Amid Debt Ceiling Standoff, Congress Aims to Avert First-Ever Debt Default

Congressional Democrats scramble to suspend or lift the debt ceiling as the government risks defaulting on its debt by mid-October. Source: "Washington DC - Capitol Hill: United States Capitol" by wallyg is licensed under CC BY-NC-ND 2.0

Lawmakers on Capitol Hill are scrambling to pass legislation as previous efforts to suspend the debt ceiling have repeatedly failed, leaving the nation on the brink of fiscal calamity. 

While also working to avoid a government shutdown, lawmakers are separately tasked with preventing a catastrophic first-ever default on U.S. debt next month. If lawmakers do not suspend or lift the debt ceiling — the maximum amount the nation is allowed to borrow to pay its debts — the federal government will be unable to pay its bills, resulting in an unprecedented default that would have myriad economic implications.

The House voted on September 30 to advance a debt-ceiling bill that would suspend the debt limit until December 2022 and avert the looming crisis, though the bill is likely doomed in the 50-50 Senate due to mounting Republican opposition. House Speaker Nancy Pelosi (D-CA) said in a note to congressional Democrats that the chamber will “move forward to honor its responsibility to protect the American economy and American families from the catastrophe of a default by passing legislation to suspend the debt limit.”

While it was initially expected that Senate Democrats may use the reconciliation process to unilaterally act on the debt ceiling, Senate Majority Leader Chuck Schumer (D-NY) seems to have ruled out the option, stating on September 28 that “going through reconciliation is risky to the country and is a non-starter.” 

Recent estimates from the Treasury Department indicate that the U.S. will run out of cash and “extraordinary measures”, or cash-conservation steps aimed at delaying the inevitable hitting of the federal borrowing limit, by October 18 unless Congress acts on the debt ceiling. If Congress fails to raise the debt ceiling, the nation could “plunge into an immediate recession”, according to recent reporting from the Washington Post. 

Treasury Secretary Janet Yellen detailed the potential impacts of a debt default while calling on Congress to act quickly in a recent piece for the Wall Street Journal.

“The U.S. has never defaulted. Not once. Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost,” wrote Secretary Yellen.

In the opinion piece, Yellen indicated that a debt default would likely impact Social Security, Medicare, military salaries, and other federal obligations. Without an increase in the debt ceiling, the U.S. could also fail to pay bondholders of federal debt — an action that would severely undermine faith in American credit and would likely drive up federal borrowing costs.

While both Democrats and Republicans remain insistent that the debt ceiling crisis will be averted, both parties remain sharply divided over how to proceed. On September 28, Senate Republicans blocked Democrats’ spending bill needed to both fund the government past the end of the fiscal year on September 30 and avoid the debt default. The procedural vote in the Senate, which required 60 votes to proceed, fell on party lines with all Republicans voting against the bill. Their reasoning for opposing the measure largely indicates that the impending debt crisis has become somewhat of a high-stakes political game, with the full faith and credit of the government at risk.

“We will not provide Republican votes for raising the debt limit,” said Senate Minority Leader Mitch McConnell (R-KY). He added, “Bipartisanship is not a light switch — a light switch that Democrats get to flip on when they need to borrow money and switch off when they want to spend money.”