Another Debt Ceiling Debacle Before The Election?

We may have to deal with the debt ceiling again before the November elections.

When Congress and the President finally reached a debt ceiling deal at the last minute back in August, the intention was that we would not have to relive the showdown we saw throughout the Summer of 2011 again before the 2012 elections. Now, however, it appears that there is  a growing concern on Capitol Hill that we could have to deal with debt ceiling concerns before the Presidential election in November:

Last year’s torturous congressional debate over raising the federal debt ceiling eventually resulted in a deal that President Barack Obama and congressional leaders believed would keep the federal government funded through the 2012 elections. Not so fast.

In what one top congressional aide calls a “nightmare scenario,” the federal government could wind up hitting the debt ceiling at the height of the presidential campaign. The Treasury Department is now contemplating the prospect of invoking “extraordinary measures” to keep the government funded through November.

Barring a major economic shock — a financial meltdown in Europe, for instance — the emergency measures should be enough to get the federal government past the election. But even under a rosy scenario, the next Congress will be forced to raise the debt ceiling as one of its first orders of business in 2013, if the lame duck outgoing body doesn’t do it. And if the Treasury does have to invoke “extraordinary measures” before the election, it’s easy to imagine a re-run of last year’s political circus, magnified many times over.

There are several reasons why the projections in August that the deal would be sufficient to get the nation past the 2012 elections may turn out to be wrong. The failure of the Super Committee means that several trillion dollars in expected long term deficit reduction are off the table, for one thing. For another, the extension of the Payroll Tax Cut, even with offsets, would still require the Federal Government to borrow money, thus adding to the total debt. And finally, there’s the fact that economic growth is not what analysts expected it to be back in August:

At the time Congress cut the debt ceiling deal, OMB expected real gross domestic product growth of 2.7 percent and an average interest rate on 10-year Treasury bills of 3 percent for 2011. For 2012, the office expected GDP growth of 3.6 percent and interest rates of 3.6 percent. That resulted in expected tax revenue of $2.2 trillion for 2011 and $2.6 trillion for 2012.

Growth missed the 2011 target, with OMB now expecting final 2011 growth of just 1.6 percent, more than 40 percent below the predictions, according to new data published on Tuesday. OMB has now downgraded its 2012 growth projections from 3.6 percent to just 2 percent, a 44 percent decrease.

Lower growth translates to less tax revenue from income and corporate profit. Lower tax revenue means a bigger deficit, which calls into question whether the debt deal from August will prevent the government from hitting the debt limit before November.

The good news, to the extent there is any, is that interest rates on new debt remain historically low so borrowing costs have not increased, although it’s unclear how long that will be the case if we continue to play games like this with the full faith and credit with the United States.

A debt ceiling fight right before an election would likely be a disaster. As I noted when we saw this last year, voting to increase the debt ceiling is the one vote that no member of Congress really wants to cast because it lays bare the Federal Government’s fiscal problems, and because it is easy for a political opponent to demagogue.  Explaining why voting to increase the debt ceiling is, in reality, a fiscally responsible move because it means authorizing the government to pay for things that Congress has already authorized is hard. Denouncing a Congressman or Senator for voting to “raise the debt” is very, very easy and you can guarantee that this is exactly what we’d see in the event Congress had to vote on this issue before November. The debt kamikazes would be back in full force, and the world would be sitting back and watching while the United States argued down to the wire over an issue that shouldn’t even be in doubt.

Even if we manage to avoid a necessary Congressional vote before November, though, things are unlikely to be pretty. If Treasury has to start doing what it did last year to avoid the day of reckoning we’ll see the same rhetoric we did last time around. More importantly, though, whether it happens before the September elections or not, we’re going to have to deal with this issue again sooner rather than later either in a December 2012 lame duck session, or when the 113th Congress convenes next January. Whenever it happens, I doubt it will be handled any more responsibly than it was last year.

FILED UNDER: Congress, Deficit and Debt, Economics and Business, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. MBunge says:

    Yeah, I really don’t think the GOP wants to see what Barack Obama does with a debt ceiling fight when he’s out of governing mode and into full blown campaign mode.

    Mike

  2. Dean says:

    Boy, never saw that coming.

  3. Hey Norm says:

    It’s hilarious that we are facing another Faux Debt Ceiling Kerfuffle because growth was less than expected when the 1st Faux Debt Ceiling Kerfuffle held back growth thus requiring another Faux Debt Ceiling Kerfuffle.
    August job numbers came in close to zero, in large part because of the Faux Debt Ceiling Kerfuffle…thus hurting the economy.
    Consumer Confidence was hammered by the Faux Debt Ceiling Kerfuffle…thus hurting the economy.
    Consumer Credit was set back by the Faux Debt Ceiling Kerfuffle…thus hurting the economy.
    Now…pundit poseurs will post proclaimations that “BOTH PARTIES DID IT”.
    But keep in mind that only one party has decided that harming the economy is good for them.

