Congress Facing Another Debt Ceiling Crisis
In addition to everything else on its plate, Congress will have to revisit raising the debt ceiling again sometime this summer.
In addition to health care reform, a new budget, and the Russia investigation, Republicans on Capitol Hill will also have to deal with a looming debt ceiling crisis that looks like it could do down to the wire:
WASHINGTON — This summer was supposed to be a heady time for Republicans, who would be repealing and replacing the Affordable Care Act, cutting taxes and simplifying the tax code, and reining in the reach of government.
But now the party, rife with divisions, faces a familiar fight of its own making: raising the government’s statutory borrowing limit.
Once a distasteful but manageable task for Congress, the debt ceiling has become a battle Washington seems unable to escape.
By law, Congress must periodically raise the cap on the amount of money that the government can borrow on international lending markets. Republicans transformed the once-routine task of lifting the debt ceiling into high-stakes games of chicken during the Obama presidency — edging the economy toward so-called fiscal cliffs to extract policy concessions such as budget cuts and spending caps.
With Republicans in control of both houses of Congress and the Oval Office, some thought that the debt ceiling would be an easy lift.
Instead, it has become an obstacle threatening to further stall an agenda that has already fallen well behind schedule. The Treasury Department wants the debt ceiling raised before Congress leaves for its August recess, a demand that could consume many of the 13 legislative days on the calendar next month.
“It’s going to complicate the ability to pass a budget, and it’s going to complicate tax reform because of the internal tensions that they have to struggle with,” said Ed Lorenzen, senior adviser for the Committee for a Responsible Federal Budget, a bipartisan group.
Time is running short. Republicans must finish their health care legislation under the Senate’s budget process in the coming weeks and pass a 2018 budget resolution before they can move on to the tax legislation that they have promised to approve this year. This fall, they will have to cut a deal with Democrats to fund the government. And all of that must happen against the backdrop of investigations into Russia’s meddling in the presidential election.
Fears over a looming debt ceiling fight were fanned late last month when Mick Mulvaney, the White House budget director, noted that tax receipts were coming in more slowly than had been anticipated and that the limit needed to be raised this summer rather than in the fall. The Congressional Budget Office revealed why in its monthly budget review on Wednesday: tax receipts were $60 billion to $70 billion short of what was projected at the beginning of the year. This was most likely the result of taxpayers’ delaying their tax filings in anticipation of big tax cuts.
The accelerated timetable to raise the debt limit has laid bare a difference of opinion within the White House about how it should be raised — whether it should be lifted without policy encumbrances or if it should be tied to other policy changes.
Mr. Mulvaney, who led the debt ceiling brinkmanship in his previous job as a Republican representative from South Carolina, explained last week that he would like to see concessions such as spending cuts or budget process changes tied to any bill that would raise the debt ceiling. But Steven Mnuchin, the Treasury secretary, has urged Congress to raise the borrowing limit as quickly as possible, with no strings attached, to avoid roiling financial markets and putting the economy at risk.
While the administration has not taken an official stance, President Trump signaled in a meeting with the Republican leadership this week that Mr. Mnuchin, not Mr. Mulvaney, was leading debt ceiling negotiations.
Still, those negotiations will not be easy. After years of arguing that debt limit increases should be paired with spending cuts, conservative Republicans may be unwilling to raise the ceiling without a price. Many House Republicans insist that inaction on the debt ceiling would not result in a government default, as Treasury secretaries from both parties have consistently warned.
After Mr. Mnuchin warned in May that time to raise the cap was running short, the House Freedom Caucus panned his request, saying, “We demand that any increase of the debt ceiling be paired with policy that addresses Washington’s unsustainable spending by cutting where necessary, capping where able and working to balance in the near future.”
Steve Bell, a former Republican staff director of the Senate Budget Committee, said the party’s difficulties raising the debt limit were emblematic of its current state of dysfunction.
