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The U.S. House Committee on Rules holds a hearing about the United States' debt ceiling.
House passes debt limit bill
The US House of Representatives on Wednesday night passed a bipartisan debt limit bill to avoid a government default. And after all the drama, it wasn’t even that close: 314 lawmakers voted in favor of the bill, while 117 opposed it. Interestingly, more Dems (165) backed the measure negotiated by House Speaker Kevin McCarthy with the White House than Republicans (149).
It’ll now go to the Senate for a vote before Monday, when the US Treasury has warned that the government will run out of money to pay back its debt.
To be sure, many lawmakers – on both the right and left – didn’t get what they wanted. But while some progressive Dems spoke out against the bill’s provisions that they say benefit the wealthy and ramp up work requirements for recipients of food aid, they stopped short of criticizing the Biden administration, instead placing blame for the bill’s shortcomings squarely on the GOP.
Republicans, however, have been at loggerheads in recent days, with members of the far-right Freedom Caucus panning McCarthy for giving too much to the Dems, and at least one calling for his ousting. Indeed, it was a blow for the House speaker that he didn’t even have enough votes from within his own caucus to pass a procedural step earlier in the day needed to advance the bill. He had to rely on Dem votes to push it forward.
So what now? Markets will likely respond well to the news. But anti-McCarthy Republicans are seething and have warned of a “reckoning to come.”U.S. House Speaker McCarthy talks to reporters at the U.S. Capitol in Washington.
Debt ceiling deal comes down to the wire
There was much relief after President Joe Biden and House Speaker Kevin McCarthy announced on Saturday night that they’d agreed to raise the debt ceiling and avoid a default in the world’s largest economy by June 5, the date Treasury Secretary Janet Yellen says the US will run out of money to pay back its debts. But it’s clear that the ongoing crisis will come down to the wire. (For more on what’s in the proposed bill, see here.)
On Tuesday night, the bill narrowly passed in the House Rules Committee – a procedural step required before any legislation can be brought for a vote in the House. Two ultraconservative GOP lawmakers on that committee (out of nine) voted against the bill’s advancement. House lawmakers are now expected to vote on the bill this afternoon.
Yet again, McCarthy is experiencing the perils of presiding over a razor-thin majority in the lower chamber as he tries to corral Republican support for the bill that several dozen lawmakers from the far-right Freedom Caucus say gives too much away to the Dems. McCarthy needs a majority of 218 votes to get the bill through, meaning that dozens of Dems will need to back the legislation to move it along to the Senate for a vote. And making matters harder, he needs a majority of the majority – aka Republicans – to back the deal so as not to lose the confidence of his caucus and GOP leadership and risk being ousted from the job.
Meanwhile, progressive House Dems, many of whom are furious at the Biden administration for raising some work requirements for needy families receiving food benefits, are playing their cards close to their chests.
The Graphic Truth: Who blew up the US national debt?
On Saturday night, just days before the US government was set to run out of money, US President Joe Biden and House Speaker Kevin McCarthy reached an agreement to raise the debt ceiling. The deal is, as expected, a modest compromise that includes more spending cuts than Democrats were initially willing to make, but less than Republicans wanted.
In exchange for avoiding a catastrophic default and kicking the can down the road until Jan. 2025, the US government will keep nondefense spending almost flat in the 2024 fiscal year and increase it by only 1% the following year. The agreement will fully fund veterans care but nix unspent COVID money and claw back some IRS funding, expand (some) work requirements for SNAP beneficiaries, and fast-track environmental approvals for energy projects.
Now it only needs a thumbs-up from Congress this week. Despite opposition from progressives and the GOP's Freedom Caucus, the bill is expected to pass in the House and get overwhelming support in the Senate. But don't be surprised if we're having this conversation again right after the 2024 election.
Indeed, prior to the Biden-McCarthy deal, there was plenty of finger-pointing over who was to blame for the US creep toward fiscal purgatory. Democrats blamed Republicans for refusing to raise the debt ceiling without preconditions, while Republicans said that Dems’ overspending landed the country in this mess in the first place.
But a look at US federal debt compared to GDP over the past four decades – which highlights America’s ability to pay back its debt – shows that both Democratic and Republican spending and fiscal policies have fueled the country’s current imbalance. We look at these figures dating back to 1980.
Will the US default on its debt? Ask GZERO World's guests
It's the question swirling around Washington this week (and last week, and the week before, etc, etc). It's of concern to US allies and of great interest to US adversaries: Will the United States government default on its debt for the first time in history? Depending on the day of the week, or the hour of the day, you may get a different answer from politicians and pundits alike.