  4. Brummagem Joe says:

    Aint going to happen Doug.

  5. Pete says:

    @Hey Norm: Yes, the party that doesn’t control the WH. Not sure why Reid won’t allow a senate budget to come to the floor, but might it be that it would bare for all to see how insane all the spending is?

  6. Brummagem Joe says:

    @Pete:

    Money bills originate in the house. The WH makes a suggestion. What are you not understanding about this?

  7. JohnMcC says:

    The original Huffington Post item does not detail what “extraordinary measures” the Treasury has in it’s quiver. Should we expect the 14th Amendment to again become a topic of controversy? Partial shutdowns? I am somewhat in the dark.

  8. john personna says:

    This is not a bug, this is a feature.

    As I’ve been saying, at least since that last debt ceiling fiasco, this is about the election cycle.

  9. Pete says:

    @Brummagem Joe: Doesn’t the Senate have the responsibility to submit its own budget? It is NOT a bill, Joe.

  10. Ben Wolf says:

    @Doug

    The good news, to the extent there is any, is that interest rates on new debt remain historically low so borrowing costs have not increased, although it’s unclear how long that will be the case if we continue to play games like this with the full faith and credit with the United States.

    The Fed determines interest rates, not the bond market.

  11. Hey Norm says:

    @ Pete…
    What is with the Republicans facile focus on a budget? No budget is going to pass, a budget isnt necessary, so why waste time on unnecessary things? Bush passed budgets…then promptly spent trillions on Iraq off the books. I’m sure you spent a lot of time complaing about that spending. There are real issues to deal with…Republicans should focus on them, and not made up things.

  12. Tillman says:

    Help me follow the calculus of the Congressional GOP here. They can see from polling conducted after the first debt ceiling fiasco that Obama’s job approval hasn’t sunk lower, the people for the most part still like him, and he still polls well over any of his possible Republican presidential contenders. Moreover, while the President and Congress shared blame for the fiasco in the voters’ minds, the GOP bore the majority of that blame.

    I can kinda see causing another fiasco to galvanize the base in light of poor primary numbers, but what makes them think this would be a winning political battle when all’s said and done? The backlash would be electoral suicide. It’s not as if they can’t condemn him for poorly-managed budgets and deficit-exploding policies while also voting for a debt ceiling increase.

  13. Brummagem Joe says:

    @Pete:

    Doesn’t the Senate have the responsibility to submit its own budget?

    Is there a statutory requirement for it to do so?

  14. Brummagem Joe says:

    @Ben Wolf:

    The Fed determines interest rates, not the bond market.

    ???????????

  15. grumpy realist says:

    @Tillman: But of course they can!

    A politician in campaign mode can lie out of both sides of his mouth the same time and the miserable mess we call the media does nothing but shovel out “both sides do it” and get a few talking heads on television while waiting to be invited to the next set of cocktail parties.

    I’m thinking of running on a platform insisting that all pundits and editorialists be guillotined five years after they make their first pronouncements. Should be a winner.

    Damn I miss Ambrose Bierce….

  16. David says:

    The President submits a proposed budget to Congress. The House would then pass a budget bill and send it to the Senate. The Senate then passes something that is similar, but very rarely the same. It then goes to conference, and if they can work out a deal, it goes to the President for signature.

  17. Hey Norm says:

    @ David…
    Then ten minutes later it means nothing. So why bother? It’s a pointless exercise.

  18. Tillman says:

    @grumpy realist: Exactly. So why don’t they? It’s not like we have high standards of truth for a politician anyway. Why suddenly an insistence on seeming hardcore and then actually being hardcore?

    Also, I never knew the Devil’s Dictionary had a definition for Wall Street:

    WALL STREET, n. A symbol for sin for every devil to rebuke. That Wall Street is a den of thieves is a belief that serves every unsuccessful thief in place of a hope in Heaven. …

  19. David says:

    @Hey Norm: I agree, at least in this day and age. It is not the budget but the individual appropriation bills that actually matter.

  20. Ben Wolf says:

    @Brummagem Joe: The Fed is the master and the bond market its dog. If traders decide to challenge that then they’ll get their faces smashed into the pavement as the FOMC swamps their trades via open market operations. Interest rates rise only if the Fed allows it.

