Wake Up To Politics - September 22, 2021

Good morning! It’s Tuesday, September 21, 2021. Election Day 2022 is 413 days away. Election Day 2024 is 1,141 days away.

If you’ve been reading this newsletter over the past few days, then you’ve probably seen a fair amount about the debt ceiling (also known as the debt limit).

You’re only going to be hearing more about it over the coming weeks — but I know that some of you might not be fully versed in U.S. budgetary policy. That’s OK! This stuff is confusing. So I figured it might be helpful to run a more in-depth explainer on what exactly the debt ceiling is, and what the consequences of hitting it are.

Tomorrow, I’ll catch you up on some other important developments, on topics such as the border, the pandemic, and more. But today’s newsletter is going all-in on the debt ceiling, to make sure you get as full a sense as possible of what exactly this means and why it matters. Let’s dive in...

Explainer: What is the debt ceiling?

Let’s start with the basics. Every year, through the annual appropriations process, Congress tells the U.S. Treasury how much money to collect through taxes, how much money to spend on government programs, and which programs to spend it on.

Like many other countries, the U.S. government runs on a deficit, which means it routinely spends more money than it takes in through taxes. The government manages to do this by borrowing money to cover the difference. That borrowed money is what’s known as the national debt, and it comes from a range of creditors: American banks and investors, foreign countries, even the government itself (through borrowing from federal accounts like the Social Security Trust Fund).

However, unlike many other countries, when Congress instructs the government to spend a certain amount, the government isn’t automatically allowed to take on the debt necessary to make that spending a reality. Instead, there is a legal limit to how much money the Treasury can borrow, and the limit can’t be exceeded without approval by Congress — even to cover spending that Congress has already mandated. That limit on borrowing is known as the debt ceiling.

Still have questions? Here are some you might be asking:

When was the debt ceiling created? 1917. Before that, Congress approved each specific issuance of debt through separate pieces of legislation. That became unrealistic when World War I rolled around, and Congress passed the Second Liberty Bond Act to give the Treasury more flexibility to finance the war effort. However, the law set a cap of how much debt the Treasury was allowed to borrow ($11.5 billion), thereby creating the debt ceiling.

So how does it work in practice? You may have guessed that the debt ceiling is no longer just $11.5 billion: it’s been raised a few times since 1917. How that works is whenever the government is coming close to hitting the debt ceiling, Congress has to pass a law setting a new limit, which allows the Treasury to borrow at will until the next time the ceiling is hit.

Since 2011, Congress has also frequently suspended the debt ceiling, which temporarily abolishes the limit — but sets a deadline for when the limit comes back into play. According to the Congressional Research Service, the debt limit has either been raised or suspended a total of 98 times in the past 104 years.

What’s the situation now? In August 2019, with the Bipartisan Budget Act, Congress suspended the debt ceiling through July 31, 2021. The law said that on that deadline, a new cap would go into effect, which would be set at the previous ceiling ($22 trillion) plus however much debt had been borrowed over the course of the suspension (which had been about $6.5 trillion as of June 30, per the Congressional Budget Office).

So, theoretically, on August 1 of this year, the new debt ceiling would have been about $28.5 trillion. However, the Treasury has continued borrowing past that level — which it’s able to do through a series of work-arounds it calls “extraordinary measures.” These emergency maneuvers basically allow the Treasury to move money around to make sure it can keep paying the government’s bills, and they have the effect of delaying the date at which Congress absolutely has to act on the debt ceiling.

So when is the real deadline? It’s approaching. The Treasury Department has been invoking its “extraordinary measures” since August 1, but they are bound to run out of work-arounds soon. Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed that her agency would hit that point “sometime in October.”

Yellen also wrote that “it is impossible to predict precisely when” that point will be, although that hasn’t stopped many experts from trying. Wrightson ICAP is an independent research firm that tracks the Treasury closely, and many in Washington pay attention to their analysis. Their current estimate is that the Treasury Department will run out of “extraordinary measures” on October 25 or 26, meaning the real debt ceiling deadline is probably around then.  

Will Congress act by then? We don’t know! The House passed a bill on Tuesday that would extend government funding through early December — separately from all this, government funding is set to expire on October 1 — and suspend the debt ceiling through the end of 2022. The measure passed 220-211, with exclusively Democratic support.

The measure is now dead on arrival in the Senate, where it would need support from 10 Republicans to get past a filibuster. That’s because the Senate’s top Republican, Mitch McConnell of Kentucky, has led his members in declaring they will vote against any debt ceiling increase or suspension. McConnell’s argument is that Democrats used the reconciliation process to pass $1.9 trillion all on their own, and are currently trying to use it to pass another $3.5 trillion all on their own, so they should have to use the same process to raise the debt ceiling all on their own too.

The Democratic counterargument has been to point out that raising the debt ceiling is not about allowing the government to take on new spending: it merely allows the government to borrow the debt it needs to spend what has already been mandated. In this case, Democrats point out, much of that spending was approved during the Trump administration. Democrats have also argued that both parties came together to lift the debt limit during the Trump era, so it is only fair to do the same again.