On GZERO World with Ian Bremmer, though, guests from the past few months, including Utah Senator Mitt Romney, World Bank Group President David Malpass, former New Jersey Governor Chris Christie, and US Transportation Secretary Pete Buttigieg, have struck a common chord: it won't happen, but if it does, we're in for a hurting. Catch GZERO World with Ian Bremmer on public television stations nationwide. Check local listings.
- US debt default would be "destabilizing," says World Bank's David Malpass ›
- Sen. Mitt Romney on DC dysfunction, Russian attacks, and banning TikTok ›
- Pete Buttigieg explains: How the debt limit impacts transportation ›
- Chris Christie weighs in on US debt limit fight ›
- US debt limit: default unlikely, dysfunction probable ›
A trader works on the trading floor at the New York Stock Exchange.
How’s the US economy doing right now?
If you’re a Republican, you probably think this is the worst economy in American history. If you’re a Democrat, chances are you at least rate it better than when Donald Trump was president.
But the truth is that even if your views weren’t colored by your partisan preferences, there’s enough conflicting data out there to confuse even the best, most apolitical economists.
Thankfully, I’m neither apolitical (I am nonpartisan) nor an economist (political scientists FTW), so if you ask me, I’d say the US economy is … pretty good.
Let’s start with inflation. Unless you’ve been living under a rock, you’ve surely noticed that everything seems to cost a fortune these days. Low and stable for decades, inflation surged in 2021-22 to levels not seen in 40 years thanks largely to the COVID-19 pandemic, which disrupted global supply chains and prompted the government to cushion the fall in incomes with extraordinary stimulus. China’s zero-Covid lockdowns and Russia’s invasion of Ukraine then pushed inflation even higher.
The good news is that inflation has already slowed noticeably, courtesy of the Federal Reserve’s most aggressive tightening cycle in decades. Annual headline inflation is down 4.2 percentage points after declining for 10 consecutive months since peaking at 9.1% last June. Annualized monthly data over the past 3 and 6 months shows even larger declines.
Core inflation – the less noisy measure preferred by economists and policymakers – has proven a bit stickier owing to wild, pandemic-induced swings in the prices of things like used cars and housing. But “supercore” and core services inflation – two measures that strip those components out – have been slowing. All in all, most price measures currently put underlying inflation around 4%.
The bad news is that inflation is still higher than anyone would like it to be, even if it’s at a level that we once found bearable and other countries consider normal. And because inflation has a way of becoming self-sustaining, there are reasons to fear it may prove hard to bring all the way down to the Fed’s target of 2% without causing big job losses.
Which brings us to the labor market. Despite interest rates rising by 5 percentage points in just over a year, unemployment is the lowest it’s been since 1969. Job growth has beat expectations in 11 of the past 12 months, prime-age labor force participation just hit a 15-year high, and people who were out of the labor market before (think older people, people with disabilities and criminal records, parents of young children) are now being pulled into it.
The labor market is so tight that the share of prime-age workers currently employed is higher than it was pre-pandemic, and the total number of people employed is higher than economists expected would be by now before the pandemic began. That includes a record-high share of prime-age women employed and a record-low Black unemployment rate.
It’s not just that everyone who wants a job can get one. Today, for every 10 people who want a job, there are 16 vacancies waiting to be filled. That means for the first time in a long time, American workers have options – including the option to demand a raise or to quit for better pay. Indeed, wages have grown significantly (even though – critically – they haven’t kept up with inflation), and the number of people voluntarily switching jobs remains high by historical standards.
Recent months have seen some softening in labor demand as Fed hikes have begun to hit the economy’s most rate-sensitive sectors, with slowing job growth, a slight uptick in unemployment claims, and more moderate wage growth. If it continues, this could eventually feed into lower spending. For now, though, layoffs show no sign of picking up, and the labor market remains remarkably robust.
What about that recession we’ve been promised?Politicians, economists, and investors have been predicting an imminent recession for more than a year now. The Fed’s rate hikes have to throttle economic activity eventually, the thinking goes, as the tighter financial conditions needed to get inflation down depress credit, spending, and hiring. If you are old enough to remember the 1980s, the story sounds familiar.
Yet despite the highest interest rates in 16 years and a recent spate of banking turmoil, the economy is growing, employers keep hiring more workers to meet Americans’ still-strong demand for goods and services, and recession calls keep getting pushed back.
