This month’s edition of The Landscape is called “must we always test what the worst-case scenario would look like?”. As you are probably aware, for the past several months Congressional Republicans and the Biden administration have been at loggerheads over whether to raise the nation’s debt ceiling. Much more than an academic disagreement, breaching the debt ceiling (an event that has never occurred) would be catastrophic for the economy with consequences felt across industries and kitchen tables. Precisely what would happen and how quickly is a subject of some debate amongst experts—there is broad agreement that it would be very bad. So how did we get here, and why?
Put simply, in order to fund all the things the government does the United States borrows money. A lot of money. But for a few times in the past fifty years the nation runs deficits (it spends more than it takes in), which means that in addition to the regular spending on day-to-day operations the US must also pay interest on the debt that it holds. Just like your credit card company, the holders of that debt require regular payments be made on the balance owed. If you miss payments your credit score goes down and eventually you’ll find it difficult to be approved for a new loan. The US usually maintains a AAA credit rating, which means we’re a good borrower; we make our payments on time. Should we miss a payment that credit rating would be put in jeopardy. While that might not be a huge deal for the family finances, the US Dollar is the benchmark currency of the global economy so the impact of such a downgrade would have ripple effects beyond our shores.
Enter the debt ceiling. Periodically, Congress votes to essentially raise the limit on the nation’s credit card to prevent the aforementioned default from occurring, preserve the credit rating, avert economic apocalypse and so on. Ordinarily this is a non-controversial vote and it is one that has been taken by Congresses and Presidents of both parties. So why have things become so dire this time around?
The Biden administration began the year by saying that it would not negotiate the debt ceiling and would not attach conditions to raising it. The Administration held that any compromises to be had around spending cuts can be done through the regular order of the budget process but that should not be tied to a “must-pass” bill like the debt ceiling. Congressional Republicans argued that the nation’s spending was out of control and must be reined in and what better time to do it than when that train from earlier was mere feet away.
It is worth mentioning that in previous Congresses where default appeared a real possibility, and more specifically when there was a Democrat in the White House and a Republican Speaker of the House, a similar dynamic played out. In 2011 Congress even passed a measure that set rules, which if broken would cause mandatory cuts – operating under the assumption that surely such an event would never occur. Those rules were broken, the cuts occurred, and we all got to learn what “sequestration” meant. Back then Republicans had just completed an historically large electoral rout in the midterm elections and held a 49-seat advantage in the House, which meant that they had the mandate, the votes, and the leverage in negotiations. Then-Speaker John Boehner had plenty of wiggle room in his caucus to pass a bill with only Republican votes while losing as many as 22 members.
Fast forward to 2023. There is a Democrat in the White House. There is a Republican Speaker of the House. The debt ceiling must be raised. History doesn’t repeat itself, but it often rhymes.
Critically different today is the dynamic in the House of Representatives. Speaker Kevin McCarthy cannot afford to lose more than 4 votes in his caucus unless he wants to turn to the Democrats for help (which they will provide, but which can only hurt the Speaker’s standing). Furthermore, the far-right wing of the Republican party is far more entrenched and far larger than it was in 2011. Remember that it took 15 ballots to even elect a Speaker of the House because the majority party could not unite behind what they viewed as a leader too willing to compromise.
There’s plenty in the deal that neither side likes, but it postpones economic disaster until 2025 and would ensure that Medicare, Medicaid, and Social Security payments are made. It would allow the nation to step off the tracks before the train hits us, but the political dynamic that has led to this last minute type of deal making is unlikely to change in the near-term.