“This is the reality of the Balkanization of the Republican Party,” said Mr. Bell, now with the Bipartisan Policy Center. “It is almost theological, and this is not something that is going to cement the party back together.”
The infighting means that Republicans will need support from across the aisle to raise the debt limit, but Democratic leaders do not appear eager to help. The party out of power in the White House has, by tradition, been reluctant to shoulder that political burden.
“I don’t have any intention of supporting lifting the debt ceiling to enable the Republicans to give another tax break to the wealthy in our country, to further exacerbate the challenge that is created when they have their trickle-down economics,” Representative Nancy Pelosi, the House minority leader, said last week.
The last time we had a real showdown over the debt ceiling, of course, was in the summer of 2011 when House Republicans, fresh off the wave election that swept them to power in 2010, played a game of brinksmanship with President Obama and the Democratic-controlled Senate that quite literally went down to the wire to the point where the Treasury Department was going to have to start choosing which of the obligations would get paid and which would not. The most important of those payments, of course, is the payment of interest and principal on the nation’s debts, which exist principally in the form of Treasury Bonds and Notes that are publicly traded on exchanges throughout the world and widely seen as the safest investment on the planet. If the Federal Government were to miss payments on this obligation, it would likely lead to serious disruptions in world financial markets, the end of a world where the U.S. is seen as a safe investment, and have serious ramifications for the world economy and the American economy. For that reason, if we did reach a point where there was not sufficient money to pay all of the obligations of the Federal Government, the Treasury Department would most likely be forced to prioritize payment with the cash on hand it has during a given period. This would mean that at least some obligations, which could range from everything to billing generated by the business that Federal agencies conduct with private companies to obligations owed to entitlement programs such as Social Security, Veterans health care, Medicaid, and Medicare. While the economic impact of missing such payments would not be nearly as serve as missing payments on the national debt, it would still be substantial and could be sufficient enough to significantly slow down economic growth that is already proving to be quite anemic.
Congress and the President both learned a lesson from that debt ceiling showdown six years ago, and as a result, we’ve had few confrontations over the issue in the ensuing time period. Instead, the Republican-controlled Congress, largely with Democratic Party consent, has quietly either raised the ceiling itself or passed a law that effectively “suspends” it for a given period of time. The one thing it hasn’t done, though, is to take the step that would seem to be the most logical, which would be to eliminate it entirely. The only reason that the United States has these confrontations over raising the debt ceiling from time to time is that Congress passed a law that bars the Treasury Department from raising debt to fund things that Congress has already authorized beyond a certain limit. As I’ve argued several times in the past — see here, here, and here for just a few examples — there is no rational reason why we need to keep revisiting this issue every time we run up against an artificially created barrier that threatens to degrade the credibility of the United States in global financial markets.
In the end, it’s likely that the Republicans on Capitol Hill will find a way to quietly raise the debt ceiling just as they have in the past. Before we get there, though, it’s looking like we may have to put up with another showdown between Members of Congress who recognize that authorizing the Federal Government to pay the bill for things that Congress has already authorized it to spend money on and the debt kamikazes who think that playing with the financial integrity of the nation is a way to advance their political position.
Isn’t it ironic, in the sickest possible way, that one of the mostly likely causes of an economic collapse in our country is the actions of people who have erroneously convinced themselves that they are fighting to prevent a mythical economic collapse?
For how many years now have we been told that hyperinflation is “just around the corner”, when in reality we can’t even hit the meager 2% target that is supposed to be part of the Federal Reserve’s mandate.
“Money” in the 21st century is essentially nothing but 0s and 1s on computer hard drives. Today’s “debt” is not like a credit card that will eventually be paid back. We are not shortchanging our kids and grandkids by running government deficits. If anything, the people who are screwing our grandkids are the ones who insist that the wealthiest country that has ever existed can’t afford to fix our roads and bridges, properly educate our people and make investments based on what the world will look like in the future, not a past that will never come back (and probably wasn’t nearly as good as some imagine it to be anyway).
