Conversations with Capitol Hill Members and staff over the middle of this year evidenced a considerable “process fatigue.”  This was not terribly surprising given that they had lived through — and been run over by — the National Commission on Fiscal Responsibility and Reform (Bowles-Simpson), and the debt-limit deal with its Supercommittee and sequester.  The players were not interested in another road map to a solution; they wanted the solution itself (ideally, handed to them fully cooked on a plate).

With a greater realization of the limited potential of the coming lame-duck session of Congress, and a greater appreciation of the consequences of a flight off the “fiscal cliff,” all that is gradually changing.  There are no firm decisions, pending the election results; anything planned today could be irrelevant at the opening of business on November 7.  But people are beginning to understand that there must be some resolution (or at least credible assurances) on the fiscal cliff before the end of the year; and that resolution is impossible without some firm indication of impending action on the underlying budget problem.

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The Congress has gone dark until November 13, when it will return in a “lame duck” session.  Some people had harbored hopes that the lame duck would solve all of our budgetary problems.  That was never on.  (See “What the Lame Duck Can Do” and “Where the Budget Is Going in 2012“ for the upside and the downside limits of the lame duck.)  And as difficult as it will be merely to avoid the fiscal cliff, there is one more problem lurking just at the end of the year.

We are going to hit the debt limit again.  As part of the debt deal last year, the statutory limit was increased by just enough to get us through the election.  Well, that’s just about where we are.  The limit is, of course, somewhat malleable.  As the Treasury approaches the limit, the Secretary has certain tools at his disposal to open up additional borrowing authority.  Those tools are limited, and in fact have become more limited over time.  (See “Delays Create Debt Management Challenges...” from the Government Accountability Office (GAO), which catalogs those tools and explains how their power has shrunk.)

The criticality of projections of the nation’s debt subject to limit is far greater than those of the budget deficit itself, even though predicting those two numbers is essentially the same task.  The difference is the functional equivalent of the contrast between games of horseshoes and hand grenades.  If budget forecasters one month out predict the ultimate deficit number to within $20 billion, they pat themselves on the back for hitting the target.  On the other hand, if Treasury’s staff at the Bureau of the Public Debt are $20 billion off, the consequence could be an unexpected default.  At this point, the range of uncertainty about the date of our next encounter with the statutory limit is in practical terms enormous.  It is likely that the nation will need to resolve the issue before the turn of the year.  It is certain that the nation will be far better off, with much less uncertainty in the markets, if we do.

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