Why Congress is bringing US to the brink of default

Like a bad date, Republicans are trying to “dine and dash,” Senate Majority Leader Chuck Schumer said this week, accusing his GOP colleagues of ducking responsibility for covering America’s debt, trillions of which accrued during the Trump presidency.  

Why should we help cover that bill, the GOP is responding in essence, when our dinner companion is right now preparing to order a 10-course meal against our objections? 

The analogy is imperfect, and there are holes in both parties’ arguments. But one thing everyone agrees on is that the bill must be paid, and quickly. The U.S. Treasury is due to run out of funds as early as mid-October, and if Congress doesn’t authorize more borrowing, the country will default on its debt. That could damage not only America’s economy, but the world’s. 

Raising the debt limit is nothing new, nor is the political posturing around it. In the past, however, it’s been used as leverage to ensure some measure of fiscal discipline as the country pursues its spending priorities. This time, Republicans aren’t asking for fiscal restraint as a condition of supporting the bill. Instead, they’re flatly telling their colleagues across the aisle to go it alone, as Democrats did in passing the $1.9 trillion American Rescue Plan last spring, and as they plan to do with the $3.5 trillion budget they’re drawing up now. 

And so, a tool that was intended to – and once did – compel the parties to work through their differences has instead turned into another form of political brinkmanship, with no prospect of a deal on the horizon. The standoff reflects the perils of an increasingly majoritarian approach to Congress, and especially the Senate. Whether wielded to pass legislation, as the Democrats did in March, or to block it, as Republicans are threatening to do now, it indicates a shift away from the view that American interests are better represented when both parties have input on – and responsibility for – major decisions. 

“This is not a leverage game at this point; it’s just a hot potato game,” says Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget in Washington.

Democrats blame Republicans for breaking with a long-standing tradition of bipartisan cooperation on the debt limit. Republicans argue Democrats’ unilateral effort to expand government makes this standoff different.

“The point we’re trying to make as Republicans is, if you’re going to go around us and massively increase the size and scope of government … you’re on your own,” says Sen. Lindsey Graham of South Carolina, the top Republican on the Senate Budget Committee. 

But Democrats say that this is a unique moment, when a pandemic has caused deep, if temporary, economic pain and exacerbated economic inequality. 

“This has been one of the toughest stretches in the last 100 years, and that’s why I think going big right now makes a lot of sense,” says Sen. Tim Kaine, a Virginia Democrat on the Budget Committee.

Senator Kaine says he doesn’t want to encumber future generations with debt – noting that Democrats believe they can find ways to pay for the entire $3.5 trillion budget that includes sweeping social reforms, including free community college, expanded Medicare benefits, and new climate change initiatives.  

But he also implies that the current Republican stance is hypocritical, citing the 2017 GOP tax-cut bill, which passed without a single Democratic vote. The nonpartisan Congressional Budget Office estimated that the bill would add $1.46 trillion to the deficit, though Republicans argued that the boost to the economy would ultimately more than make up for that.

“They were like, ‘We don’t care about the debt.’ I have to care about it, but I don’t really accept the criticism from Republicans on it,” says Senator Kaine.  

Treasury running out of money

The debt limit was established in 1917 to bring some fiscal discipline to federal agencies, and also to ease Congress’ role in authorizing additional borrowing. It essentially told the government: You can borrow this much money before you need to come back and ask for permission to borrow more. 

Since World War II, the debt limit has been modified 98 times. Most recently, a 2017 deal suspended the debt limit through July 31, 2021, allowing the government to borrow as much as it needed until then to meet its obligations, which included COVID-19 stimulus checks and other pandemic spending. Since Aug. 1, the Treasury Department has been using so-called extraordinary measures to keep paying the bills until Congress takes action again.

The other urgent deadline for Congress is Sept. 30, which is the end of the fiscal year. In order to keep the government running and pay things like military salaries and Social Security benefits, Congress needs to authorize a new budget. Since the Democrats are still wrangling over their $3.5 trillion deal – with the party’s progressive and moderate wings clashing over the price tag – they have proposed a short-term measure known as a continuing resolution to tide them over. And within that legislation, they included a proposal to suspend the debt limit until December 2022, allowing the government in the meantime to do whatever borrowing necessary to pay the bills. The House passed the legislation, but Senate Minority Leader Mitch McConnell has taken a firm stand against it. 

