As Congress returns from its August recess, it’s staring at a difficult proposition: do its job. It must pass a new appropriations bill, or a continuing resolution, by September 30. In order for the government to spend, the Treasury has to be able to borrow, so Congress must raise the $19.8 trillion debt ceiling by September 29. Federal insurance programs considered to be uncontroversial, such as flood insurance and children’s health insurance, are also due for reauthorization by September 30. On top of this, there is the Gulf Coast of Texas, battered by Hurricane Harvey, badly in need of federal aid — deadlines be damned.
On Sunday, Treasury Secretary Steven Mnuchin suggested that Congress should clear part of its plate by attaching the debt-ceiling increase to the first Harvey-relief package. “Without raising the debt limit, I am not comfortable that we will get money to Texas this month to rebuild,” Mnuchin said on Fox News.
Set aside the politics for a second: That’s mechanically true. If the debt limit is not raised, government spending will have to come in line with its receipts — a euphemistic way of saying, “There will be drastic cuts in spending.” (That’s because the Treasury must issue debt to finance its spending.) The federal government must spend hundreds of billions of dollars in October on Medicare, military salaries, social security, and interest payments. Come November, it will owe tens of billions of dollars in bond coupon payments. And of course there are countless other programs dependent on federal dollars. To avoid a technical default on its debt, the Treasury would probably prioritize making interest payments — which means these federal programs would have to wait. So would Texas.
However, attaching the debt-ceiling increase to a Harvey bill is a political decision, too. Both are necessary measures, but only raising the debt limit is a politically contentious one. Some staunch fiscal conservatives pick debt-ceiling fights in an effort to rail against irresponsible spending. That happened in 2013, and 2011, and 1995. Naturally, the dire consequences of a default always wind up being more compelling than the principled case for defaulting. Mnuchin — presumably speaking for the Trump administration — is seeking to avoid another such fight.
Even if a financial crisis would not happen immediately after the Treasury surpassed its debt limit, one would certainly loom. Markets are currently pricing in some risk of default, based on the yield curve of different maturity bonds. (The yield of a Treasury bill due to mature in October is higher than the yield of Treasury bills due to mature earlier in September and November. In this case, the higher yield compensates for the risk of default.) If a default happens, American debt would be downgraded, which could lead to a massive sell-off in bonds. It could also cause a sell-off in equities and a retreat into bonds, which happened during the 2011 standoff, if markets don’t take the default risk to be genuine. In any case, the dollar would be adversely affected, and its status as the world’s reserve currency could be imperiled. Defaulting could be catastrophic.
Outside of this context, it would seem strange that $7.9 billion — what the House is proposing to include for the first of many Harvey aid packages — in extra spending is what would convince fiscal hawks to raise the debt ceiling. Of course, it is the context that makes the political play likely to succeed. The images from Harvey are harrowing, and the Federal Emergency Management Agency would use the billions to repair homes, clean up after the flooding, and provide shelters and temporary housing. For a politician who wants to be reelected, this would be a weird battle to pick.
Some still seem willing. On Wednesday, the House will vote on its Harvey relief bill, $7.9 billion in funds, with no language about raising the debt ceiling. Perhaps that’s because some Republicans have opposed disaster-relief legislation that was not sufficiently narrow in the past — a disaster-relief bill that hikes the debt ceiling is certainly not “targeted.” But what seems likelier is that raising the debt ceiling remains unpalatable to fiscal hawks. “As we have stated for months, the debt ceiling should be paired with significant fiscal and structural reforms,” said congressman Mark Walker (R., N.C.) in a recent statement. Congressman Mark Meadows (R., N.C.), chairman of the Freedom Caucus, called the bundle bill a “terrible idea.” That position might bolster their credentials as fiscal conservatives for now, but how will they react if the Senate, as it is expected to do, includes the debt-ceiling language in its own version of Harvey relief?
Raising the debt ceiling and helping out Houston are two of Congress’s top priorities. It has twelve days to take care of all that . . . and then some.