As the Senate finally makes progress on the bipartisan infrastructure bill and a budget resolution and budget reconciliation bill bearing much of the Biden agenda, congressional Democrats are wrestling with yet another problem: the need for an increase in the public debt limit. This complex but unavoidable issue has long been an irritant for both parties in Washington, largely because the public doesn’t like the idea of taking on debt — even though majorities favor the goodies debt is purchasing for them. Here’s a brief guide to the hot-potato issue, why Democrats will probably have to include an increase in their budget bill, and what happens if they don’t.
What is the debt limit?
It’s a statutory cap on how much debt the federal government can owe at any given moment, first established in 1917 and expanded to cover virtually all public debt in 1939. The debt is largely “owed to ourselves;” $22.3 trillion is held by the public, and another $6.2 trillion reflects borrowing by the federal government from assets it owns (mostly surpluses in the Social Security and Medicare trust funds).
Why is this issue coming up right now?
The debt limit was suspended in 2019 as part of a two-year budget deal between Congress and the Trump administration intended to postpone major fiscal fights until after the 2020 elections. The deal expired on August 1, 2021, with the effect that the debt ceiling was adjusted upwards to the level of debt as it exists right now. Accruing further debt will require an increase in or suspension of the limit. That makes this an immediate issue since the federal government ran large budget deficits over the past two years.
What will happen once the debt limit is exceeded?
Nothing at first. The U.S. Treasury can (and has on 15 previous occasions) taken what are known as “extraordinary measures” to cover debt by shifting funds around and pursuing other temporary expedients. But that will only work for so long, and now as in the past we can expect Treasury officials to put Congress on notice as to when “extraordinary measures” have been exhausted. The current guessing is that this will happen in October or November.
At that point, serious economic consequences are likely if the debt limit has not been increased or suspended, since the federal government would be required to default on some of its obligations (whether in the form of interest payments or federal spending) until such time as tax revenues provide more money to finance ongoing debt. At a minimum interest rates would spike, but the big fear is that a debt default would touch off a global financial disaster.
In the past some conservatives have argued a debt default might be a good thing by forcing a major reduction in the size and cost of government, but that’s not a serious claim since any ratcheting-down would be accompanied by a major blow to the “full faith and credit” of the United States and much higher interest costs for existing debt, which isn’t going to just go away.
Why is it so hard to raise or suspend the debt limit?
Because the public closely associates the need to raise the debt limit with the decisions that made it necessary (always blamed on the “other side”) debt limit increases are consistently unpopular, and not only with the Republicans who are typically moralistic about the very idea of debt. Higher-income Americans who are likely to have market-sensitive assets, and federal employees whose pay is threatened by a default, are about the only segments of the public who are positive about debt limit increases. So politicians of both parties look for every opportunity to vote against such measures, or at a minimum to make sure the “blame” is shared across party lines.
So is this a particular problem for Democrats?
At the moment, yes, because they control both the executive and legislative branches of the government that is in danger of debt default. In addition, Republicans no longer have to carry water for a president of their own party who was at least as avid for deficit spending as his Democratic predecessor and successor. So they have returned to the moralizing about deficit spending that characterized the GOP during the Obama presidency — and which was also a signature motif for the tea-party movement.
Unsurprisingly, then, Senate Minority Leader Mitch McConnell has announced that Democrats cannot expect a single Republican vote for a debt limit measure right now. That’s a problem because a debt limit increase or suspension is subject to the Senate filibuster, which means it will require 60 Senate votes unless some away around it is devised — like including it in filibuster-proof budget legislation.
What are the options for getting this done?
McConnell has helpfully suggested that Democrats just include a debt limit increase in the Fiscal Year 2022 budget-reconciliation bill that is already on tap to implement the un-enacted portions of President Biden’s 2021 legislative agenda. But that would guarantee exclusive Democratic “blame” for an increase in public borrowing since it is a foregone conclusion that the reconciliation bill will be passed in both Houses on a strict party-line vote.
Aside from the blame game, budget rules might require that the debt limit measure include a very specific dollar figure increase rather than a harder-to-demagogue suspension. Thus, some Democrats, particularly “centrists” thought to be vulnerable in 2022, are talking about a different vehicle, as Punchbowl News explains:
Democrats … have also toyed with attaching the debt limit increase to a must-pass government funding bill in late September, but that carries massive risk. The funding package will need 60 votes in the Senate in order to pass, so 10 Republicans would have to break with McConnell and vote for it. That seems exceedingly unlikely.
Also, that kind of high-stakes showdown isn’t what the White House and Wall Street want to see as the U.S. economy rebounds from the Covid-19 pandemic. Government funding expires Sept. 30.
What is the likely outcome?
Because they definitely cannot afford the risk of a debt default that could derail an economic recovery already threatened by the latest COVID-19 surge, Democrats in the White House and Congress are likely to grit their teeth and include a debt limit increase in their budget legislation, knowing that this approach will guarantee Republicans won’t have to share responsibility for a necessary but unpopular step.
Democrats do not have a lot of time to decide a course of action, however. Including a debt limit increase in the reconciliation bill means including it first in the FY 2022 budget resolution that authorizes reconciliation. That resolution will be on tap in Congress as soon as the Senate finishes action on the bipartisan infrastructure bill, and before it is free to take its planned August recess.
