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Treasury Department prepares for the worst — if the debt ceiling isn't raised

MICHEL MARTIN, HOST:

What happens if the government runs out of money to pay its bills?

STEVE INSKEEP, HOST:

President Biden and House Speaker Kevin McCarthy keeps saying not to worry about that. They met yesterday to negotiate over raising the federal debt limit. Congress needs to do that in order to meet its legal obligations. Biden spoke before yesterday's meeting.

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PRESIDENT JOE BIDEN: We still have some disagreements. But I think we may be able to get where we have to go. We both know we have a significant responsibility.

INSKEEP: McCarthy said after the meeting, I believe we can get it done. But hardly more than a week remains before June 1. The Treasury Department says that's the earliest date at which the U.S. may have less money than it needs.

MARTIN: NPR's Scott Horsley has been asking what that might look like. Good morning, Scott.

SCOTT HORSLEY, BYLINE: Good morning.

MARTIN: So let me start with Republican Congresswoman Nancy Mace of South Carolina. She was on MORNING EDITION not long ago. She suggested the U.S. can pay its existing debts. Let's listen to what she said.

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NANCY MACE: We can prioritize. The president can prioritize spending. We're not going to run out of money to pay the interest on the debt because we get 11 times the interest on the debt in tax revenues year over year.

MARTIN: So let me briefly fact check that. Is she right?

HORSLEY: If all you're concerned about is making interest payments on the government's debt, she is right. The government almost certainly will keep making those payments. And interest isn't due until the middle of June anyway. But the government has tens of billions of dollars in other bills that it's supposed to pay before that. And Treasury Secretary Janet Yellen says it's very likely the government will not have enough money to cover all those bills unless Congress raises the debt limit soon. Keep in mind, tax revenue covers only about 75 cents of every dollar the government spends. The rest has to be borrowed. And if the government can't borrow more money, some bills are going to go unpaid.

MARTIN: Which is like the way a lot of families live, right? I mean, if you don't have enough money to pay all your bills, you prioritize some over the others. So how is the government going to decide who gets paid and who doesn't?

HORSLEY: Yeah, the government has a very tough call. Who do you stiff, retirees on Social Security, members of the military, doctors who look after Medicare patients, taxpayers who are waiting for their refunds? Bondholders are paid through a separate computer system, so they can easily be given priority. But Yellen told a Senate committee this spring, trying to pay some of the government's bills and not others is both risky and untested.

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JANET YELLEN: The government, on average, makes millions of payments each day. And our systems are built to pay all of our bills on time and not to pick and choose which bills to pay.

HORSLEY: That said, the Treasury Department might be forced into that position in just about nine days. Yellen told NBC over the weekend if the debt ceiling is not raised, there will be hard choices to make about which bills go unpaid. Now, the government has not said a lot about how it would go about that. It would be messy. There could be legal challenges. One option would be to keep paying bills in order as tax money becomes available. So perhaps someone who's expecting a Social Security payment on June 2 instead gets paid on June 3 or June 5. The longer the impasse drags on, the more those unpaid bills pile up and the later the payments might get.

MARTIN: How much lasting damage would that do?

HORSLEY: Well, when an individual is late paying bills, his credit rating takes a hit. And that makes it more expensive to borrow money in the future. The same thing could happen to the federal government. Now, if bondholders keep getting paid, this might not count as a technical default. But Yellen has said failure to pay any of the government's bills would be a default by another name. And, you know, it would likely rattle the financial markets. Bondholders might reasonably wonder, how long are they going to keep getting paid while grandmothers and service members have their checks held up? That's not a very good look politically.

MARTIN: That certainly isn't. That is NPR's Scott Horsley. Scott, thank you so much.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Michel Martin is the weekend host of All Things Considered, where she draws on her deep reporting and interviewing experience to dig in to the week's news. Outside the studio, she has also hosted "Michel Martin: Going There," an ambitious live event series in collaboration with Member Stations.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.