Since several of you have asked, I figured you deserved a post about the current default crisis in DC. The short of it is, it’s all political, and none of this has to happen. The rest of us are essentially held hostage because each party would rather win an election next year than govern with responsibility and good faith.
If that sounds too cynical, allow me a chance to change your mind.
The background here is critical to understand. First, if you aren’t crystal clear on the difference between debts and deficits, read this; it’s a topic I have previously covered.
If you understand the difference, let’s move on to how the government is funded and debt service payments are authorized. It would make sense that these two authorizations would be the same, but in the United States, they aren’t because, reasons. The government is funded by appropriations bills in which Congress gives the government permission to spend money. If no appropriations bill is passed, the government shuts down—you might remember this from January 2018, when the government shut down over immigration. Or you might remember it from 11 months later, when it shut down over funding for a border wall.
We are not in immediate threat of a shutdown because an emergency appropriations bill was passed last night—literally at the buzzer—to keep the government open until December 3rd.
The threat now facing us is a threat of default, which would happen sometime between October 15th and October 20th if nothing changes (the date isn’t certain because our financiers can move a few things around before the money runs dry, and it’s not exactly clear when they would exhaust all options).
A default is a failure to pay bills. It means the U.S. government misses its due date. This would happen because, separate from authorizing the government to spend money, Congress also has to authorize the government to issue debt to pay the bills from the money the government is already authorized to spend. It wasn’t always this way, but the history is less important right now, so I won’t get into it.
Congress sets a “debt limit” above which the government cannot borrow money. We are almost at that limit, because we continually spend more than we tax (another, another issue for another time). Right now, there is a huge standoff, with all of us as the hostages, about whether to authorize the U.S. government to borrow enough money to pay the bills it created in the past.
The Republicans in the Senate are saying they refuse to vote for a debt limit increase because Democrats are runaway spenders, and Democrats need to use Budget Reconciliation to raise the debt limit. The Democrats don’t want to do this because they want to save reconciliation for the $3.5t Build Back Better plan.
The thing is, the debt limit has nothing to do with any type of runaway Biden spending. It has to do entirely with runaway Trump spending. The government does not need the debt limit raised to have authority to issue new debt for Biden’s yet-to-pass plans, they need it raised to have authority to pay Trump’s bills, which are…huge.
It’s popular belief, largely because of propagandized campaigning and media, that Republicans are the responsible party on spending and debt. They aren’t. For my entire lifetime, and even before that, it has been Republican administrations that have increased spending and deficits the most. If that sounds to you like I’m a just a liberal taking a jab at conservatives, I dunno what to say. The facts are what they are. Even the much berated spender-in-chief, President Obama, was not a bad as President Trump. Obama averaged about $1.4 trillion in new debt per year. Trump averaged about $2 trillion. Even before the Covid-19 pandemic Trump was running annual trillion dollar deficits—unprecedented for a period of peacetime growth.
And now, Mitch McConnell is holding all Republican Senators against any authorization to pay any more of Trump’s $8t debts.
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To give you the sense of where things stand now, I have to step away from economics and budgeting entirely, and get completely political (notice, I said political, not partisan). Here is how the chess board sits for each side, starting with the Republicans because their strategy is easier to explain, and they have already made their first move.
While I describe these strategies, please keep in mind that The Constitution states, in the 14th Amendment, that:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned (emphasis added).
But, you know…elections.
To be fair, that sentence may not entirely apply here, but it gives you an idea of how seriously we are *supposed* to take our debt obligations.
Republican Strategy
In the spring the Senate Parliamentarian ruled that budget reconciliation could be amended, essentially giving the party in power two shots at reconciliation—a maneuver that is exempt from the filibuster, so it does not need 60 Senate votes. Democrats used their first go to pass Covid-19 relief, so they are down to their last one. They would like to use it for the $3.5t Build Back Better plan.
