The U.S.May Not Default on Friday But Washington Is Still Playing A Dangerous Game

What’s going to happen on October 18 if Congress doesn’t vote to increase the debt limit? Probably nothing.

Make no mistake, Washington is still wading in exceedingly treacherous waters as the President and Congress wrestle over a deal to avoid–at least for now—a breach of the nation’s borrowing authority. The government risks financial calamity if it fails to pay its bills on time–which it inevitably will do without the ability to borrow more money. But default may not happen on Thursday, or even this week.

In a recent  on-line discussion sponsored by the Urban Institute, policy experts from across the ideological spectrum agreed: If necessary, the Administration will probably find ways to put off financial catastrophe for at least an extra few days.

Oct. 18 was never really a drop-dead date in the way that Oct. 1 was the government shutdown deadline. Congress had to pass a spending bill by Oct. 1 to prevent federal agencies from furloughing workers and cease some operations.

By contrast, Oct. 18 found its way into the public debate after Treasury Secretary Jack Lew warned Congress that he expected to have only about $30 billion in cash available by then. After that, he said he could not promise to make all scheduled government payments.

The government may be about out of borrowing authority. But that doesn’t mean it will immediately be unable to pay its bills. As a result, the exact date of actual default remains uncertain.

Government raises money by borrowing and by collecting taxes and other revenues. Even after its borrowing authority is exhausted, it will continue to collect taxes. It may also have some limited additional flexibility to shift money among accounts, although this is uncertain.

As a result, the White House may have a few days or even a couple of weeks to play with.

When exactly will the federal Treasury turn into a pumpkin? The budget experts at the Congressional Budget Office and the Bipartisan Policy Center figure the Treasury will run out of money between Oct. 22 and Nov. 1.

Why the range? It turns out the green eyeshade folks can identify projected daily spending quite precisely. They know, for instance, that Social Security must pay $12 billion in benefits on October 23 and that Treasury owes $6 billion in interest on the public debt on October 31. They also know the government must pay out more than $55 billion on Nov. 1.

They are less adept at projecting day-to-day revenues, which can vary quite a lot. That’s why Lew conservatively estimated that he’d be down to his last $30 billion in cash-on-hand by Thursday.

Thus, the drop-dead date may not be Oct. 18. But it will be very soon—and almost certainly before those big payments are due on Nov. 1.

This may create a serious credibility problem for President Obama. If Congress does not act in time, his critics will note with some glee that the sun still rose on Friday morning and Treasury still paid its bills. So, they’ll ask, what’s the rush?

To start, it is impossible to know how financial markets will react in coming days. Which turn of the Washington screw will set them into a panic? Who knows?

We also run the risk that Congress and the White House will miscalculate in their game of chicken and throw the nation into default. That puts us in largely unchartered waters, though my Tax Policy Center colleague Donald Marron noted in a recent blog post that an accidental short-term default in 1979 caused a sharp spike in interest rates.

The nation may not go over the fiscal cliff at 12:01 AM on Oct. 18, but in the absence of a fiscal deal in the next day or so, we will be teetering on the edge of the precipice. And that is a dangerous place to be.