As of Friday morning, the most likely scenario for resolution to the current budget debate in Washington appears to be this: A government shutdown beginning next Tuesday, a funding bill including some concessions that (eventually) ends the shutdown, and then a clean vote to increase the debt ceiling. Check back in a few hours, though, because on this issue, assuming you can predict what will happen is the domain of fools.
At issue are two budget-related bills that most people agree need to be passed. The first is a bill funding the government, a resolution continuing existing budget allocations (called, appropriately, a continuing resolution or CR). Without a new funding bill, the government will shutdown on October 1st.
The second is an increase to the debt limit, which is the amount the government is allowed to borrow to pay accrued bills. That needs to happen by October 17 if it is to be effective. (If you want more detail, see this article.) One week ago, the House passed a funding resolution that would keep government running until the middle of December — minus any money for Obamacare-related programs. The Senate is expected to strip out the Obamacare exemption and pass the bill over the weekend, at which point it returns to the House. And House Republican leadership appears to still be figuring out what it's going to do.
By passing the bill last Friday including the Obamacare qualification, Speaker John Boehner signalled a willingness to use the two measures as negotiating chits for a broader set of Republican priorities, ones that they've had less success advancing in the face of a Democratic president and Senate. Politico reports that Boehner tried to get his caucus to focus on the debt ceiling as a point of leverage instead of the budget resolution. On Thursday, we wrote about the Republicans' ambitious debt ceiling proposal, which was so packed with non-starters for Democrats that it seems unlikely the Republican leadership meant it seriously. The GOP caucus was apparently similarly skeptical.
The idea was to put something in the package that everyone liked, and most of these measures had already been approved by the House, so Boehner and his top lieutenants were confident they could line up the votes for the measure quickly. … But Republicans instead ended up holding back their support on lifting the debt limit, curious what a final government-funding bill would look like.
The idea being that since the budget fight has arrived first, the conservative faction wants to maintain the ability to fight for its priorities in both negotiations. Politico: "[if] unified Democratic opposition forces Republicans to swallow a government funding bill they deem less-than-satisfactory, House Republicans will certainly counter by increasing their demands for reform when it comes to the debt-ceiling legislation."
It's important to note that the stakes in the two fights are not equivalent. We've had government shutdowns before, and the effects are largely temporary, falling mostly on those who use government services and government employees. Politico notes the cost of the shutdowns in 1995 and 1996: "more than $1 billion, and clipped economic growth by several tenths of a percentage points for two quarters. Most estimates are that a comparable shutdown today would cost at least twice as much." But that pales in comparison to the effects of not increasing the debt ceiling — which means not paying bills, which means risking the government's faith with creditors. The Financial Times, quoting a financial firm, put it bluntly: "Let us be perfectly clear: crossing the debt ceiling would be catastrophic."
The Treasury’s systems do not clearly mark what scheduled payments are for what reasons, so it is impractical to try to prioritize payments. And clearing systems like Fedwire do not allow defaulted securities to flow, so the system would seize. In order for the clearing systems to work, the Treasury would need to notify the market of a default almost a day before the default happened (to give everyone time to modify payments), and that is not going to happen because the Treasury will not want to declare default while Congress still has time to pass a bill.
Emphasis added. In short, the machinery of the financial system would shut down, with no notice.
Which is why some people are advocating for the government to shutdown. Business Insider editorialized to that effect, arguing that a shutdown allows Congressional Republicans to, in essence, vent some steam as well as to force a quicker resolution of any negotiations over what's included in an eventual bill. It's risky politically — polls regularly show that Republicans would bear more blame for a shutdown. But it's better than being blaming for a seizure of the economy. Which is why Goldman Sachs also would prefer a shutdown: "The upshot is that while a shutdown would be unnecessarily disruptive, it might actually ease passage of a debt limit increase."
What a compromise resolving the budget debate looks like isn't clear, but as we noted on Thursday, one Obamacare-related amendment seems to be gaining traction: forcing Congress to transition staff and members to insurance coverage on an Obamacare exchange. (In other words, moving from the health insurance system operated by the government to one of the publicly-available marketplaces.) It's mostly symbolic and largely ironic — as The Atlantic's Garance Franke-Ruta notes, the point of the exchanges is that they offer policies for those without employer coverage — but it could offer House Republicans a response to vocal constituents on a hotly contested issue.
This is the path we're on. Time is running out for any sort of resolution that doesn't involve a shutdown, given that both chambers of Congress would need to vote on and approve a measure before the Tuesday cut-off. It's what led to the contentious exchange between Sens. Bob Corker of Tennessee and Ted Cruz of Texas — both Republicans — on the Senate floor on Thursday. Corker was frustrated that Cruz's 21-hour filibuster wasted a day during which the Senate could have responded to the House offer on the funding resolution — mostly, in Corker's words, to bump the vote to Friday because Cruz wants "everybody to be able to watch."
But the larger reason that a shutdown is likely is simply because it's the easiest political path for House Republicans to walk at this point without causing catastrophic damage to the economy. The Huffington Post reported a telling exchange.
Asked bluntly if using the limit for leverage risked blowing up the economy, Rep. Blake Farenthold (R-Texas) paused for a second and then offered a drawn-out "Yes" that suggested the answer was obvious.
"That's why we're paid the big bucks -- to figure these problems out," Farenthold added.