Republicans don’t want this because the policies laid out in the plan poll pretty well and they would like to keep Democrats from winning elections. The public line from Republicans is that the plan costs too much, and that may be true, but as I mentioned above, they have no problem spending even more than Democrats when they have the power.
So, the Republican strategy is simple. Here it is in 5 steps.
Claim there is too much spending, and that they cannot increase the debt limit because of it.
Ignore and distract from the fact that they are refusing to pay for Trump’s spending, and that this has nothing to do with the $3.5t in potential future spending.
Use the full faith and credit of the United States as a chess piece to coerce Democrats into action.
Leave no choice for Democrats but to use budget reconciliation to pass a debt limit increase. Afterward, Democrats will not be able to use reconciliation to pass Biden’s popular agenda.
Filibuster all future Biden initiatives, and claim Biden has not given voters anything useful, giving people a reason to vote for Republicans next year.
Simple enough. If it really comes down to it, McConnell might cave. Or, perhaps more accurately, some Republicans might cave. Defaulting on our debt may be opening a Pandora’s box, and it might be one that at least 10 Republican Senators don’t want to toy with. Nobody really knows what would happen if the United States defaults. When other sovereign nations have defaulted in the past, they have had enormous financial crises, including overnight inflation of triple digits or more.
It’s unclear whether this would happen with the U.S. because we are the world’s foreign reserve currency. So much U.S. currency (and debt) is held internationally that the world may choose to see a U.S. default more like a missed credit card payment than a global crisis. So, the consequences may not be disastrous. But then again…they might be.
It would also be a clear sign to the world that we are an entirely unserious nation who cares more about our political squabbles than about being a responsible international player, let alone an international leader. It would give good reason for other countries to stop using the U.S. dollar as their reserve currency. Even if this happens slowly over several decades it would have huge economic consequences, and would shift influence away from us to another nation who chooses to be more stable—possibly even China or Russia. The specific economic consequences deserve an entire textbook to detail their impacts, so I’m gonna move on assuming you now understand that ish could really hit the fan if we default.
Democrats would only need 10 Republican Senators to decide they don’t want to be covered in ish and this whole strategy collapses. The Republican bloc might be fairly likely to collapse because voters in the past have blamed Republicans for government shutdowns, and McConnell might now want to get blamed for ish flying everywhere going into next year’s elections. But, for the sake of the what if, let’s assume McConnell can get at least 41 Senators to truly be willing to open Pandora’s box.
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Democratic Predicament
In Democrat’s ideal world, the strategy would be simple. Pass everything with reconciliation, and move on.
They can’t do this because the moderate and extremist wings of the Democratic Party have about as much in common as John McCain and Donald Trump. They have, so far, refused to play nice with each other.
Progressive Democrats in the House have said they will not pass the $1.5t infrastructure package, already passed by the Senate on a bipartisan basis, unless the Senate votes on the $3.5t package as well. Without the progressives there aren’t enough votes to pass the $1.5t package because Republicans in the House won’t vote for it the way some Republicans in the Senate did.
The Senate can’t vote on the $3.5t package because Joe Manchin-WV, and Kyrsten Sinema-AZ, the two most moderate Democratic Senators, don’t like the package as it stands. For them, the idea of spending this much, and raising taxes on people making more than $400,000 per year is just not palatable. Friends in DC tell me there are at least two other Democrats who also don’t want the $3.5t bill, and are hiding behind Manchin and Sinema rather than face the ire of MSNBC and The Intercept.
Manchin said yesterday that he’d support a $1.5t plan, but progressives shot that down, saying $3.5t is already a compromise—down from $6t. Manchin insists that $1.5t is plenty, and the rest can be taken to the voters next year.
So, the Democrats are stuck. They have 4 options, and it’s not clear which, if any of them, will work.