  21. john personna says:

    @Ben Wolf:

    Ben, you always tell part of the story. And that part is valid, until it hits the constraints you prefer not to talk about.

    From October 1993 to November 1994 10-year yields climbed from 5.2% to just over 8.0% fueled by concerns about federal spending. With some guidance from Robert Rubin, the Clinton Administration and Congress made an effort to reduce the deficit. 10-year yields dropped to approximately 4% by November 1998.

    That’s from the Wikipedia bond vigilante page.

    Clinton political adviser James Carville said at the time that “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

    Just curious. Do you think the Clinton administration misunderstood their power, or do you think they were in conditions outside your “Fed is the master and the bond market its dog” analogy?

  22. anjin-san says:

    if we Republicans continue to play games like this

    FTFY

  23. Doubter4444 says:

    @David:
    Hey, I saw that episode of The Electric Company.
    Damn PBS – indoctrinating kids.

  24. Ben Wolf says:

    @john personna: http://www.ny.frb.org/markets/statistics/dlyrates/fedrate.html

    Look at the chart, john. The Fed Funds rate increased sharply throughout 1994 and then dropped through 1998. The Fed Fed Funds rate is controlled by the Federal Reserve and influences bond yields. That is why bond yields changed, not mythical bond vigilantes who have apparently decided not to protest this time around despite deficits far beyond what were experienced during the first Clinton Administration. Greenspan knew exactly what he was doing, and to answer your question Clinton and his team were economically ignorant.

  25. Ben Wolf says:

    The Fed doesn’t issue a decree that “interest rates shall be x”. It alters rates by engaging in what are called Open Market Operations. The Fed goes out and buys and sells and swaps just like any other market participant, but it does so on such a large scale it distorts the market in the direction the Fed wants. In 1994 the Fed began raising the Fed Funds Rate, which is the interest rate banks charge each other to lend their reserves. The Fed did this by draining the banks’ reserves and increasing their scarcity, while replacing the reserves with bonds, increasing their supply. Basically the Fed artificially increased the number of outstanding bonds, decreasing demand for them and spiking their yields.

    Later through 1998 the Fed began lowering the Fed Funds Rate by buying the bonds back and replacing them with reserves, a reverse swap increasing bond scarcity and dropping their yields. No private actor or group of actors in the bond market can compete with the tidal wave of assets the Fed can move in and out; that’s why rates will rise only when the Fed allows them to. It’s not magic and it’s not mysterious, the Fed just like to pretend it is to enhance its reputation.

  26. Brummagem Joe says:

    @Ben Wolf:

    That is why bond yields changed, not mythical bond vigilantes who have apparently decided not to protest this time around despite deficits far beyond what were experienced during the first Clinton Administration.

    The bond vigilantes are not mythical, ask Italy, Greece, Portugal, Ireland et al. And the reason the bond vigilantes haven’t moved here is because of low inflation expectations, a recognition our deficit problems are soluble, and a flight to quality. And yes the Fed has some ability to influence interest rate movement by open market operations but it’s not an infinite as you suggest.

    Greenspan knew exactly what he was doing, and to answer your question Clinton and his team were economically ignorant.

    You’re contradicting yourself. Clinton’s economic team INCLUDED Greenspan who had a particularly symbiotic relationship with Rubin and Summers which has been much commented upon

  27. Brummagem Joe says:

    “The vigilante is not gone. It is just that inflation is at bay, so there is no need to call the Fed’s bluff and say policy officials are behind the curve when it comes to fighting inflation,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “The bond market may let them have their way for now…as long as inflation pressures do not start to heat back up.”

  28. @Ben Wolf:

    This is interesting:

    The main response by MMT economists to the abovementioned criticism is to point out that the positions taken by critics betray a misunderstanding of MMT. Although critics often represent MMT as supportive of the notion that “deficits don’t matter”,[17] MMT authors have explicitly stated that that is not a tenet of MMT.[18]

    That’s from the Wikipedia “Chartalism” page, and represents “deficits don’t matter” as a critic’s straw-man.

    If we follow link [18] we get Bill Mitchell saying:

    First, I have never said that “deficits are never a problem as long as you have your own currency”. I have never heard Warren Mosler say that, nor Randy Wray, nor Stephanie Kelton, nor Pavlina Tcherneva, nor Scott Fullwiler nor others who have been working on developing MMT. I have never read anything to that end in anything the key proponents of MMT have written.

    Now, when I said above “you always tell part of the story” I was referring to deficits with the kind of constraints that Bill Mitchell (MMT advocate) talks about.

