If President Obama manages to get his entire jobs plan passed — a big if, of course — it will quicken the pace at which the federal government is burning through its new borrowing authority and could set up another debt limit battle with Republicans before Election Day 2012.
There are several variables at play, and another debt limit fight before the election wouldn’t be a sure thing. But it’s not out of the question, especially if economic growth between now and then is weaker than predicted.
A slower-than-expected economy — or a double dip recession — combined with the jobs bill’s $447 billion price tag, means the federal government could run out of borrowing authority right about October 2012, according to one worst-case-scenario estimate. The deal to raise the debt limit last month was designed to give the government enough cushion to make it past the election before the parties would have to square off again. But that was before Obama introduced his new jobs plan, and before revised economic forecasts revealed the economy’s in worse shape than economists believed earlier this year.
Here are the variables to watch that could come together to create an exquisitely timed political crisis:
When the debt limit increase passed, the Treasury Department estimated we wouldn’t hit the debt limit again until February 2013, after which the Treasury Secretary could buy a few weeks by taking a handful of extraordinary measures.
The debt limit law guarantees the administration $2.1 trillion in new borrowing authority, in a handful of increments. It could ultimately provide up to $2.4 trillion — but only if the new deficit super committee fully meets its $1.5 trillion deficit reduction target, or Congress sends a Balanced Budget Amendment out to the states.
If the administration gets stuck with the lower, $2.1 trillion figure, current economic estimates suggest the a new debt limit bill will have to pass in early 2013, or borrowing authority will lapse, and trigger all the potential cataclysms we barely avoided in August.
For their part, administration officials have looked at this conundrum, and estimate that the debt limit law (known officially as the Budget Control Act) gives the Treasury enough borrowing authority to get through 2012, even if the jobs bill passes in full, although it might require Geithner moving money around to make it last.
Maybe, but then again maybe not, says Richard Kogan a budget expert at the Center on Budget and Policy Priorities, and former Office of Management and Budget adviser.
Kogan estimates the jobs bill will add more than $300 billion to the deficit next year.
“If the $2.1 trillion is only good through January with [Treasury taking] extraordinary measures, losing $300 billion … would make it much closer to being an Election Day problem rather than a January problem,” he says, envisioning a pessimistic scenario.
“If the President’s plan were to pass in its entirety, there is a meaningful probability that the next debt ceiling vote would have to come before next November’s election,” says Mark Zandi, Moody’s chief economist.
Another key variable is the strength of the economy. A stronger economy usually means more government revenues, fewer expenditures, and less of a need to borrow. But what if already iffy economic forecasts don’t hold, and, say, a Eurozone crisis strikes the global economy? Then all of these economic growth predictions are subject to revision — downward.
That’s where the jobs bill enters the picture.
Obama’s plan is paid for — meaning there will be spending cuts and tax increases elsewhere in the budget to offset the cost of the jobs plan. But the expectation is that those offsets wouldn’t kick in until 2013 at the earliest, causing a spike in the deficit in 2012 and the possibility that we blow past the debt limit just before the election.
The White House estimates the plan’s total cost to be $447 billion, but Zandi expects only $421 billion would accrue in calendar year 2012. If you assume a friendly economic multiplier on these new deficits (that the new spending and tax cuts trigger GDP growth and thus a bit of a return in the form of less unemployment and more tax revenue) then the deficit impact in 2012 will be below $400 billion. Zandi estimates $307 billion. But that’s still a healthy chunk of $2.1 trillion.
“The irony of all this is that … they may have to confront it (raising the debt limit) again soon because the deficit might be a great deal higher than we were anticipating,” Robert Bixby, executive director of the fiscally hawkish Concord Coalition told Reuters.
Jim Horney, another CBPP expert, cautioned that some of the jobs bill’s new costs wouldn’t hit until after 2013. But he acknowledged, “enactment of this proposal would increase the possibility that the debt limit increase will have to come sooner than hoped for.”
A Treasury official says the administration believes that full passage of the jobs bill would mean the country hits the debt ceiling in October 2012, but that Secretary Tim Geithner would be able to shift funds around to push the final deadline through the end of the year — an unwelcome problem in and of itself given the lame duck session and, possibly, the transition to a new administration.
Welcome to the law of unintended consequences. Most economists think legislation like the jobs bill is appropriate given the fragile state of the economy. But just as with the 2009 stimulus, it could prove to be inadequate if the current, already dire forecasts are off base, or another major economic shock throws them out the window. If either happens, then full passage of the jobs bill could leave Obama and the country in a worst-of-all-worlds situation: an economy that’s worse than it is now and another brutal fight over the debt limit when angry voters are paying close attention.
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