The release of President Biden’s budget proposal really didn’t give us a sense of where this summer’s debt ceiling brawl is going.
Presidential budgets are important for establishing policy goals of an administration. But they aren’t binding. The presentation of a budget by the president – to say nothing of various budget proposals pending in the next two months from Congressional Republicans – offer both sides gobs of fodder to cast aspersions on their adversaries for political gain.
Budgets are required by law. And most importantly, they are political documents. That’s why each side seizes on whatever the other propounds.
However, the contemporary federal budget process – as crafted by the Budget Act of 1974 – doesn’t amount to much compared to the upcoming fight over the debt ceiling.
The debt ceiling is the law. How to address it is also a political exercise – albeit one with profound, real-world consequences.
President Biden’s budget proposal would slash about $2.8 trillion from the debt over a decade. The Biden Administration whittles away at the debt by raising taxes on the super-wealthy. The billionaire’s minimum tax is a big 'want' by liberal Democrats, requiring they pay at least 25 percent on their income. Overall, the administration would impose $5 trillion in new taxes over ten years.
The package also prunes the Trump tax cuts adopted in 2017.
However, addressing the necessity of raising or suspending the debt ceiling is not the focus of the budget proposal. That’s a distinct animal.
House Republicans are Mr. Biden’s sparring partner in the debt ceiling ring. There’s little consensus among Congressional GOPers as to how to address the debt ceiling. The conservative House Freedom Caucus is proposing a clawback of all unspent COVID funds, slashing money from the Internal Revenue Service, going after the administration’s student debt relief package and imposing a cap on all congressional appropriations for the next decade. The Freedom Caucus believes that would save about $3 trillion.
Such a proposal may struggle to get anywhere near enough votes to pass the House. That’s to say nothing of the Senate. But the plan reflects the politics of the Freedom Caucus and what their voters expect – whether it passes or not.
This is why the budget exercise is mostly a hollow shell when it comes to actually addressing the debt ceiling sometime this summer – or pitching the U.S. into default and potentially triggering a nationwide financial meltdown.
House Speaker Kevin McCarthy, R-Calif., is coy on what course of action lies ahead on the debt limit. He’s only said 'you’ve got to have everybody' involved to avert an economic catastrophe. That includes the House, Senate and President.
The potential rendezvous with a debt ceiling crisis is now in a period of meandering, continental political drift. Everyone knows the fiscal continents are going to crash into one another. But no one has a clue about how to avert it or what to do about it. Of course, everyone knows that little unfolds in Washington unless the sides tiptoe right to the precipice of a crisis. So no one truly expects anyone to conjure up a remedy until they absolutely must. The deadline could focus the political minds on the task at hand.
The other event which could focus minds on the debt ceiling? A stock market crash.
The markets have largely ignored this early shadowboxing in Washington. But it would not take much to spook the market over the debt ceiling in this environment. Wall Street has become inured to the various manufactured crises in Washington and histrionics with government shutdowns and the debt limit over the years. But this may be the most significant quandary for the markets since the debt ceiling debacle of 2011. Congress ultimately lifted the debt ceiling and developed a two-tiered track of prospective spending cuts back then. But the 2011 melodrama was enough to rattle Wall Street. Standard & Poor’s thought so little of Washington’s effort to actually address the problem that it downgraded the credit worthiness of the federal government for the first time in history.
It's possible the markets and the credit ratings agencies could take a dim view of how earnest policymakers are for this round. And since no one knows precisely when the U.S. will collide with the debt ceiling, no one is exactly sure what episode out of Washington could spark jitters on Wall Street. It could happen at any time.
It hasn’t gotten serious yet.
But it will.
Policy won’t matter until then. But politics will. That’s why we’re likely in for a few more months of posturing from both sides.
The Dow cratered in the fall of 2008 during the nation’s financial crisis. What jolted the market reaction was a real-time failure on the House floor of the fiscal rescue package known as TARP (Troubled Assets Relief Program). The Dow lost 777 points – then a record for a single-day decline. $1 trillion in market capitalization evaporated. The stunner was that the market slid in synchronicity with the vote failing on the House floor.
The failed TARP vote spooked investors. In turn, the market spooked lawmakers to get serious about TARP and pass it to salvage the American economy. The Senate approved the plan a few days later with both 2008 presidential nominees – future President Obama – then a senator, and the late Sen. John McCain, R-Ariz., peeling off the trail to vote yes.
The House followed suit after the Senate and finally approved the plan to avert a calamity.
If lawmakers are wise, you can bet that no one will want to hold a vote on any plan to address the debt ceiling when the markets are open.
So expect no true 'policy' on the debt ceiling until an external force compels them to do so. Settle in for months of political Kabuki dances. The next big exercise will come in May when the House decides to tangle with a budget – and maybe even force a vote on Mr. Biden’s budget on the floor.
But that’s just the politics.
Things are far from getting serious.