All that being said, there’s not much most of us can do about it anyway. It’s almost like driving down the freeway and seeing a car weaving in and out of traffic ahead of you. You’re pretty sure a wreck is likely to happen, but all you can do is hope it doesn’t, and if it does that you are somehow able to avoid the worst of the pileup. :-/
This is a real test for the Republicans. And they have failed so very many tests already since January. Personally, I believe that the Republican Party is no longer capable of governing. The “all problems have simple answers” mentality of Reagan, the “never reach across the aisle” policies of Gingrich, the nihilism of Ted Cruz, and the teenage fascination with dramatic theories no matter how many times they are proven disastrous ala Paul Ryan have metastasized and consumed the party from within. There is perhaps no better example of this than Kansas, which has probably lost a generation due to the self inflicted wound of repeatedly voting for the pawns of billionaires with libertarian hobbies. Kansas is the modern Republican Party writ small.
To date, even with control of both houses and the presidency they haven’t enacted a single piece of major legislation, and made no meaningful progress on their minimum responsibilities such as budgeting.
Maybe I’m wrong. McConnell has, in extreme circumstances, worked with the Dems. But Ryan has not. Remember, Boehner did the deed for him and then resigned. Maybe they can cobble it together, and scare Trump into signing by talking about what it would do to real estate prices if we default, or even look like we are going to default. But would the Koch brothers tolerate it? Or would they let it be known they will primary all “defectors” into oblivion?
I hold Ronald Reagan to be the most disastrous president in American history, James Buchanan aside. He put an avuncular happy face on this ugly right wing nonsense, leading to the pass in which we now find ourselves.
I’m not sure where you get your optimism from. Or your definition of “quietly”.
The Republicans used the debt ceiling to draw major concessions on every occasion after the 2010 election, and there is a significant chunk of their party that believes that they don’t have to. Raising/suspending it in 2015 required Boehner to resign. Our credit-rating was downgraded, making debt more expensive.
The Republicans don’t have the votes to raise the limit. They have the majority in both houses of congress and the presidency, but they don’t have the votes because a large chunk of their caucus is insane. The “governing” party is now dependent on the opposition party to get basic maintenance done.
And they aren’t going to want to make a deal with the Democrats, if the Democrats hold out for increased funding for social services or increased revenue. And, after years of Republican brinkmanship with the debt ceiling, that’s how the game is played now.
@Todd: Yep. Joe Stiglitz explains the debt in forty-nine seconds:
https://m.youtube.com/watch?v=76wtfxepWQQ
A number of commentors used to demand I present as evidence of this a nobel prize-winning economist who agreed. Well there it is.
@Ben Wolf: Stiglitz appears to be missing something rather obvious — printing the pieces of paper doesn’t happen automatically, people have to authorize printing those pieces of paper.
Also, printing those pieces of paper doesn’t come without a price — if done too much, it devalues the existing pieces of paper. There are some rates of printing that are sustainable, and others that are not.
If there’s a more artificially-generated crisis than the debt ceiling, I don’t know what it is.
Republican debt ceiling strategy
@Gustopher: I have not put enough effort into studying economics to claim to be knowledgeable enough to try to contradict actual experts (even if I think I disagree with them).
I have found this particular site to be useful though, in that his explanation of modern economics seems to include conditions and circumstances that can be observed in the real world: http://www.pragcap.com/biggest-myths-in-economics/
Of the myths listed on that page, this is the one that is probably most relevant, and hardest to argue with:
The whole concept of the debt ceiling needs to be abolished, and replaced with a law that states that the Secretary of the Treasury shall take all appropriate measures to ensure the creditworthiness of the U.S. government is not impaired.
@Todd: I’m an engineer, I contradict everyone, whether I know enough to or not. I don’t trust experts making broad, general claims — you can always find cases where the claim doesn’t apply. There’s a whole bunch of unstated assumptions.