Sure, there are important pockets of weakness in the economy, such as commercial real estate and high-profile industries like tech, finance, and media. But most of the economy is still chugging along. Corporate profits are near all-time highs, and while consumer spending, retail sales, and industrial production have all slowed somewhat, they remain strong.
Combined with evidence of cooling inflation and healthy but slowing wage growth, this resilience makes me hopeful that the US economy can achieve a “soft landing” – a Goldilocks scenario in which inflation comes down to an acceptable rate (say, under 3%) without a large increase in unemployment or a major recession.
Of course, it’s possible the Fed’s hikes are just taking longer than expected to work their way through the system and will cause a recession down the road. It’s also possible that we haven’t seen the last of the banking stress (plausible), that the US will default on its debt (very unlikely but at least some level of crisis seems necessary to avoid it), or that the Fed will raise rates too much (always a risk).
Any of these could push the US into recession, and indeed, most analysts still expect one to begin sometime in the next year. Then again, they’ve been wrong before. Barring any policy own goals or unexpected external shocks, a soft landing remains a distinct possibility.
So what’s with all the doom and gloom? By some measures, Americans think economic conditions are about as bad as they were during the heights of the Great Recession – when millions of workers had just been thrown out of work, unemployment was in the double digits, and households had lost more than $10 trillion worth of wealth.
This disconnect between reality and perception is quite striking, but it’s not mysterious. To understand it, there are two things you need to know.
First, inflation is much more salient than unemployment. While unemployment imposes severe costs on a small group of people, inflation affects everyone. Bad news also gets more coverage – and sticks more with people – than good news. The corollary is that as far as perceptions go, a strong labor market can’t possibly cancel out the rising cost of living. That’s why only one in five Americans say their financial situation has improved since last year. To the rest, hearing that jobs are plentiful is little consolation when they’re already employed but can’t afford groceries.
Second, partisanship plays a much larger role in shaping public opinion than it did in the past. It used to be that feelings about the economy were determined by the actual state of the economy. But this relationship broke sometime in the last two decades, no doubt thanks to the rise in polarization and the echo chambers created both by social media and by our increasingly politicized news media.
These days, Americans’ feelings about the economy are determined almost exclusively by the president’s politics, independent of the actual state of the economy. The partisan gap in economic perceptions under President Joe Biden and former President Trump has been more than double that under former presidents Barack Obama and George W. Bush. That means virtually half of the country is always bound to be sour on the economy, no matter how good it may be.
Rightly or wrongly, most Americans are feeling down about the economy, and no amount of explainers are about to change that. While for now consumers are still spending like it’s the roaring twenties, there’s always the risk that we’ll eventually talk ourselves into a recession. Perception may not be reality, but when it comes to politics and economics, it’s pretty damn close.
Biden returns to join US debt ceiling talks
US President Joe Biden is on his way back from the G-7 summit in Japan to Washington, DC, where on Monday he plans to meet with House Speaker Kevin McCarthy to iron out a compromise over the debt ceiling. Biden nixed the last two legs of his trip — to Papua New Guinea and Australia — to join the talks in the hope of avoiding a catastrophic default as early as June 1.
With that hard deadline fast approaching, the two sides have moved a bit closer yet remain far apart. Republicans want sweeping spending cuts, including work requirements on beneficiaries of food stamps, while the Dems are offering to keep defense spending flat. McCarthy is under as much pressure to not cave from the penny-pinching far right of the GOP as Biden is from free-spending progressives.
The fact that the president — who for months has refused to join the debt ceiling talks — is meeting McCarthy for the second time in two weeks signals that the White House can no longer delay nor expect to get a deal without giving up something. Still, as Eurasia Group's US Managing Director Jon Lieber points out, that won't matter as long as enough Republicans believe that the US can stave off a default by choosing to pay off some creditors and not others.Everything you need to know about the US debt ceiling
The dumbest recurring character in US politics (no, not the one you’re thinking), the debt ceiling, is back with a vengeance for yet another season of wholly unnecessary drama.
After trading a series of ultimatums, President Joe Biden and House Speaker Kevin McCarthy met at the White House on Tuesday to discuss how to defuse the looming crisis. Predictably, the meeting ended without a breakthrough.
This year’s fight will be the most contentious and dangerous since 2013 – the last time we had a disruptive standoff over the debt limit that pushed the US to the brink of default. House Republicans are demanding deep spending cuts in exchange for a debt-ceiling hike, while the president insists he’ll only agree to a “clean” increase without preconditions.
