American politics is seemingly operating as normal.
Joe Biden has been launching his bid for re-election. The Republicans have kicked off their presidential primary season.
Both sides have been busy slinging insults back and forth. It’s business as usual – with one big exception.
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It’s been easy – perhaps too easy – to forget that the country’s finances have been subject to “extraordinary measures” since the start of the year, when the debt ceiling was reached and the Treasury was forced to change tack in order to avoid defaulting on payments. These measures are expected to run out of road come June, when the US risks defaulting on its debt.
It’s strange that, of all countries, the US should have a debt ceiling. Thanks to its reserve currency status, the US is in a better position than most other countries to borrow vast sums of money. But this ceiling, dating back to the First World War, requires Congress to sign off on the Treasury’s ability to borrow.
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Even when politicians have legislated to spend more than is brought in through tax revenue, an additional green light from Congress is required for borrowing to be ramped up.
This keeps US spending more publicly accountable than in other countries. It is also a recipe for showdowns. And in a matter of weeks, an unwillingness to compromise on spending and restraint could see the US witness large scale economic unravelling.
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The penalties in the past for waiting until the last minute to agree a deal – which include hits to the country’s credit score, and a loss of confidence with investors – would only be the start of the economic mess should these special measures come to an end before anything is agreed.
A report from the White House Council of Economic Advisers this week lays out a series of worst-case scenarios, which include a deep recession, the loss of up to eight million jobs, and a 45pc hit to the stock market.
These prospects are terrifying. But there are two pieces of good news. The first is that the country has never allowed debt ceiling debates to escalate that far. Back in 2011, when the gridlock seemed impassable during President Obama’s first term, it was in fact then-Vice President Joe Biden who was sent in to negotiate a deal with Republicans.
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While politicians typically do their best to use the debt ceiling debate to their advantage, there has always been recognition that no party benefits politically from wrecking the economy.
Neither party is likely to escape blame if negotiations fail. The political incentives may be in place to take this fight up to the cliff’s edge, but it is in no one’s interest to it tip all the way over.
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The other piece of good news is that there is already a bill going through the system that would avoid catastrophe, delivered by the Republican-led House of Representatives. The party has been responding to Biden’s spending splurges by insisting that any increase in the debt ceiling be linked to some kind of spending restraint. But rather than simply calling for compromise, the party has taken action, producing a bill that could avoid default.
Last week, House Speaker Kevin McCarthy pulled off nothing short of a political miracle by getting his rather divided party to pass the bill, with only four Republicans voting with the Democrats against it.
In return for lifting the debt ceiling by an additional $1.5 trillion, the Republican-led bill would reduce federal spending by almost $5 trillion over the decade, and includes plans to recall some pandemic funding that has not yet been spent.
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It would also pause the Democrat’s pledge to forgive up to $20,000 of federally loaned student debt – a policy considered regressive and unfair, given the earning potential of college graduates compared with those who don’t enter higher education.
Both requests are reasonable – yet the bill is considered to be dead on arrival in the Democrat-controlled Senate. Democrats are not engaging with the bill, insisting that the spending restraint would cause too much harm. Senate majority leader Chuck Schumer has called the bill “dangerous” as his party searches for other options.
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And, so far, those options stray further away from compromise. House Democrats are openly discussing the possibility of a “discharge petition”, which could bring forward a vote in the House to raise the debt ceiling without the permission of the House speaker (as things stand, this option is considered unlikely to be successful, as they would require Republican votes to get a majority).
But this is not just about avoiding compromise. It seems that any and all options are being considered, so long as they avoid one of the toughest truths in American politics right now: that even the country which can get away with overspending is testing the limits of what is feasible – not to mention ethical.
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The $1.5 trillion that could be added to the debt limit will come on top of the $31.4 trillion already racked up. It was last year that the US crossed the threshold of $31 trillion for the first time, following multiple spending packages from President Biden.
There is a growing realisation that this kind of spending cannot continue – especially as interest rates are back on the rise. Not only do such levels of egregious borrowing saddle the bill on future generations; they also put programmes like Medicare and social security on shaky ground, potentially making them undeliverable for those wholly reliant on them.
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It is not just the Democrats that are refusing to have this debate. Donald Trump has been using his time out on the campaign trail to take aim at possible rival Ron DeSantis, claiming that the governor of Florida wants to “destroy” such programmes.
Trump previously likened social security to a Ponzi scheme – frankly, a fitting description given how many of these promises made to workers are unfunded liabilities. But just like for Biden, it’s politically useful for Trump to lean into spending promises as people start thinking about the 2024 election.
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Refusal to admit that the country has developed a serious public spending addiction is making it near impossible to brainstorm serious proposals that could get borrowing under control, and actually make these institutions sustainable for the future.
But Americans don’t have the luxury of waiting for the penny to drop for these politicians. They don’t even have until the next election. They have until June. History would suggest a deal will be struck: but denial about America’s financial state has left everything up in the air.
