPoint, printed it out in color, and headed to Capitol Hill. So our first meeting on the Hill was with a staff assistant. Staff assistant. Does that mean like it's the intern or just above the intern? Is that what that means?

Yeah, just above the intern. That's basically what it means. This staffer didn't have an office. So they sat down in the waiting area, pulled out those color printouts of their PowerPoint and patiently explained. Here's what the debt ceiling is. Here's why your boss's boss's boss shouldn't blow past it. And if they do, here's what might happen. Their presentation was impressive. Soon they got meetings with important staffers,

then actual members of Congress, including Tea Party types. Chai says it was actually those meetings that were the most interesting because of the questions they would ask. Why do we have to act? Couldn't we do this? Or couldn't we do that? Or couldn't we just, you know, go over the cliff and see what happens? And Jay Powell and Shai would tell them, truth is, no one knows exactly what's going to happen when we go off that cliff. Beyond the X-State is a grave unknown. We've never been there before in the modern history

of our country, and we just don't know what some of the reactions to that action would be. So what are the markets going to do? What are interest rates going to do? What would the economy do? What would credit rating agencies do? Those are all open-ended questions. They would tell the politicians, remember the government shutdowns where Congress doesn't pass a spending bill and a bunch of federal employees are mad because they're not getting paid? This is way worse.

Way worse. Way worse. The market for U.S. debt is basically the foundation for all other financial markets. So going off the cliff would make it more expensive for everyone to borrow money. Worst case, a drop in financial markets, downgrades to our credit rating, the dollar's dominance in the world might be threatened. And all for what? For a few extra days of negotiation? Not worth it. And when lawmakers would say, isn't there some secret plan or new magic money that Treasury could create to avoid catastrophe after we go off the cliff,

Shai and Jay Powell would say, well, let's think that through. So one idea that was floating around at the time was, couldn't the United States government print script? So basically an alternative currency like IOUs that we would hand out to people instead of actual money. And we would just go on like this for a period of time until the debt limit situation resolved itself. And Jay had to talk through this and explain what some of the ramifications to that could be. I would argue that that would make us look closer to a banana republic than the preeminent leader of the global economy. But it was an idea that was on the table at the time and one that needed to be talked through. To get the message out about the debt ceiling, Jay Powell and Shai

would talk to anyone who would listen. We're back with Jay Powell. He is the visiting scholar at the Bipartisan Policy Center, out with new analysis that you authored. Including taking questions from random callers on C-SPAN. Let's move on to Dalton on our Democrats line in Benton, Kentucky. Hi, Dalton. I have a question for Mr. Powell. Go right ahead. What will happen to America if they do not raise the debt ceiling?

So if the debt ceiling is not raised, then we will immediately, relatively immediately, within a few days, find ourselves unable to pay about half of our non-debt related bills. Non-debt related bills. Before I worked on the show, I figured that if the U.S. went off that debt cliff, we would start to default on our debt immediately. But as Jay Powell pointed out, that would be so globally catastrophic that, in fact, Treasury would likely do everything possible to avoid defaulting. Right. So instead, Jay Powell said the Treasury secretary would have to make really hard decisions. You can protect all of the safety net payments. You know, these are the poor, the sick and the elderly that get payments, Medicare, Medicaid, Social Security, food stamps, that kind. You can protect all of that.

But if you do, you haven't got a dollar left to pay for defense, not even for the troops. And you can't operate the Justice Department. So you open the prisons and let everybody go? That's not going to happen. His point was, that would be such an impossible situation. Let's just not go there. We can't go there. The peak of their efforts came on July 15th, two weeks before their projected X date of August 2nd.

Jay Powell had been invited to speak in front of the entire Republican caucus at a closed door meeting. Chai was not invited. But when Jay Powell came back, did he have some stories to tell? I was told there was some yelling. I was told there may have been some expletives. told there was some yelling. I was told there may have been some expletives. Shai says this is the moment Republican leadership got enough of their party on board with the plan that they would eventually negotiate with the White House. Ultimately, this meeting was the beginning of the resolution.

When was the deal struck? Do you remember how close to that August 2nd X date? I believe the deal passed on August 2nd. So it was a last-minute deal. Congress really only tends to act when they have their backs up against the wall. Seriously? I thought journalists liked deadlines, but wow. Congress really likes deadlines. The U.S. didn't stop paying its bills, didn't default on any debt. But four days later, the country's credit rating was downgraded for the first time in history.

President Obama vowed never to negotiate about the debt ceiling again. That is what happened back in 2011. And lo and behold, here we are again. Twelve years later, another debt ceiling impasse. Jay Powell doesn't do ex-state predicting anymore. In fact, he got a big promotion. He was nominated to the Fed by President Obama just a few months after this deal was struck. So now it's Shai's job to make the rounds on Capitol Hill. He's the guy going on C-SPAN to field calls from worried Americans. And he says this time the negotiations are really not going well. The political dynamics this year are perhaps worse than they've ever been.

There's more political discord even within the parties. And it leads to a very difficult situation because negotiations are best held when there is a clear picture on one side of what they're calling for and a clear picture on the other side. And I don't know that we have that this year. It sounds like you have a lot of work cut out for you. Yes. So is this moment from 2011 a cautionary tale for the current debt ceiling negotiation? Of course. That's why we're telling it now.

