Six million jobs could be lost amid economic chaos if Democrats and Republicans cannot avoid a historic default on U.S. debt.
Biden’s Agenda Hangs In Balance As Senate Flirts With Economic Catastrophe
A series of pitched congressional battles linked to President Joseph R. Biden Jr.’s key economic plans are expected to come to a head Thursday, with funding for the federal government set to expire as Democrats and Republicans in the Senate feud over the debt ceiling.
The White House and Democratic leaders in Congress remain at odds with Republicans and moderates in their own ranks over the passage of $4.7 trillion in proposed spending, as well as legislation to suspend the debt limit and avoid a U.S. government debt default.
“There are competing crises at play here, and what happens of course when we have top priorities on Congress’s plate — everything becomes a priority all at once,” Rachel Snyderman, associate director for economic policy at the Bipartisan Policy Center, told Zenger.
If the government is not funded beyond Thursday, the Treasury Department estimates it will run out of money to pay its obligations by late October or early November.
To avoid shutting the government and a catastrophic default on U.S. debt, the Democrat-led House passed a bill over the weekend to temporarily fund the government through Dec. 3 and to suspend the debt limit. But Senate Republicans then blocked the measure in a Monday night vote, leaving Congress with only three days to remedy the problem.
While Republicans have supported raising or suspending the debt limit in the past — doing so on three occasions during the administration of President Donald J. Trump — party leaders have this time taken issue with the price tag on the Democrats’ $3.5-trillion budget plan.
The plan aims to invest in healthcare, paid parental leave, child care, education and green energy. But Republicans and even some Democrats have balked at its cost, and say they will not raise or suspend the debt limit due to the level of spending being proposed.
In addition to the $3.5-trillion budget framework, the Biden administration has also proposed spending $1.2 trillion on an infrastructure bill, which has received some GOP support.
Republican leaders such as Senate Minority Leader Mitch McConnell (R-Ky.) have threatened to use the filibuster, which presently requires 60 votes in the 50-50 split chamber to pass most legislation, to stop the spending plans and prevent the debt ceiling being raised.
They say the Democrats should use the budget-reconciliation process, which would only require a simple majority, to increase the debt ceiling without Republican cooperation.
“Democrats do not need our help,” McConnell said on Monday. “They have every tool to address the debt limit on their own: the same party-line process they used to ram through inflationary spending in March and already plan to use again this fall.”
In turn, Democrats have accused GOP of playing politics with the economy, which is still recovering from the fallout of the coronavirus pandemic, arguing the large tax cuts passed by a Republican-led Senate under Trump have dramatically driven up government debt.
“Republicans are doing a dine-and-dash of historic proportions,” Senate Majority Leader Chuck Schumer (D-N.Y.) said following Monday’s vote, noting the debt ceiling was suspended under Trump. “Anyone who says this is Democratic debt is not talking fact — they’re talking fiction. Both sides have a responsibility to pay the debt we have already incurred.”
If no compromise is reached, a third shutdown in three years would be on the cards. The 35-day shutdown of late 2018 and early 2019, which was the second to take place under the Trump administration, reduced gross domestic product by an estimated $11 billion, including $3 billion that will never be recovered, according to the Congressional Budget Office.
Still, the costs of another shutdown would be “negligible” compared to the cost of the U.S. defaulting on its loans, according to Bernard Yaros, Jr., an economist at Moody’s Analytics.
“The consequences of not raising the debt limit in time are much greater,” Yaros said, adding that such a shutdown this time would impact more than just federal employees.
“We considered a scenario in which the Treasury can no longer pay its bills in-full and on time in late October and the political standoff over the debt limit lasts through November,” he said. “In such a dark scenario, we estimate that six million jobs would be lost, the unemployment rate would surge to near double digits, and the economy would contract meaningfully.”
“No matter how much the Treasury attempts to prioritize its incoming obligations, there will be a crisis of confidence … that will leave long-lasting scars on the economy.”
While the U.S. has not defaulted on its debts in modern history, it has come close in the recent past, including during the 2011 standoff under then-President Barack H. Obama. Congress last suspended the debt limit in 2019 until July 31 this year, and the Treasury has since then been operating on “emergency measures” to finance the government.
“We don’t quite know the true economic costs, but we know that they would be real, and they would be widespread,” the Bipartisan Policy Center’s Snyderman said of a U.S. default. “There’s no doubt that if Congress continues to not come together to find a solution on this, that the economy — not only the domestic economy, but the world economy — would see repercussions.”
Republicans have indicated that they would support a standalone bill to keep the government open — but one that does not permanently change the debt ceiling, and then only if Democrats back down on their $3.5-trillion spending proposal. If the Democrats are unwilling to decrease that figure, they could instead include a debt-limit provision in that same bill, and attempt to pass it using budget reconciliation as suggested by McConnell.
But in that case, the 50 Senate Democrats would still need to vote in unison to pass the legislation — something that is looking more and more unlikely as Thursday nears.
In addition to GOP concerns, moderate Democrats like Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.) have voiced criticism of the spending plan’s price tag. While the proposal was approved by a Democrat-led House committee on Saturday, the chances of the bill passing both chambers with united Democratic Party support is looking slim.
In the end, House Speaker Nancy Pelosi (D-Calif.) indicated during appearances on Sunday morning talk shows that it “seems self-evident” that the price will have to come down.
But that will only create another kettle of fish.
Any concession to moderates on the spending plan threatens to derail the passage of the $1.2 trillion infrastructure plan, which was approved with cross-party support in the Senate in August. Some progressive House Democrats have threatened to vote against it in their chamber if the Senate is not prepared to pass the spending bill at the current price.
Thanks to a larger majority in the House, Democrats can afford a few defectors — and Pelosi has said she is confident she has the votes needed to pass the infrastructure bill.
With funding for the federal government set to expire, though, any such disputes will by Thursday pale in comparison to a bigger question: Can the U.S. government stay solvent?
“The parties don’t have a bipartisan solution, but there could very well be one because it’s been a bipartisan issue in the past,” Snyderman said. “Leadership in both parties thinks it’s of the utmost importance that the United States continues to pay its bills in-full and on time.”
“It’s how we arrive at that solution that is the center of the debate right now.”
Edited by Alex Willemyns and Matthew B. Hall