The looming fight to raise the federal debt limit is drawing parallels to 2011 and 2008, neither of which is especially encouraging. In both cases, Republicans in the US House showed they were willing to risk economic and financial catastrophe to make a political point. The question is how far they are prepared to go this time.
The short answer: Pretty far. I spoke to economists, current and former government officials, and veterans of past legislative battles, and many believe that there’s only one thing that will force recalcitrant lawmakers to make a deal: market turmoil.
It’s worth recounting that recent history. In 2011, the standoff between the Republican House and the Democratic White House was also about the debt ceiling. They struck a last-minute deal, but not before the US lost its S&P AAA credit rating. In 2008, the fight was over the bank bailout, and it took a one-day loss of more than $1 trillion in market capitalization to get enough Republican House members to agree to it.
The dysfunction of 2008 and 2011 seems almost innocent now. Washington has “played chicken” so often over the last decade, says Mark Zandi, chief economist at Moody’s Analytics, that it’s hard to tell when the two parties are getting close to a deal. At some point, he says, the “trickle” of market responses to Washington’s dysfunction will turn into a “torrent” of volatility.
Fortunately — if that’s the right word — there are ways to tell which direction Washington is headed. Over the next several months, there will be a few key signposts to monitor.
First is the so-called X-date, the day when the US can’t meet its obligations in full. Treasury Secretary Janet Yellen says it could come as early as June, but more likely it will be later in the summer. One scenario would be for it to arrive at the end of July, with the August recess looming. Vacation is a powerful motivator for lawmakers. The Bipartisan Policy Center, which is considered an authority on this issue, will release its prediction in February.
A second thing to look for is any level of engagement, however minimal, between President Joe Biden’s administration and congressional Republicans. The White House says it won’t negotiate and it wants a clean debt-limit increase. Republicans, most notably in the House, want spending cuts in exchange for lifting the debt ceiling.
Don’t expect negotiations for a grand bargain, which former President Barack Obama and former Speaker John Boehner tried in 2011. Instead, watch what moderate Republican representatives such as Nebraska’s Don Bacon are saying. Biden won his district in 2020, and Bacon called out House Speaker Kevin McCarthy for removing Democrats from key committees this week.
But Bacon also said Biden’s position on the debt ceiling is a non-starter. If the White House refuses to negotiate, he said, Republicans won’t even consider a discharge petition, a complicated procedural tool that makes it easier to bring a bill to the House floor for a vote.
The discharge petition is the third signpost — and there are different schools of thought on whether it’s a way out of this impasse.
Ultimately there need to be 218 votes in the House for a bill to lift the debt ceiling. In theory, the discharge petition allows the House to pass a bill over the objection of the speaker. But the process is time-consuming. The bill needs to sit in committee for 30 legislative days, then on the “discharge calendar” for another seven. The longer lawmakers wait, the less likely an option it becomes.
Further complicating the maneuver is that a bill would need to be filed relatively soon which anticipates the final deal in the Senate. Republicans just aren’t that unified. It may be the most obvious path now, but the clock is ticking.
That leads to the fourth signpost — what happens with the budget resolution in the House in March or April. As part of his deal with the Freedom Caucus to become speaker, McCarthy committed to balancing the budget in 10 years. The plan reportedly cuts defense spending by $75 billion. If Republicans have 218 votes for a blueprint for spending cuts, it may be a sign they are unified in debt-ceiling negotiations.
Finally: It would be a bad sign if it’s late spring and people are still discussing a platinum coin, a Treasury payment prioritization plan or the 14th Amendment.
Ideally, elected representatives would understand what’s at stake and the markets wouldn’t need to act as a catalyst for action. But House Republicans apparently aren’t quite there yet. At their weekly lunch on Wednesday, leaders organized a tutorial about the debt limit — including how a debt default is different than a government shutdown. What would investors do if they saw the results of a pop quiz?
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