Here's what you need to know about the debt limit, why it matters, and where we’re headed.
What’s the debt limit?
The US Constitution gives Congress the sole power to decide how much money the federal government spends. When Congress authorizes more spending than the government collects in revenue, the Treasury Department has to borrow to finance the deficit. Every time the Treasury issues new debt to pay the government’s bills, it adds to the national debt.
For many years, Congress had to approve every bond that was issued by the Treasury, but as debt issuance became more common, that became too burdensome. In 1939, Congress set a statutory limit on how much the Treasury could borrow without having to come back for approval every time: the debt limit.
Whenever the stock of outstanding debt reaches this arbitrary number – currently set at $31.4 trillion – Treasury isn’t allowed to borrow any more money unless Congress agrees to raise the cap. If the debt ceiling isn’t raised before Treasury runs out of cash, the government is rendered unable to pay its bills.
The debt ceiling has been raised 78 times since 1960, largely without much drama. The exceptions were the showdowns in 2011 and 2013, when Republican lawmakers threatened not to raise the debt limit until the last minute in order to extract policy concessions from President Barack Obama, pushing the nation to the precipice in the process.
What purpose does it serve?
The debt limit makes no sense as a policy tool. All it does is artificially constrain the government’s ability to meet the spending commitments previously mandated by Congress. As former Fed Chairman Alan Greenspan put it, the limit is “either redundant or inconsistent” with the spending legislated by Congress in its budgets.
If Congress wants the government to spend less, it can pass laws that mandate that. But debates about fiscal policy should happen before, not after, Congress has approved a budget. By the time it has done that, it has automatically committed the government to foot the bill.
Neither Joe Biden nor Treasury Secretary Janet Yellen has the legal authority to spend less than what Congress has mandated. Nor does the US government have the legal option to renege on its obligations.
By not raising the debt limit, Congress stops the implementation of the laws it itself already passed. That’s what’s so absurd about this. Telling the government to spend $X while forbidding it from borrowing enough money to pay $X is like running up your credit card but refusing to pay the tab.
When is the US expected to hit the debt limit?
Technically, the US already hit its debt limit of $31.381 trillion on Jan. 19. Since then, Treasury has been relying on “extraordinary measures” (read: accounting tricks to free up cash) to continue paying America’s bills.
But extraordinary measures can only buy so much time. Beyond a certain date, the so-called “X-date,” the government’s cash balances will be exhausted, and Congress will need to raise or suspend the debt ceiling in order to avoid defaulting on at least some of the government’s bills.
Last week, Yellen sent a letter to Congress warning the US could run out of cash as early as June 1. While that’s probably a conservative estimate, we at Eurasia Group expect that the X-date will come in mid-June. If Treasury can hold out until the June 15 tax filing deadline, it can potentially make it into mid-July, but it’s very unlikely that cash will last through August.
What would happen if we breached the debt ceiling?
If we get to the X-date and Congress doesn’t raise the debt limit, the government will be unable to pay all its obligations in full and on time. That means payments of things like Social Security and Medicare benefits, food stamps, and military wages would be delayed, depriving millions of Americans of income they were promised and were counting on to make ends meet. Depending on how long the standoff lasts, the economic impact of this could be severe.
The worst-case scenario would be if the government is forced to miss a debt payment to a bondholder, triggering a technical default. A default – the first in modern American history – would undermine the full faith and credit of the United States, roil global markets, and likely cause a recession.
In the event of a breach, Treasury would have to “prioritize” payments to delay a default for as long as possible by ensuring that bondholders got paid before the likes of retirees, veterans, and government workers. Some Republicans in the House believe payment prioritization means the threat of default is overstated, but the fact is prioritization would buy a finite amount of time before the government is forced into default. Credit rating agencies might also consider prioritization a partial default and downgrade the US accordingly.
The Council of Economic Advisors estimates that an extended breach of the debt limit could lead to up to 8.3 million job losses, a 6.1-percentage point hit to US GDP, and a 45% decline in the stock market. Even a short default or the mere threat of one would cause damage to financial markets and the US economy.
While the debt ceiling has never been breached before, the 2011 standoff led to a downgrade of the US credit rating that increased US borrowing costs and added to the debt (exactly what you wouldn’t want to do). Actually defaulting on debt payments voluntarily (as opposed to due to an inability to pay) would be the best way to destroy confidence in the US dollar and jeopardize its global reserve currency status.
