“The legislation, known as the Budget Control Act of 2011, initially increased the debt ceiling by $900 billion and guaranteed a similar amount in long-term savings across defense and non-defense expenditures. It also set up a super committee of lawmakers who were tasked with finding a set amount of additional spending cuts by late November, or automatic spending cuts would be triggered across the board.
By the time the bill passed, however, some of the economic damage was already done. Because the US was so close to default, the stock market had already dipped and the cost of borrowing had increased for the government as well. Higher borrowing costs effectively mean the government has to pay more for loans and has fewer resources to spend on public investments like infrastructure. Additionally, in part due to the brinksmanship involved, the credit rating agency S&P downgraded the country’s credit rating for the first time in US history, signaling to potential buyers that taking on US debt wasn’t as safe as it once was, and undercutting global trust in the country’s economy.
The outcome in 2011 revealed that even getting close to a default was dangerous and had a problematic impact on the economy, experts say. “This is an entirely human-made crisis that adds extra cost to the taxpayer, that can lead to market volatility, and that’s totally avoidable,” said David Vandivier, a former Treasury Department official.
“Repeating it doesn’t make sense,” emphasized Furman.
That warning may go unheeded, however. While Democrats have argued that the debt ceiling — which covers debts the US government has already incurred — should be separate from negotiations on the budget and spending, Republicans have indicated that they’re eager to use this opportunity to secure possible savings, even if it incurs risks that became apparent in 2011.”
“President Joe Biden and his staff have said repeatedly he is willing to sit down with House Speaker Kevin McCarthy to negotiate a compromise on government taxes and spending.
Biden has also said, repeatedly, that he is unwilling to negotiate over raising the debt ceiling.
These things may seem contradictory. They are not, and the somewhat subtle distinction between the two is important for understanding what is happening in Washington, DC, this summer.
Congress has two important deadlines coming up.
One is the day that the US officially hits the debt ceiling, and cannot borrow more money from bond markets without further congressional authorization.
We don’t know when that day will be, exactly — but we have a guess. In a Monday letter to McCarthy and other lawmakers, Treasury Secretary Janet Yellen said that “our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1” without a debt ceiling increase.
Once we reach that date, the federal government will not be able to pay its bills, or for things like Social Security checks, payroll for service members and other federal employees, and Medicare reimbursements. Interest payments on past debt could go unpaid, which would mean the US government would default on its debts.
The US would almost certainly enter a recession, probably a quite severe one, and the whole world could face a massive financial crisis. Beth Ann Bovino, chief US economist at Standard and Poor’s, was hardly alone in 2017 when she predicted that “the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008.”
The second deadline is September 30, 2023, the date that funding for the federal government runs out. If Congress does not pass funding bills lasting beyond that date, then on October 1, the federal government will “shut down” as it has done many times before, with many federal employees going without pay and “non-essential” services shutting down, but ordinary operations like Social Security, Medicare, and the military continuing.
Biden is willing to negotiate over the latter. He is not willing to negotiate over the former, as he reminded everyone anew in his invitation to congressional leaders for a May 9 debt ceiling discussion at the White House.
Whether he and McCarthy can navigate those distinctions and negotiate in good faith will likely determine whether the US tips into crisis in the next few months.”
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“Biden’s principled case against bargaining over the debt ceiling is that doing so is effectively bargaining over policies Congress has already passed.
When Congress passed an omnibus spending bill in December 2022, it authorized specific amounts of funding for the rest of the fiscal year, which ends on September 30.
Congress has also, through literally hundreds of bills over the years, dictated the levels of tax on personal income, corporations, payroll, tobacco, etc. The revenue from these taxes do not come close to paying for the spending Congress has also authorized — meaning it has to borrow to pay for its obligations.
So the White House sees a debt ceiling bill as simply Congress agreeing to pay for spending it’s already approved, and obeying the 14th Amendment’s dictate that the federal government must always pay its debts.
“Like the President has said many times, raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” press secretary Karine Jean-Pierre explained in January. “Congress has always done it, and the President expects them to do their duty once again. That is not negotiable.”
By contrast, arguing over the budget is arguing over future spending, which is a proper thing for the White House and Congress to debate with each other.”
“If nothing changes, Social Security benefits will be subject to a 23 percent cut in a decade.”
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“Since any changes to shore up Social Security’s bottom line will likely require huge tax increases or changes to how benefits are paid, policy makers are also running out of time to implement those changes in ways that don’t cause major disruptions to the economy and Americans’ retirement plans.”
