You are using an older browser version. Please use a supported version for the best MSN experience.

5 ways the debt ceiling brinksmanship in Congress could end, from markets teetering to Biden's agenda and who gets blamed

Business Insider logo Business Insider 9/30/2021 (Jake Lahut,Juliana Kaplan)
Sen. Majority Leader Chuck Schumer (D-NY) and Sen. Minority Leader Mitch McConnell (R-KY). Drew Angerer/Getty Images © Drew Angerer/Getty Images Sen. Majority Leader Chuck Schumer (D-NY) and Sen. Minority Leader Mitch McConnell (R-KY). Drew Angerer/Getty Images
  • Even if Congress avoids a shutdown and a default on the nation's debt, things could still get ugly.
  • The brinksmanship fueled by negative polarization entails several knock-on effects.
  • Markets could teeter, and it comes at a crucial time for President Biden's agenda.
  • See more stories on Insider's business page.

As with most things in Congress, seemingly arcane and petty disputes may end up having wide-reaching effects across the American public and global economy.

When it comes to this particularly chaotic week in late September - with lawmakers in a standoff over lifting the debt ceiling, narrowly avoiding a government shutdown, and making any progress on President Joe Biden's infrastructure package - the stakes couldn't be higher and the pettiness is off the charts.

It might seem irrational given the gravity of the situation, but these inter-connected spats are all part of a broader trend in American politics known as negative polarization and asymmetric polarization: As long as the other side is losing, your side is winning. That mentality is now especially strong among Republicans with Democrats holding the White House and both chambers of Congress.

Even if some or all of the following potential catastrophes are averted, the uncertainty and confusion surrounding the negotiations could send global markets teetering in a ripple effect that may already be under way.

Here are five ways this Congressional brinksmanship could play out:

1. Armageddon: Congress fails to raise the debt ceiling and the US defaults on its debts.

Traders work on the floor of the New York Stock Exchange August 9, 2007. REUTERS/Lucas Jackson © REUTERS/Lucas Jackson Traders work on the floor of the New York Stock Exchange August 9, 2007. REUTERS/Lucas Jackson

The debt limit or debt ceiling is often a misunderstood term, since it pertains to money the US government has already spent, not future payments.

The Senate and House have passed a continuing resolution to fund the government and stave off shutdown, averting a double whammy worst-case scenario - but the debt ceiling issue has yet to be resolved.

If Congress doesn't lift it, the government could run out of funding by mid-October, according to Treasury Secretary Janet Yellen.

Democrats in the House passed a bill suspending the debt ceiling, but it was dead on arrival as soon as it reached Senate Republicans. A default - or a near-default - stands to negatively impact markets, and services that millions of Americans reply upon.

Democrats are sick of dealing with the debt ceiling and the need to regularly stave off economic catastrophe, finding themselves the target of GOP efforts to make them pay a political price via a mechanism that isn't even used by most developed democracies, as Insider's Ben Winck, Joseph Zeballos-Roig, and Andy Kiersz reported last week.

Even if there is no default, prolonging the process could still cause a financial drag: The nonpartisan Committee for a Responsible Federal Budget finds that even the threat of default can have "serious negative economic implications."

In 2011, a similar showdown resulted in a last-minute increase to the debt ceiling - but not before roiling financial markets as the country's credit rating was downgraded. For instance, a Government Accountability Office (GAO) report estimated that the prolonged debt ceiling process in 2011 made Treasury's borrowing costs go up by $1.3 billion.

There could be a huge hit to employment and stocks if the debt limit doesn't get lifted by mid-October, Moody's Analytics predicts. Economists led by Mark Zandi found that 6 million jobs could be shed, with unemployment soaring up to 9%. Stocks crashing could wipe out $15 trillion in household wealth.

Yellen said in a statement to the Committee on Banking, Housing, and Banking that "the full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession" if the country goes into default.

If the debt ceiling isn't lifted, Americans receiving support from government programs may feel the impact acutely. Treasury Secretary Janet Yellen warned in a Wall Street Journal opinion piece that families could see their monthly child tax credits delayed.

Also potentially impacted: Military troops, senior citizens, children receiving free or subsidized school lunches, and Americans relying on Medicaid. Yellen wrote that almost 50 million senior citizens may not receive their Social Security checks, and that troops may not receive their paychecks.

In a memo sent out to the state and local governments, the White House warned that federally subsidized Medicaid and free school lunches could face reductions in the case of a default.

2. Both crises are avoided and the HIP and BIF live happily ever after.

Rep. Ilhan Omar (D-MN) (L) and Speaker of the House Nancy Pelosi (D-CA). Chip Somodevilla/Getty Images © Chip Somodevilla/Getty Images Rep. Ilhan Omar (D-MN) (L) and Speaker of the House Nancy Pelosi (D-CA). Chip Somodevilla/Getty Images

Because Democrats hold the narrowest majority possible in the Senate, with just 50 members plus Vice President Kamala Harris as the deciding vote, passing Biden's infrastructure plan has been a high wire act from the start.