What’s actually going to happen this time?
That’s up to McCarthy and Biden. With less than a month to go until the earliest estimates of the X-date, they’re nowhere near reaching an agreement. But at some point they’ll have to.
Coming in the run-up to the 2024 elections, the president has an incentive to act responsibly and get a bipartisan deal done that avoids default. While he’d much prefer a clean increase, he knows McCarthy can’t agree to that without losing his gavel. That means Biden will be amenable to long-term spending caps in exchange for a debt-ceiling increase that lasts until after the election.
But McCarthy has to be willing to agree to that, and the speaker has an incentive not to budge for as long as he can avoid it. In fact, to keep his job – his top priority – with such a narrow and divided Republican majority, McCarthy needs to play hardball until the market and constituent backlash to the risk of default gets so bad that it makes it politically safe for him to pass a debt-ceiling increase (whether short-term or long-term) with Democratic votes. Any compromise before then will open him up to challenges from the right wing of his party and almost surely lose him the speakership. The worse the consequences of no deal get, the more political space he’ll have to compromise.
The problem is that investors and most Americans aren’t too concerned about the risk of default because they’ve seen this movie before and the debt limit has always been raised in the end. That means it’s possible they won’t react forcibly enough to shake Republicans out of their complacency until after the X-date, at which point it may be too late to avoid default.
If I had to bet, I’d wager that as the June X-date draws closer and markets show signs of distress, Biden and McCarthy will agree to a last-minute, short-term extension that kicks the can down the road and buys them more time to negotiate. This could happen multiple times until both sides feel enough pressure from market turmoil and constituent backlash that they’re finally incentivized to agree to a longer-term increase in the debt ceiling. Whether they’ll have to go beyond the X-date to get there is anyone’s guess, but the point is that the crisis needs to be big enough before it can force decisive action to solve it (sound familiar?).
One thing is clear: Sooner or later, the debt limit will be raised. The only question is how much damage gets done along the way.
Are there any alternatives?
Well, yes. The debt ceiling is a crisis of Congress’s own making, and Congress can make it go away with the stroke of a pen. There just need to be enough Republican members willing to do that (news flash: there aren’t).
Folks have proposed a number of wonky workarounds, such as minting a trillion-dollar coin, invoking the 14th Amendment, and issuing premium Treasury bonds. None of these untested (and possibly illegal) gimmicks are as good as bipartisan legislation, and under normal circumstances, no one serious would (or should) remotely consider resorting to them.
The only reason why I’m even mentioning them and the White House refuses to rule them out is that if Congress fails to do its job, the alternative – defaulting on US debt – would be even worse.A mock 10 baht banknote bearing an illustration of a yellow duck instead of the Thai king or his predecessor is pictured in Bangkok on Nov. 25, 2020.
Hard Numbers: Thai royal canard, Biden’s deficit plan, Japan’s gender pay gap, golden Odin, Greek walkout
2: Prepare to read the next sentence twice. A man in Thailand is facing two years in jail for selling calendars of … rubber ducks. The squeaky fowl has long been a symbol of the country’s pro-democracy movement, and since these birds were dressed in royal regalia, authorities say they insulted the monarchy. The country’s defamation laws have been used to convict 200 people since 2020.
2 trillion: With a partisan battle over the debt ceiling looming, President Joe Biden on Thursday is set to unveil a plan to reduce the federal budget deficit by $2 trillion over the next 10 years. Don’t expect Republicans to jump for joy though – the plan is expected to call for tax increases for the wealthy and corporations but won’t satisfy the GOP’s demands for spending cuts.
75: PM Fumio Kishida vowed yesterday to “work even harder” to tackle the massive gender pay gap in Japan, where women earn 75% of what men do for full-time work. The Land of the Rising Sun has ranked abysmally on the World Economic Forum’s gender parity report despite efforts by successive governments to tackle the issue.
1,500: Historians shouldn’t be too Thor about this. Scientists have uncovered the oldest-known reference to the Norse god Odin on a gold disc dating back 1,500 years. The ornamental pendant is part of a trove of gold found in Denmark in 2020, and its inscription, “He’s Odin’s man,” likely refers to an unknown lord or king.
60,000: At least 60,000 Greeks joined anti-government protests Wednesday, a week after a deadly train crash — blamed on years of underinvestment in infrastructure — killed 57 people. Most protesters were in Athens, where they marched to parliament chanting "murderers” in the biggest challenge to date to PM Kyriakos Mitsotakis.