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“The most straightforward solution to Social Security’s problem is to raise the payroll taxes that fund the program to make up for the shortfall on the benefit side of the ledger. But that would only exacerbate the problem by placing a bigger burden on younger, generally poorer workers.
According to the report, Social Security could be kept afloat for the next 75 years by hiking the payroll tax by 4.15 percentage points in 2034 (or implementing a smaller increase sooner). The payroll tax is currently charged at a 16.5 percent rate, with employers and employees each covering half. That works out to a nearly 25 percent tax hike. Alternatively, the report says, benefits could be cut by about 25 percent.”
LC: We could also fund it by higher taxes on the wealthy.
“To pretend that Social Security and Medicare shouldn’t be touched is nothing short of political malpractice. Over the next 30 years, the two programs will run a $116 trillion shortfall. This number accounts for the significant amount of interest payments on the debt the government will ring up in the process. While we might be able to stumble along indefinitely, all that borrowing will slow—perhaps even halt—our economic growth, making funding the programs that much more difficult.”
“The U.S. will default on its $31.4 trillion debt this year if Congress doesn’t raise the nation’s borrowing cap. But when, exactly? That’s harder to answer.
While Congress sets the nation’s annual budget, the Treasury Department actually manages trillions of dollars beyond that, with millions of payments flowing in and out of the government’s accounts each day. And just like an everyday checking account, cash flow varies: Sometimes the government gets a flood of dollars from tax receipts, and other times it needs to pay the bills. Those dips and surges add another wrinkle to a political drama that threatens to tank the global economy.
By this summer or early fall, unless Congress acts before then, the U.S. government will be so cash-strapped it won’t be able to pay interest and principal to the country’s lenders. But before the nation reaches that point of default, it could come alarmingly close several times over the next few months as spending and revenue rise and fall — a fluctuation that could spook Wall Street, escalate pressure on negotiations between congressional leaders and President Joe Biden, and potentially force a short-term fix.”
“Even if McCarthy is able to push his debt limit bill to House approval, the legislation is dead-on-arrival in the Democratic-controlled Senate. Instead, the GOP debt bill is effectively a messaging tool for Republicans in their push for talks with President Joe Biden, who has thus far insisted on a no-strings-attached increase of the debt limit.
The Treasury Department has already been using “extraordinary measures” for months to hold off a default while an unclear “X-date” looms. But there could be more clarity soon: The Congressional Budget office and the Bipartisan Policy Center are planning to release updated projections the second week of May.”
“In one scenario outlined by the CBO, Congress would have to cut 86 percent of all discretionary spending if it wanted to balance the budget by 2033 without touching the military, veterans programs, or entitlements like Social Security and Medicare. In a slightly altered version of that same scenario in which the Trump tax cuts were not allowed to expire as intended in 2025, Congress would have to cut 100 percent of discretionary spending—and the country would still face a $20 billion deficit.”
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“it should be clear that any attempt at bringing the federal budget deficit under control must kill (or at least wound) the Republicans’ sacred cows of military spending, entitlements, and the recent Trump tax cuts. Right now, however, leading Republicans including former President Donald Trump and Speaker of the House Kevin McCarthy (R–Calif.) have vowed to keep Social Security out of any long-term spending deals. Rep. Jim Banks (R–Ind.) has promised to oppose any bill that cuts defense spending.
As for the tax cuts, they’re technically temporary—a gimmick that allowed Republicans to game the CBO’s scoring of the tax cut bill—but keeping the lower individual income tax rates in place past 2025 is a top priority for Republicans.”
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“the CBO’s numbers aren’t partisan and neither is the blame for America’s massive budget deficits. These latest projections only reveal how difficult the choices ahead will be. If Republicans are serious about trying to balance the budget, there can be no more sacred cows.”
“Social Security will be insolvent by 2034. One of the trust funds for Medicare will be insolvent even sooner. When insolvency hits, both programs will be subject to mandatory benefit cuts. The exact size of the cuts will depend on payroll tax collections in that year, but the current estimate is that Social Security will be able to pay only 80 percent of promised benefits in 2034.
As I wrote last month, when Republicans such as former President Donald Trump were making similar vows not to cut Social Security benefits: Promising to do nothing amounts to promising a roughly 20 percent benefit cut in a little more than a decade. There is no getting around that fact.”
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“Standing up for seniors (and everyone else who has been paying into Social Security and Medicare for their entire working lives) requires acknowledging that there is no reality in which the politicians do nothing and the entitlement programs continue functioning normally. The choice is between making changes now or accepting mandatory cuts in about a decade.”