You'll find out after the break. Since 2011, Congress has more than doubled the debt limit. It's now at $31.5 trillion. This past fall, Republicans won control of the House, in part because of a hardcore faction who seems willing to take the debt ceiling fight really far. And so Shia Kavis and the crew at the Bipartisan Policy Center are busy at work again, trying to figure out this year's X date. They weren't ready to tell us what it is yet, but they said the X date will probably

fall in the summer, maybe early fall. The posturing in Washington, D.C. is getting intense. People are already throwing around some galaxy brain ideas on how to avoid catastrophe. And so we asked Shai to catch us up. What's already happened, what's being proposed, and what it all means. Now, technically, the U.S. already hit the debt ceiling this year, back on January 19th. That's the day Treasury Secretary Janet Yellen told Congress that the U.S. had run out of money and they needed to come to an agreement quickly. But, she told them, you do have a little time to figure out the details. I'm pulling out some old tricks to forestall a crisis.

Some tricks with a kind of cool name. The Extraordinary Measures? Yes. How did they come up with that term? with a kind of cool name? The Extraordinary Measures? Yes. How did they come up with that term?

So originally, the Extraordinary Measures were quite extraordinary in that you wouldn't think to use them in anything other than a debt limit scenario where Congress needed to buy more time. Does that mean they don't make sense in the normal logic of government governing? No, they make sense to almost nobody who I discuss it with.

And that puts an extra onus on us to try to explain them in simple terms. Let's do it. Extraordinary measures explained in simple terms. They're basically just accounting tricks that allow the government to keep spending money by freeing up some space under the debt limit. One of these tricks, for example, say you work for NASA. You have a government retirement account. Part of your retirement is an investment in government bonds. And when the debt ceiling gets close, Treasury can basically say, hey, let's pretend that we don't owe that money to you in the future

so we can use that money to pay for other things right now, like your paycheck. Once the debt limit situation is over, everything goes back to normal. Accounting gimmicks go away, but it's really just this built in cushion for Congress's delay. Are they just gimmicks? They are necessary gimmicks. They're the only thing that is standing in the way between where we are right now and us defaulting on our obligations. But yes, they're effectively gimmicks. They are accounting maneuvers that are permissible by law. In the past, the extraordinary measures have bought several months of negotiation time. And if the past is any guide, politicians will keep negotiating right down to the wire. And so there's another category of new, never-been-done-before tricks people are

proposing to avoid a crisis, given how bad the political dynamics are this year. One you might have heard of is this idea of a trillion-dollar coin, that in case of emergency, Treasury can just mint and maybe, big if here, deposit at the Federal Reserve. Boom, one trillion more dollars on the books. Another has to do with so-called premium bonds, which would let the government borrow more money, but it would look like they were staying under the debt limit. At least it would to accountants.

On a scale of 1 to 10, 1 being serious policymaking, 10 being a gimmick, where do you put the trillion dollar coin? It's got to be somewhere up there near a 10. OK, premium bonds. Yeah, I'm going to list almost all of these up near the 10 range. Maybe even at the 11, because they're all falling in the category of unprecedented actions by the Treasury Department that are going to be viewed as a bailout for Congress failing to do its job. Are they more gimmicky than the gimmicks we already have? They are not, but everybody is accustomed to the gimmicks that we already have.

And I would argue that those are baked into the cake. There are a few gimmicks that aren't baked into the cake yet. One is so simple that it doesn't seem like a gimmick. The U.S. could just keep borrowing money. Treasury could pretend like there is no debt ceiling. Just blow right past it. There is a legal argument to justify this. It comes from the 14th Amendment, which says, quote,

the validity of the public debt shall not be questioned. Does that mean that Treasury can just ignore the debt ceiling? Shia says, who knows? That would likely be subject to a challenge in the courts and could cause large financial market repercussions while that whole situation is unfolding, not to mention political fallout, if Treasury were to take that approach.

If Treasury does this, if they keep lending out money, that debt is probably going to be challenged in court as unlawful. Instead of being the safest investment in court as unlawful. Instead of being the safest investment in the world, a U.S. Treasury bond would become kind of unsafe, kind of junky. And who would buy those now junky government bonds? Well, there's this idea that maybe current Fed Chair Jay Powell would. And to be clear, this has never happened. This is not how the Federal Reserve is supposed to work. But in theory, the Fed could buy up that debt, keep the government running smoothly.

Has Chairman Powell, to me, Jay, to you, said anything about this? All he has said is that the Fed has no role in this debate, and it is up to Congress and the administration to take action and hold whatever negotiations they will. I am comforted by the fact that Jay is very familiar with this issue. And having somebody at the Fed in a worst-case scenario who understands it and the various dynamics, both economic and political, could be important. But hopefully we will never get to that point. could be important, but hopefully we will never get to that point. He thought he foisted all this debt ceiling stuff on you, but it's coming back to haunt him year after year.

Exactly. Much to his chagrin, I know. One thing that's weird about this whole thing is that the government could be having meaningful debates about the country's debt and deficits. But Chai says the time to have those conversations is when Congress is making decisions about how much to spend and how much to tax, not right before the X date. deficits. But Shai says the time to have those conversations is when Congress is making decisions about how much to spend and how much to tax, not right before the X date. The system that we have makes very little sense. Nobody would start from scratch and come up with the political football of the debt limit that we have today. Shai and his team expect to have their estimate of the X date

sometime next week. They're hopeful that Congress will find a new way of reducing debt that's not fighting about the debt limit. But if not, they'll be ready to do this whole thing again, probably next year. Today's episode was produced by Sam Yellow Horse Kessler with help from Alyssa Jong Perry. It was engineered by Josh Newell and fact-checked by Sierra Juarez. It was edited by Jesh Jang.

Special thanks to Ron Elving, NPR politics editor and walking encyclopedia of political knowledge. I'm Nick Fountain. And I'm Amanda Aronchik. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.