America’s need to pay its bills has spawned a political game

By Jim Tankersley,

For nearly two decades, lawmakers in Washington have waged an escalating display of brinkmanship over the federal government’s ability to borrow money to pay its bills. They have forced administrations of both parties to take evasive actions, pushing the nation dangerously close to economic calamity. But they have never actually tipped the United States into default.

The dance is repeating this fall, but this time the dynamics are different — and the threat of default is greater than ever.

Republicans in Congress have refused to help raise the nation’s debt limit, even though the need to borrow stems from the bipartisan practice of running large budget deficits. Republicans agree the United States must pay its bills, but on Monday they are expected to block a measure in the Senate that would enable the government to do so. Democrats, insistent that Republicans help pay for past decisions to boost spending and cut taxes, have so far refused to use a special process to raise the limit on their own.

Observers inside and outside Washington are worried neither side will budge in time, roiling financial markets and capsizing the economy’s nascent recovery from the pandemic downturn.

If the limit is not raised or suspended, officials at the Treasury Department warn, the government will soon exhaust its ability to borrow money, forcing officials to choose between missing payments on military salaries, Social Security benefits and the interest it owes to investors who have financed America’s spending spree.

Yet Republicans have threatened to filibuster any attempt by Senate Democrats to pass a simple bill to increase borrowing. Party leaders like Sen. Mitch McConnell of Kentucky want to force Democrats to raise the limit on their own, through a fast-track congressional process that bypasses a Republican filibuster. That could take weeks to come to fruition, raising the stakes every day that Democratic leaders decline to pursue that option.

The problem is further compounded by the fact that no one is quite sure when the government will run out of money. The Covid-19 pandemic continues to ravage the United States in waves, frequently disrupting economic activity and the taxes the government collects, complicating Treasury’s ability to gauge its cash flow. Estimates for what is known as the “X-date” range from as early as Oct. 15 to mid-November.

Amid that uncertainty, congressional leaders and President Joe Biden are not even attempting to negotiate a resolution. Instead, they are sparring over who should be saddled with a vote that could be used against them, raising the odds that partisan stubbornness will propel the country into a fiscal unknown.

It all adds up to an impasse rooted in political messaging, midterm campaign advertising and a desire by Republican leaders to do whatever they can to protest Biden’s economic agenda, including the $3.5 trillion spending bill that Democrats hope to pass along party lines using a fast-track budget process.

Also read: India, US fail to make headway in resolving trade concerns during Modi's visit

Republicans say they will not supply any votes to lift the debt cap, despite having run up trillions in new debt to pay for the 2017 tax cuts, additional government spending and pandemic aid during the Trump administration. Democrats, in contrast, helped President Donald Trump increase borrowing in 2017 and 2019.

“If they want to tax, borrow, and spend historic sums of money without our input,” McConnell said on the Senate floor this week, “they will have to raise the debt limit without our help.”

Thus far, Biden and Democratic leaders in Congress have declined to do so, even though employing that process would end the threat of default.

Jon Lieber, a former aide to McConnell who is now with the Eurasia Group, a political-risk consultancy in Washington, wrote in a warning to clients this week that there is a 1-in-5 chance the standoff will push the country into at least a technical debt default — forcing the government to choose between paying bondholders and honouring all its spending commitments — this fall.

“That’s crazy high for an event like this,” Lieber said in an interview, noting that the odds are significantly higher than in past standoffs. “But I feel really confident that’s the level of panic we should be having.”

Leaders of both parties have, at times, made a version of the core argument in favour of raising the limit: that it is simply a way to allow the government to pay bills it has already incurred. Both parties also have shown no sign of slowing the nation’s borrowing spree, which accelerated last year as lawmakers approved trillions of dollars of aid for people and businesses struggling through the pandemic recession. Each party has recently occupied the White House and controlled Congress, but neither has come close in recent years to approving a budget that would balance — which is to say, not require additional borrowing and a debt-limit increase — within a decade.

Biden administration officials, former Treasury secretaries from both parties and business executives from around the country have all urged lawmakers to raise the borrowing limit as soon as possible.

“I think it’s scary for consumer confidence and for confidence in US businesses and potential credit ratings if we don’t make sure that we raise that debt ceiling,” Andy Jassy, CEO of Amazon, said on CNBC earlier this month.

Democrats say Republicans have a responsibility to help raise the limit, noting that they helped when Trump needed to do it. White House officials called McConnell’s position hypocritical.

“Republicans in Congress have spent a decade ushering in a new era where the prospect of default and a global economic meltdown has become a dangerous political football,” Michael Gwin, a White House spokesperson, said in an email. “As we rebound from the deep recession caused by the pandemic, it’s more important now than ever to put partisanship aside, remove this cloud from over our economy, and responsibly address the debt limit — just like Democrats did three times under the previous administration.”

Lieber and other analysts worry party leaders are talking past each other. Experts suggest it would take a week or two for Democratic leaders to steer a debt limit increase through the fast-track budget process. That could leave the government vulnerable to a sudden crisis. On Friday, the independent Bipartisan Policy Center, a Washington think tank, said the government could run out of cash to pay its bills by mid-October.

Lieber said he is worried about “the risk of miscalculation of both sides,” in part because this standoff is not the same as the ones under Obama. “The Republicans aren’t asking for anything,” he said. “So their position is, there’s nothing you can do to get us to vote for a debt ceiling increase. That’s a dangerous situation.”

Goldman Sachs researchers warned in a note to clients this month that the volatile nature of tax receipts this year, a product of the pandemic, makes the debt limit “riskier than usual” for the economy and markets. They said the standoff was at least as risky as in 2011, when brinkmanship disrupted bond yields and the stock market.

Other financial analysts continue to believe that, as they have in the past, the sides will eventually find an agreement — largely because of the consequences of failure.

“We believe Congress will raise or suspend the debt ceiling,” Beth Ann Bovino, S&P US chief economist, wrote this week. “A default by the US government would be substantially worse than the collapse of Lehman Brothers in 2008, devastating global markets and the economy.”

In the meantime, Republicans are awaiting a vote by Democrats to raise the limit. Sen. Rick Scott of Florida, who heads Republicans’ campaign arm in the Senate, told an NBC reporter he was eager to highlight Democratic support for raising the limit in midterm advertisements.