    I’m not enough of a Fed Governor myself to be sure, but I think Paul Volker might have been operating at some of those limits.

  29. Ben Wolf says:

    @Brummagem Joe:

    And yes the Fed has some ability to influence interest rate movement by open market operations but it’s not an infinite as you suggest.

    Joe, take a look at the results of a recent bond auction.
    http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/R_20111121_3.pdf

    The primary dealers are tendering three times the amount up for auction. This is because the Fed ensures the dealers always have enough reser ves on hand to take down the entire auction. No matter what the bond market wants to do, the Fed has total control of rates because it has total control of bond supplies. Even if everyone else on the planet refused to buy U.S. bonds the Fed would continue supplying reserves and bonds would drain them.

    The eurozone members are at the mercy of their bond markets because they have a different monetary system than we do, or Japan or Britain. They borrow because that’s the only way they can spend more than they collect in taxes, while we issue bonds to drain excess reserves, not to fund our spending. Japan has been doing this for twenty years with a vastly greater debt/GDP ratio, and yet their bond yields continue to dip to zero or even negative. Bond vigilantes don’t live here.

    As for Greenspan, the man deliberately spiked yields then told the preident he had to eliminate the deficit to fix it, which the Fed could have done at any time by reversing its operations. He was never a friend to Clinton’s economic team and he lied to them to force his anti-spending dogma on the country.

    @john personna

    You mean you want me to write more? It’s already a wall of text to bore OTB denizens out of the thread.

  30. @Ben Wolf:

    Just say briefly if Bill Mitchell is right, but not your emphasis?

  31. Brummagem Joe says:

    @Ben Wolf:

    The primary dealers are tendering three times the amount up for auction. This

    This is for the reasons I stated above, the Fed are pushing on an open door at the moment.

    He was never a friend to Clinton’s economic team and he lied to them to force his anti-spending dogma on the country.

    That he was joined at hip with the Clinton economic team is a matter of public record.

  32. Brummagem Joe says:

    @Ben Wolf:

    Greenspan and Clinton never a team?….Your inventions are getting a bit tedious

    http://users.dickinson.edu/~rudaleva/greenspan.htm

  33. Ben Wolf says:

    @john personna: There are no hard constraints on government’s capacity to spend, meaning there is no point at which the government would run out of dollars. The primary “soft” constraint is always real resources. If insuficient resources are available to meet government spending levels then inflation occurs. This damages the private sector by imposing a hard constraint on its ability to acquire goods and services for its own uses at a reasonable price. Such malinvestment would occur if deficit spending sends aggregate demand beyond the country’s productive capacity, therefore spending should be targetted to push toward maximum economic output but not beyond. Mitchell would then argue the best way to avoid going beyond is via buffer stocks.

    @Joe

    There is much more the Fed can do. QE3 will push rates down even further. And just because Greenspan puts his hand on Bill Clinton’s back doesn’t mean there isn’t a knife in it. Of course they worked closely together, with Greenspan manipulating the Clinton team’s ignorance.

  34. Brummagem Joe says:

    @Ben Wolf:

    And just because Greenspan puts his hand on Bill Clinton’s back doesn’t mean there isn’t a knife in it. Of course they worked closely together, with Greenspan manipulating the Clinton team’s ignorance.

    Having disproved your denial of a symbiotic relationship between Greenspan and the Clinton economic teams now according to you their closeness was just so Greenspan could stab them in the back. (sigh)…Clinton of course had a particularly strong succession of treasury secs as was demonstrated by their overall economic management and successful interventions in the Mexican and LTCM bailouts.

    In that takedown of MMT fakery by Krugman that I linked to but was ignored he had this to say about the mindset of those like Ben Wolf who promote this baloney. He’s just about nailed it I’d say.

    First of all, yes, I have read various MMT manifestos — this one is fairly clear as they go. I do dislike the style — the claims that fundamental principles of logic lead to a worldview that only fools would fail to understand has a sort of eerie resemblance to John Galt’s speech in Atlas Shrugged — but that shouldn’t matter…..

    But I do get the premise that modern governments able to issue fiat money can’t go bankrupt, never mind whether investors are willing to buy their bonds. And it sounds right if you look at it from a certain angle. But it isn’t…..

    OK, I have no illusions that this will convince anyone in this area. (Can you imagine John Galt admitting that he was wrong?) But I thought I should put it down.

  35. @Ben Wolf:

    That’s pretty much where I thought you were, based on past discussions. You do headline “no limits” a bit, and it takes some prodding to talk about “soft” ones.