A dark lingering cloud, or perhaps a sad and gray drop ceiling, continuously hangs over the U.S. economy: The self-perpetuated and self-enforced debt ceiling, which every few years threatens to wreak havoc on the country’s financial well-being. Now it appears that the Senate will narrowly and temporarily avoid crisis once again, with a can-kicking maneuver instead of a permanent solution.
Senate Minority Leader Mitch McConnell announced Monday he has made Democrats a deal: he will allow them to increase the country’s borrowing ability for two months, he said, so long as they vote on a higher debt-limit number instead of just a temporary suspension.
“To protect the American people from a near-term Democrat-created crisis, we will … allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December,” McConnell said.
The plan would allow Democrats to forego the arduous and timely reconciliation process to raise the debt ceiling without Republican help, but may also spark controversy within a Democratic party already divided on Biden’s proposed $3.5 trillion infrastructure package. Progressive and centrist Democrats will need to come together to approve a very specific amount, which will certainly take some negotiation.
That’s likely because Democrats have begun publicly speaking of voting to end the Senate filibuster rule which requires 60 votes altogether, a move that would badly hurt the power of Republicans in a 50-50 Senate with a Democratic tie-breaker.
Typically it would take two-thirds of the Senate to ban the filibuster, but with a simple majority Democrats can create a new Senate precedent which exists alongside formal rules to provide additional insight into how and when they can be applied.
Democrats discussed the prospect at a private lunch Tuesday. The main impediment to ending the filibuster are Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-Ariz.). Manchin spoke out against the idea this week and Sinema remained silent on the topic.
It appears that McConnell isn’t so sure that Manchin and Sinema will hold out and stop the precedent from happening.
Markets immediately reversed course on news of the deal. The S&P 500 and Nasdaq 100 both made up for earlier losses of more than 1%. Still, the two-month extension will only temporarily placate markets, business confidence, and lenders. The can will be kicked down the road, but for a very brief period and will likely have to be extended again before the end of the year.
Democrats now have a very difficult decision to make.
President Joe Biden said on Monday that the U.S. is hurtling towards its $28.4 trillion debt limit and that without the help of Republicans, the country could default on its borrowings.
Treasury Secretary Janet Yellen predicts that the government could hit its self-imposed debt ceiling as soon as Oct 18, less than two weeks from now. Biden said that Democratic legislators were attempting to extend or suspend the limit, but that nothing could be guaranteed without the support of their colleagues across the aisle.
“Not only are Republicans refusing to do their job, but they’re threatening to use their power to prevent us from doing our job—saving the economy from a catastrophic event. I think quite frankly it’s hypocritical, dangerous and disgraceful,” Biden said from the White house. “Republicans say they will not do their part to avoid this needless calamity. So be it. But they need to stop playing Russian roulette with the US economy.”
Republicans have thwarted two attempts to raise the ceiling in as many weeks, claiming that they want to see it happen but that they would not aid in doing so. Senate Majority Leader Mitch McConnell has said that Democrats alone need to handle the issue, and that they can use a special process known as budget reconciliation, which would allow them to get around the Senate’s filibuster rule that requires 60 of 100 members to agree to pass legislation. With reconciliation, Democrats would be able to pass their bill with a simple majority (50 votes, plus Vice President Kamala Harris as the tie-breaker).
If Democrats don’t use reconciliation they would need at least 10 Republicans to vote to raise the ceiling, something that is currently unlikely to happen.
But Senate Majority Leader Chuck Schumer and Senate Democrats say that they don’t have enough time to complete the complicated process of reconciliation before Yellen’s deadline, in less than two weeks time.
In order to use reconciliation, both the House and Senate budget committees would have to write legislation allowing the debt limit to be raised. The 22-person Senate budget committee which is made up equally of Democrats and Republicans (including Independent Senator Bernie Sanders who caucuses with Democrats) would then likely deadlock at 11-11 on a vote to present the reconciliation bill on the floor. At that point, Schumer would have to make a move to “discharge” the bill from committee, after a maximum of four hours debate the Senate would vote on whether to release the bill to the full legislative body. If the bill is released, a maximum 20-hours of debate is allowed, but Republicans can further delay voting by adding a number of superfluous amendments to the bill, in what’s known as a vote-a-rama.
Lawmakers are not allowed to hold a final vote on a reconciliation bill until all the amendments have been voted on, and the party not in power often takes advantage of this. Each amendment takes about 15 minutes to get through but Vote-a-ramas can be long, arduous affairs, stretching late into the evening.
After votes on all of the possible amendments to the bill are through, the Senate would finally be able to vote on the debt limit bill with a majority of 51 votes.
That $3.5 trillion budget also complicates things—it’s unclear whether Democrats can use reconciliation to raise the debt limit could wipe out older reconciliation instructions for that package.
When asked if he could guarantee that the debt ceiling would pass on Monday, President Biden commented that he could not. “That’s up to Mitch McConnell,” he said.
If the U.S. hits its debt ceiling without increasing or suspending the limit, a “financial Armageddon,” would ensue, said Mark Zandi, chief economist at Moody’s Analytics. Ratings companies would likely be forced to downgrade U.S. debt which would severely raise the cost of borrowing. Markets, which favor stability, would also plummet.
Even waiting this long to raise the limit, said Yellen in a letter to Congress, “can cause serious harm” to both business and consumer confidence and raise the costs of borrowing. Still, Moody’s said Tuesday that they believed the debt ceiling would ultimately be raised and that the U.S. would retain its AAA credit rating.
“A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets,” Yellen wrote.
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