Debt Ceiling Baby Steps

Published April 17th, 2023 by JMSCapitalGroup

The US is expected to hit its debt ceiling sometime this summer, and so far the Biden administration and the Republican House are nowhere near an agreement to raise it. The White House wants a clean debt ceiling hike without any strings attached, while Republicans insist on spending cuts as part of any settlement. Biden views spending discussions as appropriate for budget negotiations; the federal budget currently runs through the end of September. Whatever context provides the backdrop for spending negotiations, Republicans need to put together a proposal that can pass the House.

Speaker Kevin McCarthy is attempting to cobble together an agreement that can pass via the narrow Republican House majority. Not surprisingly, it consists of large spending reductions that are likely to be unacceptable to Democrats. Moreover, Josh Barro argues that the proposal is also unlikely to gain enough Republican support to pass, as some right-wing members may insist on more draconian cuts, while moderates may require a more modest bill.

Still, Barro believes that McCarthy’s efforts represent a first step along the path of normal debt ceiling politics, in which the debt ceiling has historically been raised, often after some brinkmanship, with some modest bipartisan horse trading attached. Barro suggests that the most relevant historical analogy is the debt ceiling standoff in the 1990s between President Clinton and Republicans, in which small stopgap bills were repeatedly passed to avert a debt ceiling breach, until a broader agreement was reached months later, on a larger bill, with only minor budgetary concessions.

Barro assesses the possibility of a debt ceiling agreement being folded into a bigger bill that includes, say, permitting reform, which is a priority for both parties. He argues that such a framework is plausible, but probably not until both sides have fought over spending cuts and the budget for several months.

Barro’s arguments are reasonable, though it’s unclear that any bill can garnish 218 Republican votes in the House, or alternatively that Speaker McCarthy will be willing to introduce a bill that would pass via significant Democratic support. But even if Barro is correct, and normal politics prevails, we’re likely in for a summer of headaches from debt ceiling brinkmanship.


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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.

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