If we default on our debt obligations, it will be because of a politically motivated self-inflicted wound rather than any economic reason. Stiglitz is assuming people are semi-rational actors, and that’s not always the case.
And expanding the money supply — even a money supply backed by nothing more than the full faith and credit of the United States — obviously has some limits, which he isn’t acknowledging in that soundbyte. If the government mailed out checks for $40 billion dollars to every citizen in the country, it would have profound impacts on the economy — wipe out all debt, screw over the futures markets, etc. — and make sure that no one would ever want to hold debt in US dollars ever again. It’s an absurd case, but it shows that there is some limit, without actually getting bogged down in the question of what that limit is.
On the other hand, if we don’t expand the money supply as productivity increases, we will get deflation, and the cost of existing consumer debt will crush a lot of households as wages decrease (I would argue we are seeing the basic effects of this wage decrease already, as so much of the money supply is being captured by the extremely wealthy)
“We can just keep printing money” is like the Laffer Curve. It’s a massive oversimplification that is then used to justify all sorts of policies.
@DrDaveT: “…common, salt of the earth people; you know–morons…”
@Todd: Also, from your quoted text:
A lot of the social sciences, and the soft sciences in general, have a lot of statistical rigor over large enough groups, and it is possible to create studies with control groups, get real answers, and repeat those experiments.
Comparing economics to the social sciences is a slur against the social sciences.
(Ok, fine, I’m overgeneralizing. We can totally repeat the failures of Kansas everywhere, if we just try hard enough)
Considering that this particular dog and pony show has been a staple for well over 37 years–remembering that some economists claim that the “stagflation” that crippled the economy for most of the 70s was triggered when Nixon brought the budget into balance in, IIRC, 1969, I’m inclined to hold that “no longer capable” may be too generous an assessment. Either way, your point is true in that they sure are showing that they have no clue about what to do. The dog has finally caught the car.
@Todd: The problem with the “printing will cause inflation” argument is we’ve net printed $21 trillion over the last two centuries and there’s no inflation anywhere. It simply isn’t an issue in a developed capitalist economy.
@Just ‘nutha ig’nint cracker:
The 1969 surplus (covering the year LBJ left office and Nixon was inaugurated) is generally attributed to LBJ’s passage of a surtax. Giving the credit to Nixon, who had just started his presidency, is ridiculous.
@Gustopher:
“Economics” is a big tent. You need to distinguish.
Econometrics is all about rigor — it’s essentially the study of how to do valid statics on data with feedback loops in it.
Applied microeconomics is also pretty rigorous. Experimental economics and behavioral economics are descriptive and empirical, and do pretty well.
The quagmire is macroeconomics, where (as noted above) the goal of most of the players seems to be finding support for their prejudices. Krugman isn’t perfect, but he does pretty well and is correctable. Mian and Sufi did a pretty good job of analyzing the debt-induced crash of 2008. I’m sure there are others, but the signal-to-noise ratio is a lot lower for macro than it is for micro.
Saving money by refusing to raise the debt ceiling is like saving money by refusing to pay your credit card bill. It’s the opposite of smart.
I’m 40. In my entire life, 2 presidents have left the deficit smaller than they found it. Guess which two.
@teve tory:
No, no, no. A big part of our problem with this issue, is that even Democrats tend to accept the govt debt/credit card analogy. As if the United States government somehow doesn’t have enough money, and is only able to function if some other entity continues to lend us money. This is just not correct.
A much better (although still not absolutely perfect) analogy would be a bank refusing to accept new deposits because they don’t want to pay the (really low) interest rates … even though there is ample evidence that especially during times of crisis your bank is exactly where people want to put their money, even at effective negative interest rates (interest rates lower than the expected inflation).
It’s absolutely nuts how willfully misinformed most Americans are when it comes to how our monetary system actually works.
@Gustopher:
Maybe I shouldn’t have quoted from the text … the webpage that the link leads to has a lot more useful information beyond just what I highlighted.
http://www.pragcap.com/biggest-myths-in-economics/