Monday, September 11, 2017

A Note on the Latest Debt Limit Legislation

Many of the news articles and commentary on the legislative deal that President Trump made with House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer implies that the new deadline for increasing the debt limit is in December of this year. What the legislation that was enacted actually does, though, is suspend the debt limit until December 9, when the new debt limit will be set at the amount of public debt subject to limit on that date. The Treasury is precluded from borrowing to increase its cash holdings above “normal operating balances” in anticipation of this deadline.
Note though that Treasury has been able to meet its obligations even though the debt limit has been frozen since March 15, the end of the last suspension period. It has been able to free up borrowing room while staying in compliance with the debt limit by the use of “extraordinary measures.” The Treasury described these measures on March 16.
These measures will now be reversed and will be able to be reactivated on December 10 if the Congress has not increased the debt limit. There are a couple of things worth noting about this.
First, this is a relatively new way for Congress to deal with the debt limit. Prior to using the suspension measure, Congress would increase the debt limit by an amount which it estimated would give Treasury the desired time before it needed to come back to Congress for another increase. The suspension method makes it unnecessary to do any estimation of borrowing needs.
Second, the date for which the debt limit needs to be increased to avoid default does not coincide with the date for which the continuing resolution provides funds for government spending. The date for which the legal authority for the government to spend money ends is December 8. If Congress does nothing, there will be a government shutdown in December, but the Treasury will be able to avoid default for some time after that. (An article in Business Insider speculates that Treasury might be able to manage without an increase in the debt limit until next summer.)
This second point has been missed by much of the political commentary on the deal. Contrary to much of the political commentary, the debt limit may not be a political tool for the Democrats at the end of this year, but it may provide them leverage at some point next year.
Of course, the reason the debt limit provides the Democrats with political leverage is that the Republicans do not have the votes, even in the House where there is no filibuster, to pass an increase in or suspension of the debt limit on their own. They need Democratic votes, because there are Freedom Caucus members who will not vote for a debt limit measure without it containing politically unacceptable provisions. In other words, the political tactics of the Freedom Caucus give Congressional Democrats more legislative power than they otherwise would have.