Do what Republicans suggest, and raise the debt limit with reconciliation. The gamble here is how this plays out in the house. If no Republican Senators vote for a debt limit increase, there is no reason to think House Republicans will either. That would mean that all the progressive Democrats would have to get on board. It is unclear how they would vote because this wouldn’t technically violate their stance on the $3.5t bill, but because there would be no more reconciliation allowed, this would likely kill it altogether. Would they then vote on the $1.5t package that already passed the Senate? I have no idea, and I suspect Democratic leadership doesn’t either.
Cave to Joe Manchin, and let him run the show by trying to cram as much of his legislation as possible into reconciliation, and hope voters reward them for it. This would likely mean limiting the Build Back Better plan to $1.5t, but it also means other important Democratic initiatives can be added on to the package, like Manchin’s own Freedom to Vote Act. The act would make elections more representative of voters’ actual preferences by setting federal guidelines for things like voter IDs and gerrymandering, and limit or eliminate dark money in elections and voter suppression. But, again, if the reconciliation package does not include a $3.5 trillion Build Back Better plan, it’s not clear progressive Democrats in the House would vote for it, even if it were paired with a voting rights bill and a debt limit increase.
Cave to progressive Democrats in the House, and hope a threat of default gets Manchin and Sinema to vote along with the $3.5t plan. This would be much more easily exploited by Republicans in next year’s elections, who could then strengthen their argument that it is really the progressive Democratic Socialists pulling all the strings in the Democratic Party.
Work out a compromise in their own party, and pass their agenda through reconciliation, without raising the debt limit. They would have to hope that after the possibility of reconciliation is gone, McConnell will give in, as he has in the past. This is a gamble because voters may decide this makes Republicans look more responsible than Democrats, and because McConnell might decide to hold strong. If he does, Democrats have to hope they can get the public to blame Republicans for a default because Republicans have already filibustered a debt limit increase.
Because blinking might hurt each party’s standing in elections, all of this comes down to is who will blink first: Senate Republicans, moderate Senate Democrats, or progressive House Democrats.
I’m not sure the progressive House Democrats really understand the strength of the position Manchin has just handed them. If they can strike a compromise that lowers their Build Back Better demand to the $1.5t Manchin asked for, and in exchange include the Freedom to Vote Act, they may end up getting everything they want in the long term by doing exactly what Manchin suggests—take the rest to the voters. This plan would be contingent on the Senate Parliamentarian allows voting rights to pass through reconciliation—she recently ruled that immigration reform didn’t qualify.
If this grand deal passes, Democrats can run into the 2022 elections having passed a physical infrastructure plan, a human infrastructure plan. They can also campaign on being the responsible party who raised the debt limit after Republicans filibustered it, and lowered the huge cost of their spending bill to a reasonable1 number to let the voters have a say. They would be doing this with a voting rights bill that massively levels the electoral playing field. Without gerrymandered districts, Congressional representation might be much closer to actual vote totals, which favor Democrats. The 2022 Senate election map is also pretty Democrat friendly if there is no voter suppression.
Democrats will have to defend Senate seats in Georgia and Arizona, but Republicans will have to defend seats in North Carolina, Pennsylvania, Ohio, and Wisconsin. Biden won all these states except North Carolina, which was pretty close. On top of that the current Republican in North Carolina is retiring, as are the Republicans in Ohio, and Pennsylvania. In Wisconsin, Ron Johnson has gone full Qanon Qrazy in a state the rejected that strategy just last year when it voted against Trump. In a fair fight (which the Freedom to Vote Act would help create) this probably favors Democrats—assuming they run competent campaigns; something that isn’t exactly a guarantee for them.
This strategy has too many variables for Democratic leadership to take it to the bank—first among them whether House progressives will go along.
McConnell is betting he can get Democrats to use reconciliation to raise the debt limit by itself, and that House progressives will pass it. Then, he could prevent the Freedom to Vote Act from passing, and Republicans will likely win the House, and probably Senate. It’s kind of an all or nothing bet, and those have worked out pretty well for Republicans since about 2008.
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“Reasonable” is not my personal judgement, which I am not giving because I’m not trying to tell you what to think. It is the strategic message that Democrats could use during elections next year.