Home News Democrats have options, but no clear plan yet

Democrats have options, but no clear plan yet

The US Capitol is reflected in a pool of rain water on Capitol Hill on Monday, March 23, 2020 in Washington, DC, US.

El Drago | Bloomberg | Getty Images

An upcoming vote in Congress to raise or suspend the federal lending limit is becoming the latest political minefield for Democratic leaders, as they work overtime to scrap massive spending and infrastructure bills in the coming weeks. .

The two-year suspension of the debt ceiling passed in 2019 is set to expire at the end of this month, and Democrats have no strategy yet to raise the limit to new heights or suspend it again.

“We are looking at all options,” House Speaker Nancy Pelosi, D-Calif., recently told Bloomberg News when asked about the Democrat’s strategy.

Republicans, meanwhile, appear poised to revive the debt limit wars waged during the Obama administration after four years of relative silence about debt limit increases passed under GOP President Donald Trump.

If a deal on a loan limit increase falls victim to gamesmanship and procrastination, the consequences could be dire.

Failure to renew the current two-year suspension of the limit, or to pass a new, higher limit before the Congressional recess in August, could pose risks to the fragile economic recovery and result in a loss for workers and businesses alike. There could be serious consequences.

While the United States has never defaulted on its debt, recent history shows that being uncomfortably close to it can lead to chaos. In 2011, House Republicans refused to pass a debt limit increase, leading to a downgrade in the US sovereign credit rating that rattled financial markets.

Still, the political calculations in Congress on debt ceiling hikes are tough, with members of both parties reluctant to cast votes in what could be seen as contributing largely to the national debt.

“Everybody knows this has to increase, except for the largest swathes of executives,” said Tom Block, policy strategist at Fundstrat Global Advisors. Still, “it is one of the most politically filled votes that many members take.”

For lawmakers, the vote is often a delicate balance between appearing financially responsible in the next election and avoiding universally accepted economic turmoil.

The risk for Pelosi is the 2022 general election.

He must not only drum up enough votes to pass the debt limit suspension, but also defend his razor-thin majority as House Democrats in swing districts face intense challenges. The President’s party typically loses House seats in the midterm.

For Republicans, the risk is the 2022 primary. While the GOP will be quick to slash Democrats’ spending in the general election, every Republican who votes to suspend the ceiling opens itself up to attack by an even more conservative opponent in his own right.

CNBC Politics

Read more about CNBC’s politics coverage:

In 2019, Congress voted to suspend the debt limit until July 2021. Debt limit suspension votes are generally more palatable to members of Congress than votes that raise the limit to new heights, because there are no numbers attached to suspension votes.

But that 2019 suspension expires later this month, and after that, except in a new vote, the Treasury Department will not be able to raise additional cash by selling bonds.

Until the loan limit is raised, the treasury will have to start drawing on emergency accounts to pay the government’s tab.

And with an unprecedented spending spree for COVID-19 stimulus, Treasury Secretary Janet Yellen has warned she may not be able to sustain that emergency lifeline for very long before the all-important “drop-dead” date is reached. That is, when the government will trigger a technical lapse.

known unknown

However, the timing of that drop-dead date is a matter of conjecture because economists do not have an accurate measure of how much cash the Treasury has and how much it is spending each day to pay the nation’s bills.

While the US has never defaulted before, economists see that outcome as a doomsday and a significant threat to many sectors of the US economy.

“America going back to George Washington never defaults on its debt. So it would set a very dangerous precedent,” said Michael Feroli, chief US economist at JP Morgan.

In an extreme situation, in which lawmakers cannot reach an agreement after the drop-dead date, lenders around the world can demand higher interest payments from Uncle Sam.

This could fuel a domino effect, forcing interest rates across the US economy to jump in sympathy – from mortgage and auto loans to rates on corporate loans.

Yellen and his staff have not been silent about emphasizing the urgency of the 2021 vote as pandemic-era spending winds down. She warned senators in June that given the historic spending, the Treasury could run out its emergency funds sooner than in years past.

“It is possible that we may reach that point when Congress is out in August,” he said, referring to the annual summer vacation of lawmakers. “I think defaulting on the national debt should be considered unthinkable.”

U.S. Treasury Secretary Janet Yellen testifies about the Fiscal Year 22 Treasury budget request before the Senate Appropriations Subcommittee on Financial Services on Capitol Hill in Washington, DC, June 23, 2021.

Sean Theve | pool | Reuters

“I believe this will precipitate a financial crisis: it will threaten the jobs and savings of Americans at a time when we are still recovering from the COVID pandemic,” she said. “I would urge Congress to protect the full faith and credit of the United States by acting only to raise or suspend the debt limit as quickly as possible.”

The mere specter of government defaults can have a physical impact on the markets.

In 2011, gridlocked House Republicans and the Obama White House came within days of drop-dead defaults.

The S&P 500 fell for five consecutive days until the weekend that lawmakers finally struck a deal. That sell-off wiped 4% from the market index and represented its worst week in more than 12 months.


Credit rating agency Standard & Poor’s downgraded US credit from AAA to AA+ for the first time in the country’s history.

A default “could cause all kinds of chaos in the financial markets,” Feroli said. “Some of that chaos is knowable, but it’s the unknown that makes people so concerned about technical lapses.”

Business contracts often require parties to post the collateral of non-defaulting entities, including Treasury bonds to date, said the JPMorgan economist.

“If Treasury collateral is no longer eligible, it will really pull the rug out from under the financial system,” he said.

perennial political crisis

However, Feroli and others are not concerned about Washington’s ability to pay the dues.