It's an especially precarious position because it's so far from the 60 votes needed for most legislation to clear a filibuster from Republicans.

Given the inevitability of a filibuster on several key Democratic priorities, the bill was split in two: the Bipartisan Infrastructure Framework, or "BIF," and the more wide-reaching Human Infrastructure Plan, or "HIP." The ostensible goal was to have enough Republicans vote for the BIF, since it includes more traditional infrastructure components such as roads, bridges, and ports, while the HIP would pass with just the 50 Senate Democrats and VP Harris before going over to the House.

Right now, Democrats are essentially playing a game of infrastructure chicken as Republicans stand by and watch. From the start, progressives have said that the BIF needs to move in tandem with the larger social spending plan, and have warned they'll shut down any standalone bipartisan bill. It's a position that both Biden and Pelosi originally echoed.

But moderates like Sen. Joe Manchin have indicated that they're not on board with the size or timeline of that $3.5 trillion reconciliation package.

Now, Pelosi is pushing for a vote on just BIF, a risky gamble to get one part of the agenda across the finish line. As promised, House progressives like Rep. Alexandria Ocasio-Cortez have said they'll vote against the bipartisan bill, with prominent Senate progressive Bernie Sanders backing them.

However, there is a chance both the moderate and progressive wings were bluffing after the deal fell apart, and both will escape the prisoner's dilemma of Game Theory to arrive at a compromise.

3. Most of the public blames Republicans for the debt ceiling brinksmanship - just like before

House Minority Leader Kevin McCarthy (R-CA). Chip Somodevilla/Getty Images © Chip Somodevilla/Getty Images House Minority Leader Kevin McCarthy (R-CA). Chip Somodevilla/Getty Images

Over the past 25 years, standoffs like this one have become increasingly routine in Congress.

When it comes to the threat of a government shutdown - particularly the nation's longest, under former President Donald Trump, and both shutdowns during the Clinton administration in the mid-1990s - most Americans blame the GOP, without fail.

Yet despite Republicans always being blamed more for shutdowns and bringing the nation closer to defaulting on its debts, they keep doing it.

A Washington Post/ABC poll following the Clinton-era shutdowns, the first of which lasted five days and the second clocked in at 21, found 50% of Americans blaming Republicans to just 27% blaming Clinton. The clashes ultimately ended former House Speaker Newt Gingrich's reign in Congress, and emboldened Clinton going into his second term.

Whether a similar dynamic plays out with Biden depends on how bad things get and how much more polarized the public is now compared to the '90s, but the polling history is not on the GOP's side.

4. Both a shutdown and default are avoided, but Biden's infrastructure bill continues to suffer.

President Joe Biden. Brendan Smialowski/AFP via Getty Images © Brendan Smialowski/AFP via Getty Images President Joe Biden. Brendan Smialowski/AFP via Getty Images

With Biden's infrastructure plan already on the ropes as intra-Democratic divisions have boiled over regarding how the bill was split in two, a protracted fight over the debt ceiling does nothing to help move the roughly $3.5 trillion package along.

Similar to the way narrowly avoiding a default would still have negative impacts on the economy, a languishing infrastructure bill would factor into how Wall Street analysts assess the state of the economy and which sectors are worth investing in.

With the midterms just over a year away, Biden and Democrats would like to campaign on the infrastructure bill as a major legislative accomplishment beyond the administration's pandemic response and the March stimulus bill known as the American Rescue Plan.

5. All of this bogs down Biden's agenda through the fall, and Democrats get blamed by voters who associate government spending directly with inflation.

President Joe Biden. Pete Marovich-Pool/Getty Images © Pete Marovich-Pool/Getty Images President Joe Biden. Pete Marovich-Pool/Getty Images

The notion of "overheating the economy" has already become a theme in the Biden presidency, and has been explicitly mentioned by notable holdouts such as Democratic Sen. Joe Manchin of West Virginia as a reason to be wary of the infrastructure bill's $3.5 trillion price tag.

On top of the $5 trillion in stimulus spending during the pandemic between the Trump and Biden administrations, those ranging from partisan critics to apolitical observers tend to tie government spending directly with inflation.

Although it's much more complicated than that, and pandemic-related supply chain issues have led to many of the most dramatic price hikes, Democrats risk losing the messaging battle on what could become one of the key issues in the 2022 midterms.

Swing voters - or at least anyone showing up to a midterm election who isn't planning on backing their party all the way down the ticket - are far more likely to have the rising price of goods sitting top of mind than squabbles over the debt ceiling that took place over a year ago.

Former President Jimmy Carter faced a similar issue, and despite breaking with the historical trend of an incumbent president's party losing seats in Congress in the first election since taking office, Carter ended up failing in his reelection bid as Ronald Reagan ran on reigning in government spending and tamping down on inflation.

While this outcome is less empirical and more closely related to campaign messaging, it may be the one with the longest staying power.

Read the original article on Business Insider

More from Business Insider

Business Insider
Business Insider
image beaconimage beaconimage beacon