“He’s not bluffing on this,” says GOP Sen. John Kennedy of Louisiana, one of the few Republicans who have said they may vote for it anyway, because it includes disaster funding for his state, which was hit hard by Hurricane Ida. “On this issue, I think Senator McConnell is going to be like that Missouri mule who sits down in the mud and refuses to budge.” 

Past or future spending?

Even if not another penny were spent, the debt limit would still need to be raised to pay for funding already approved by Congress but not yet spent. And that’s the result of decisions made by both parties, which have contributed to record debt levels that reached 128% of gross domestic product at the end of FY2020.

“The debt is the accumulation of all of the fiscal decisions we have made over the course of our history, more heavily weighted toward the decisions that were made recently,” says Shai Akabas, who leads the Bipartisan Policy Center’s debt ceiling research. “The reason we need to increase the debt limit is because of decisions we’ve already made.”

In that sense, Democrats are right that it is bipartisan debt that necessitates this step. But if they suspend the debt limit through December 2022, that would effectively allow them to do as much deficit spending as they want between now and then – a point Sen. Ron Wyden of Oregon, chairman of the Senate Finance Committee, did not dispute when pressed by the Monitor. 

And because Democrats control the presidency, the House, and the Senate (albeit by a single tie-breaking vote from Vice President Kamala Harris), Republicans have no leverage to curb that spending if it is done through a process known as budget reconciliation. Democrats used reconciliation to pass the $1.9 trillion American Rescue Plan last spring, and are planning on using it to pass their $3.5 trillion budget, spearheaded by Budget Committee Chairman Bernie Sanders of Vermont, later this year. They would also have at least one more opportunity, in September 2022, to pass another sweeping budget without any GOP support. 

Republicans this week accused Democrats of writing a blank check from the American taxpayers’ account.

“Democrats are rushing toward the Bernie Sanders socialist budget plan, and the Republicans are not going to be a rubber stamp for this,” said Sen. John Barrasso of Wyoming. 

Instead, Republicans want Democrats to address the debt ceiling as part of their budget reconciliation process. But in 2017, when Republicans controlled the presidency, House, and Senate, they opted not to take that route, and Democrats joined them in suspending the debt limit – a point they are driving home now. 

The economic stakes

Even some Democrats have raised concerns about the scope of the Biden administration’s spending plans. Former Obama Treasury Secretary Larry Summers, who first sounded a warning last winter, told Politico this summer that he had become increasingly concerned that massive spending could cause inflation, though he supports long-term investments like infrastructure. 

Citing those warnings, GOP Sen. Charles Grassley of Iowa says that if Republicans were to support Democrats’ “massive spending spree,” they would be “throwing gasoline on the fires of inflation.” Others argue that the spike in prices is due mainly to pandemic supply-chain issues, and will be relatively short-lived. 

Beginning in former President Barack Obama’s second term, a new economic line of thinking began to prevail, particularly among economists on the left, that deficit spending isn’t as big a concern as was once thought. Among the most prominent proponents is Stephanie Kelton, an economic adviser to Senator Sanders and author of “The Deficit Myth.” 

Senator Sanders – an independent from Vermont who in just a few years has seen a significant swath of the Democratic base move to embrace the democratic socialist ideas he has been preaching for decades – is giving Republicans some stiff competition in the blinking contest.

“It would be incomprehensible to me, and I think to the American people, that you would have a Republican Party that will allow the largest economy on Earth to default,” he says. “I think Republicans may be a little bit crazy but they’re not that crazy.”

The last time the U.S. faced this threat of a government shutdown and possible default, S&P Global’s chief U.S. economist, Beth Ann Bovino, warned that if the nation defaulted on its debts, the economic impact “would be worse than the collapse of Lehman Brothers in 2008.”

The other option for Democrats is to address the debt ceiling within budget reconciliation. That’s been done before, but never at this stage of the process, and it could take weeks. 

Democratic Rep. John Yarmuth of Kentucky, the House Budget Committee chairman, told reporters this week that both House and Senate leadership have decided that’s not an option they want to pursue. But, he added, if they were to take that route, they would have to specify a dollar amount by which to raise the debt ceiling, not simply suspend it as the current legislation has proposed. That number would provide fodder for Republicans to use in attack ads ahead of next fall’s midterm elections. But if they raise it by too little, they’ll find themselves in a similar standoff again soon. 

“I want to raise it to a gazillion dollars and just be done with it,” he said.