What happens if Congress doesn’t raise or suspend the debt ceiling? Hopefully, that gives you a clearer understanding of what the debt ceiling is and where it comes from. But you might also be wondering why this all matters. That leaves the big question: What are the consequences if the U.S. hits the debt ceiling in mid-October, and Congress hasn’t acted?

Well, some experts say it could be downright catastrophic. Once the debt ceiling is hit — and the Treasury’s “extraordinary measures” are exhausted — the government won’t be able to issue any debt and, pretty soon, it will run out of cash. This is known as defaulting on the debt, and it would mean the U.S. would no longer be able to fulfill its financial obligations, from Social Security payments to government salaries to food stamps.

The U.S. has never defaulted on its debt — although it has come close, most notably in 2011 — and the aftershocks of such an event would be felt around the world. Mark Zandi, the chief economist of the widely respected Moody’s Analytics, published a report on Tuesday that painted a grim picture of the economic crisis that would be spawned by a default.

“This economic scenario is cataclysmic,” Zandi wrote, adding that the resulting downturn would be comparable to the 2008 financial crisis. According to Zandi’s estimates, nearly 6 million U.S. jobs would be lost, the unemployment rate would nearly double (from around 5% to around 9%), and stock prices would be cut almost by a third — “wiping out $15 trillion in household wealth.” (Plus, such a downturn would also likely lead to recessions in other countries, further exacerbating the crisis.)

“Even if resolved quickly, Americans would pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized,” Zandi added.

So what’s the endgame? Each party has their preferred solution. If you ask Democrats, the debt ceiling should be raised on a bipartisan basis — just as it was under Trump, they point out — using the continuing resolution (CR) that was passed by the House on Tuesday. But that means going through “regular order,” which means getting 60 votes in the Senate, which means getting support from 10 Republicans. At this moment, that doesn’t seem likely: only four Republican senators have even expressed openness to signing off on the CR.

Hand the mic over to Republicans and they’ll remind you that Democrats are already marching through the intricate budget reconciliation process, which only requires 51 votes in the Senate, so they should just tack on a debt ceiling increase to their massive package. Democrats have complete control of government, Republicans say, so they should fix this mess. Right now, that doesn’t seem too likely either: Democratic leaders have repeatedly ruled out using reconciliation to raise the debt ceiling, although some Democratic lawmakers have acknowledged they might have to bend on that in the end.

There are a few more fringe options: for example, during the 2011 debt debate, some people rallied around the idea of the U.S. just minting a trillion-dollar coin and paying its debt that way. But the White House has already shot that idea down, and it was never very realistic to begin with.

So we’re essentially locked in a game of chicken, just waiting for one of the two parties to fold and take the other party’s proposed offramp. It’s a classic political standoff — except for this time, the entire global economy might just hang in the balance.

Daybook

All times Eastern, unless otherwise noted.
EXECUTIVE BRANCH
President Joe Biden will receive his daily intelligence briefing at 9:15 a.m. Then, he will convene a virtual summit with global leaders to discuss COVID-19 at 11 a.m. Finally, throughout the afternoon, Biden will meet with various groups of House and Senate Democrats to discuss the bipartisan infrastructure bill and the Democratic spending package.

Vice President Kamala Harris will lead a session as part of the virtual COVID summit at 1:30 p.m., focusing on preparing for and preventing future pandemics. At 5:15 p.m., she will meet with the president of Zambia, Hakainde Hichilema.

White House Press Secretary Jen Psaki will hold her daily press briefing at 1 p.m.

LEGISLATIVE BRANCH

The Senate will convene at 10 a.m. for a day of votes on various Biden nominees. At 11 a.m., the chamber will hold cloture votes to advance the nominations of Lily Batchelder to be Assistant Secretary of the Treasury for Tax Policy and Jayme White to be Deputy U.S. Trade Representative for the Western Hemisphere, Europe, the Middle East, Labor, and Environment.

At 2:45 p.m., if cloture is invoked on both nominees, the Senate will vote on their confirmations, followed by a cloture vote on the nomination of Florence Pan to be a U.S. District Judge for the District of Columbia.

The House will convene at 10 a.m. for one-minute speeches and move to legislative business at 12 p.m. The chamber will then resume consideration of H.R. 4350, the National Defense Authorization Act (NDAA) for Fiscal Year 2022. The House will consider 476 amendments to the measure, although some of them will be voted on in groups.

The chamber may also vote on passage of up to eight bills under “suspension of the rules”:

1. S. 848, the Consider Teachers Act of 2021
2. H.R. 1029, the Free Veterans from Fees Act
3. H.R. 1154, the Great Dismal Swamp National Heritage Area Act
4. H.R. 3533, to establish occupational series for Federal positions in software development, software engineering, data science, and data management
5. H.R. 3599, the Federal Rotational Cyber Workforce Program Act of 2021
6. H.R. 1204, the District of Columbia Chief Financial Officer Salary Home Rule Act
7. H.R. 978, the Chai Suthammanont Remembrance Act of 2021
8. H.R. 2617, the Performance Enhancement Reform Act

On the committee level, the House Homeland Security Committee will hold a hearing at 9 a.m. on worldwide threats to the homeland 20 years after 9/11, with testimony from Secretary of Homeland Security Alejandro Mayorkas and FBI Director Christopher Wray.

JUDICIAL BRANCH

The Supreme Court is not in session.

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