Washington Weekly: Debt Ceiling Pause

U.S. Office of Public Policy, 08 October 2021

This Week:

The Senate approved various Biden administration nominees and passed an increase in the debt ceiling (see below).  The House worked in committee this week and scheduled no votes.

Next Week:

The Senate will be out of session until October 18.  The House is expected to vote on the Senate-passed debt ceiling extension on Tuesday evening. 

The Leads

Debt Ceiling Pause.  A bipartisan deal to raise the debt ceiling for a couple of months has been reached.  The agreement eliminates the near-term potential for default, which Treasury Secretary Janet Yellen indicated could have occurred after October 18 if Congress didn’t raise the debt ceiling by that date.  However, the action is just a punt that gives the Senate more time to negotiate a longer-term debt ceiling solution, which will be difficult to craft given that both parties remain dug in on their positions.  Nonetheless, this development is good short-term news for the markets, which won’t have to worry about a debt ceiling showdown for a couple of months.

The Next Debt Ceiling Crisis.  Under the short-term agreement, the debt ceiling will be increased by a specific dollar amount - $480 billion.  By early December, the Treasury will indicate when the debt ceiling will need to be raised again to avoid a potential default.  The exact date is fluid, but it may be some time in December or in the first quarter of 2022.  That Treasury announcement will kick off the resumption of the contentious partisan debate over raising the debt ceiling.  We expect each side to insist once again on a specific process for raising the debt ceiling.  Democrats want a bipartisan bill, while Republicans want Democrats to use the budget reconciliation process (see below).                 

The Politics of the Issue.  Democrats want to suspend the debt ceiling until December 2022 (after the mid-term elections) without conditions and on a bipartisan basis.  This is generally how the debt ceiling has been raised in the past, including during the Trump years, though there have been instances in the last decade when deficit reduction conditions were included.  Republicans want Democrats to extend the debt ceiling through the large spending and tax bill that they are negotiating amongst themselves and hope to pass on a party line basis soon.  Democrats are using the budget reconciliation process to try to pass this bill, which likely will exceed $2 trillion of spending.  That process allows them to sidestep the 60-vote procedural hurdle that applies to most legislation in the Senate.  Democrats already used this process early this year to pass a $1.9 trillion COVID relief bill.  With Democrats pursuing their own spending plans that eventually will increase the debt, Republicans have argued that it is the Democrats’ responsibility to increase the debt ceiling.  Raising the debt ceiling through the reconciliation process also requires Democrats to identify a specific level of increase (instead of suspending the debt ceiling to a certain date), something that Democrats fear will give ammunition to their political opponents.  In sum, neither side wants to be blamed for the burgeoning national debt, fearing voter wrath in the next election.                       

Other Issues

Voting Rights in the Senate.  With a break in the Senate schedule from the debt ceiling crisis, a bill to make comprehensive reforms to voting laws will be debated and voted on soon.  The House passed a more comprehensive voting bill earlier this year, but the Senate bill has been scaled back from that version.  The Senate bill would reverse election process restrictions and changes enacted into law this year by various states.  While popular among Democrats, the Senate bill will not get past the Senate’s 60-vote procedural hurdle.  Virtually all Republicans oppose the various federal standards in the bill and prefer for the states to set their own election laws.  This basic disagreement will prevent any voting rights bill from passing the Senate this or next year.  The real action will continue to be the battles over state law changes and the legal challenges to those efforts.       

US-China.  We have been expecting the Biden administration to articulate clearly its strategic policy direction towards China for some time.  Although US actions this week fell short of that, there was some progress.  Specifically, US Trade Representative Katherine Tai publicly commented on US trade challenges with China, while National Security Advisor Jake Sullivan held a series of meetings with his Chinese counterpart to exchange views on various national security issues.  The bilateral communication appeared to be constructive, even if there were no breakthroughs from a policy perspective.  At this point, the US mostly seems to be focusing on re-establishing lines of open communication with China, most notably through a planned virtual meeting between Presidents Biden and Xi later this month.  President Biden sought to reinforce the new lines of communication with China by mentioning that he and the Chinese leader agreed to the “Taiwan agreement” in conversations earlier this year.  This left some national security watchers scratching their heads since the US and China have different positions on whether Taiwan is a sovereign nation.  China’s policy is that Taiwan is a part of China, while the US has no official position on Taiwan’s sovereignty.

Facebook Fiasco.  At a high-profile Senate hearing this week, a former Facebook employee and whistleblower made allegations that the company ignored the potential harmful impact of its apps and products on younger people and on broader society.  This isn’t the first time the company has faced criticism from Congress.  The main impact of all of this scrutiny has been to pressure Facebook to alter some controversial business practices.  At this particular hearing, there were calls for Facebook to put in more robust guardrails around young people having social media accounts, the platform content on those accounts and the ads they receive.  Facebook and other tech companies also are the targets of various anti-trust inquires by the executive branch.  While Congress has been working on potential changes to both anti-trust and privacy laws, it likely will continue to be challenging to find a workable compromise in either of these areas.  Regardless, Facebook has become a familiar target for Congress, and it won’t be long before company executives are back in the hot seat before a congressional committee.   \

Digital Asset Questions.  We continue to receive questions about the regulatory treatment of different types of digital assets that have proliferated in recent years.  Depending on their structure, digital assets, which are underpinned by digital ledger technology, can be securities, currencies, or commodities.  As such, regulatory jurisdiction is split (often unclearly) between different federal and state authorities.  Crypto assets are backed by cryptocurrencies, virtual “currencies” (there are questions whether they actually meet the traditional definition of what a currency is) held on decentralized crypto networks.  SEC Chair Gary Gensler, who appeared this week at a House Financial Services Committee, has expressed concerns about the lack of investor protection on platforms where crypto assets are traded.  While many in the industry (and some in Congress) would like the SEC to lay out a clear and delimited regulatory framework, he has resisted these calls, instead asserting that existing law is clear on what a security is and that crypto exchanges have an obligation to register with the SEC.  Stablecoins are digital assets issued by private entities but backed by other assets, including fiat currencies like the dollar.  Particularly given the relationship with fiat currencies, regulators in the US and around the world are considering what measures may be needed to address the potential financial stability and other risks of stablecoins.  Separately, central banks, including the Federal Reserve, are evaluating the development of their own central bank digital currencies.  While legislation ultimately may be needed to address potential regulatory gaps on digital assets and/or provide the Fed with the authority to move ahead with some form of a digital dollar, it will be a while before lawmakers better understand these complex issues, never mind forge consensus on appropriate policy solutions. 

The Last Word

Presidential Approval Ratings.  All of the attention on national policy issues has certainly had an effect on President Biden’s standing with voters.  For the first six months of his presidency, he had a pretty steady average approval rating of 54% (40% disapproval) among national polls.  Particularly with the messy US withdrawal from Afghanistan, his standing has steadily deteriorated since August.  The re-emergence of the pandemic, rising inflation, southwest border immigration problems and mixed economic signals also have weighed down his poll numbers.  His average approval rating in national polls over the last week is 43%, while his average disapproval rating has approached 50%.  This includes a national poll published yesterday that has the President’s approval rating dipping below 40%.  This is a big political development because it further emboldens Republicans to oppose the Biden policy agenda and even could erode support for the President’s initiatives among Democrats.  These developments put Democrats on the defensive and will harm their chances of winning next year’s mid-term elections if this trend continues.  Polls can change quickly depending on events (the status of the economy and the pandemic, in particular), and the President has time to rebound.  However, if the approval ratings don’t exceed 50% by November of next year, it is our view that Democrats will lose their majority in the House or Senate (or in both) in next year’s mid-term elections.