The real risk is that political aspirations for the 2022 election cycle prevent Yellen from paying government bills on time.

And that’s because very few politicians, Democrats or Republicans, enjoy supporting the ever-ballooning federal debt, even when government spending is otherwise popular.

For example, Republicans have historically lobbied billions of dollars for the military and agricultural industries they represent. Democrats, meanwhile, currently seek trillions to support families, expand paid family leave programs, and make college more affordable.

Complicating matters this year is the fact that members of Congress in both parties are eager to settle on a trillion-dollar infrastructure deal, and Democrats are trying to balance the many competing interests within their caucuses.

A successful infrastructure deal would mean lawmakers can go home for recess later this year and show their constituents how much federal funding they have secured for the district’s roads, bridges and broadband.

The debt ceiling, on the other hand, is the opposite: a vote that has no tangible benefit to show constituents, but has much downside when his opponents accused him of raising the national debt next year.

three options

In the coming weeks, House Speaker Pelosi will have three options, each with risks.

The first option would be to block the debt limit increase in the massive reconciliation bill Democrats plan to pass later this year.

The advantage of this strategy would be that the rest of the bill’s content would potentially distract voters from the unpopular debt ceiling vote buried in thousands of pages of legislation.

The risk, however, is that negotiations on this Democrat-only bill are expected to spread well into September, and possibly even into October.

Given Yellen’s stern warnings about the Treasury’s limited ability to tap government emergency funding, tying the debt limit to a reconciliation bill could be the equivalent of playing roulette with America’s credit rating.

Another option would be to set up a stand-alone vote to suspend or increase the loan limit.

The advantage of this strategy would be that it avoids tying the borrowing limit into a difficult resolution bill.

But stand-alone votes to raise the debt limit are deeply unpopular with rank-and-file members, and would face pushback from his caucus if Pelosi sought to schedule such a vote.

US House Speaker Nancy Pelosi (D-CA) stands with members of the Democratic Women’s Caucus (DWC) during a press event on the care economy at the US Capitol on July 1, 2021 in Washington.

Jonathan Ernst | Reuters

There is a third option: Instead of raising the debt limit, Democrats could try to suspend the limit for another year, either through a vote alone or as part of an unrelated bill.

reverse here? Surviving a tough vote to raise the federal debt limit was made all the more difficult by a meager majority of Democrats.

Down side? The one-year suspension would require both houses to pass, and the Senate’s 60-vote limit means Republicans can hold off on passing the bill until they win concessions from Democrats on any other issues.

When asked to comment on this story, Senate Majority Leader Chuck Schumer, a spokesman for D.N.Y., referred CNBC to the senator’s remarks made in May.

“You know, I think it’s an absolute disgrace that Republicans are using the debt limit, which is related to financial security, as a political issue,” Schumer said at the time. “We must do something the right way.”

A spokesperson for the House Speaker’s office did not respond to CNBC’s request for comment.

The vote isn’t easy for Republicans either. While Democrats often face criticism for spending, GOP members are vulnerable to the same attacks as challengers in their own party during primaries.

“There are many Republicans who are looking over their shoulders,” said Block, Fundstrat policy strategist. “They know they risk a Republican opponent in a primary victory against them as an irresponsible spender.”

Representatives for Senate Minority Leader Mitch McConnell, R-Ky., and House Minority Leader Kevin McCarthy, R-Calif., did not respond to CNBC’s request for comment.

Bloc is betting that the Democratic leadership will attempt to incorporate a debt limit provision into a larger bill, such as the current infrastructure deal.

That approach, he said, not only allows Republicans to save face by giving them a reason to vote for it, but it puts pressure on progressive Democrats who might otherwise demand even more from an infrastructure plan that includes climate change. Funds for change or social programs are not included.

“It’s really difficult to put in your member’s politics the clear structural imperatives of raising this,” Block said. “The primary concern of almost every staff member is to get their member elected, to save their job.”

Thomas Frank reported from New York and Christina Wilkie from Washington.




US sells Wu-Tang Clan album confiscated by Pharma Bros.

Martin Shkreli and rapper Ghostface Killah of the Wu-Tang Clan.Joe Marino | Chelsea Lauren | Getty ImagesA unique album by hip-hop group...

The Fed’s concern about the spreading virus may keep it away from tough policy

Federal Reserve Chairman Jerome Powell testifies during a hearing of the US House Oversight and Reform Select subcommittee on the coronavirus crisis on June...

Arabica coffee prices rise by 10 percent in cold weather

Arabica coffee prices rose 10 percent higher on Monday, jumping nearly 20 percent last week to their highest level in nearly seven years, as...


Please enter your comment!
Please enter your name here

Most Popular

US sells Wu-Tang Clan album confiscated by Pharma Bros.

Martin Shkreli and rapper Ghostface Killah of the Wu-Tang Clan.Joe Marino | Chelsea Lauren | Getty ImagesA unique album by hip-hop group...

The Fed’s concern about the spreading virus may keep it away from tough policy

Federal Reserve Chairman Jerome Powell testifies during a hearing of the US House Oversight and Reform Select subcommittee on the coronavirus crisis on June...

Arabica coffee prices rise by 10 percent in cold weather

Arabica coffee prices rose 10 percent higher on Monday, jumping nearly 20 percent last week to their highest level in nearly seven years, as...

Alabama’s China critic Sen. Tommy Tuberville violates the Stock Act

Senator-elect Tommy Tuberville, a Republican from Alabama, stands for a photo at the US Capitol on November 9, 2020 in Washington, DC.Stephanie Reynolds |...

Recent Comments