The release of President Biden’s budget proposal really didn’t give us a sense of where this summer’s debt ceiling fight is going.
Presidential budgets are important in setting an administration’s policy goals. But they are not binding. The president’s presentation of a budget — to say nothing of various budget proposals pending over the next two months from congressional Republicans — gives both sides little fodder to attack their opponents for political gain.
Budgets are required by law. And most importantly, they are political documents. That is why each side takes advantage of what the other offers.
However, the modern federal budget process – as created by the Budget Act of 1974 – pales in comparison to the coming fight over the debt ceiling.
The debt ceiling is the law. Coping is also a political exercise – albeit one with deep, real consequences.
President Biden’s budget proposal would cut about $2.8 trillion from the debt over a decade. The Biden administration is reducing the debt by raising taxes on the super-rich. The billionaire minimum tax is a big “want” of liberal Democrats, requiring them to pay at least 25 percent on their income. In total, the administration would impose $5 trillion in new taxes over ten years.
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The package also limits the Trump tax cuts passed in 2017.
However, addressing the need to raise or suspend the debt ceiling is not the focus of the budget proposal. This is a special animal.
House Republicans are Mr. Biden’s partner on the debt ceiling. There is little consensus among members of Congress on how to deal with the debt ceiling. The conservative House Freedom Caucus proposes recouping all of the funds spent on COVID by cutting money from the Internal Revenue Service, following the administration’s student debt relief package and capping all congressional appropriations for the next decade. The Freedom Caucus believes this will save about $3 trillion.
Such a proposal may struggle to garner enough votes to pass the House. That means nothing to the Senate. But the plan reflects the politics of the Freedom Caucus and what their voters expect – whether it passes or not.
That’s why the budget exercise is mostly a hollow shell when it comes to tackling the debt ceiling sometime this summer — or driving the U.S. into bankruptcy and possibly triggering a national economic meltdown. collapse.
House Speaker Kevin McCarthy, R-Calif., has been coy about his next course of action on the debt limit. He said only that “everyone must be involved” to avoid a financial disaster. This includes the House, the Senate and the President.
The potential rendezvous with a debt ceiling crisis is now in a period of meandering, continental political shifting. Everyone knows that financial continents are going to crash into each other. But no one has any idea how to prevent it or what to do about it. Of course, everyone knows that little unfolds in Washington unless the sides reach the precipice of a crisis. So no one really expects anyone to invent a cure until they absolutely do. The deadline could focus political minds on the specific project.
The other fact that might focus the mind on the debt ceiling? Stock market crash.
Markets have largely ignored this early shadowboxing in Washington. But it wouldn’t take much to spook the market over the debt ceiling in this environment. Wall Street has been hit by the various industrial crises in Washington and historic developments with government shutdowns and the debt limit over the years. But this may be the most important dilemma for markets since the debt ceiling meltdown of 2011. Congress finally lifted the debt ceiling and developed a two-step trajectory of possible spending cuts then. But the melodrama of 2011 was enough to rattle Wall Street. Standard & Poor’s thought so little of Washington’s effort to actually deal with the problem that it downgraded the federal government’s credit rating for the first time in history.
It’s possible that markets and credit rating agencies have a dim view of how serious policymakers are about this round. And since no one knows exactly when the US will collide with the debt ceiling, no one is quite sure what episode from Washington could send Wall Street into turmoil. It could happen at any moment.
He hasn’t gotten serious yet.
But it will happen.
Politics won’t matter until then. But politics will. That’s why we’re likely to have a few more months of posturing from both sides.
The Dow cratered in the fall of 2008 during the nation’s financial crisis. What rattled the market reaction was a real-time failure on the House floor of the fiscal bailout package known as TARP (Troubled Assets Relief Program). The Dow lost 777 points – then a record for a one-day drop. Its $1 trillion market capitalization evaporated. What was striking was that the market slipped in sync with the failure of the vote on the floor of Parliament.
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The failed TARP vote spooked investors. In turn, the market scared lawmakers into getting serious about TARP and passing it to save the American economy. The Senate approved the plan a few days later with the two 2008 presidential nominees – future President Obama – then Sen. and the late Sen. John McCain, R-Ariz., pulling out all the stops to vote yes.
The House followed suit after the Senate and finally approved the plan to prevent a disaster.
If lawmakers are wise, you can bet no one will want to hold a vote Any they plan to tackle the debt ceiling when the markets are open.
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So don’t expect any real “policy” on the debt ceiling until an outside force forces 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 wrangle a budget – and maybe even force a vote on Mr. Biden’s budget for now.
But that’s just politics.
Things are far from serious.