Yellen’s June 1 Deadline May Not be Real

There is a Strategy for Not Defaulting on Federal Loans

Unfortunately, the media and both parties have tended to conflate a shutdown with defaulting. That has never happened with past shutdowns. Not even during the longest ones.

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The US budget is again teetering on running out of money because the Republicans and Democrats are playing a game of chicken on whether to raise the debt ceiling. The debt ceiling caps how much the US can borrow through issuing bonds. Treasury Secretary Janet Yellen has warned that failure to pay US bondholders will cut revenue to foreign countries, corporations worldwide, US IRA accounts, and personal holdings, which “would undoubtedly cause a recession in the US economy.”

That assessment was backed by Beth Ann Bovino, chief US economist at Standard and Poor’s, who predicted that “the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.”

Yellen conditioned this catastrophe from occurring when she said at the beginning of the year, “Once all available measures and cash on hand are fully exhausted, the United States of America would be unable to meet its obligations.” 

But those conditions can be met within a government shutdown. Unfortunately, the media and both parties have tended to conflate a shutdown with defaulting. That has never happened with past shutdowns. Not even during the longest ones of 22 days in 1995 under Pres. Clinton, 17 days in 2013 under Pres. Obama, and 35 days in 2018-19 under Pres. Trump. 

Not defaulting on loans was accomplished since the “cash on hand” was not exhausted. That’s because income and payroll taxes are the federal government’s primary revenue sources. As a result, the Office of Management and Budget (OMB) estimates that net interest payments on the debt will be a little less than $400 billion this fiscal year, or 6.8% of all federal expenses. 

Consequently, without borrowing additional funds to continue operating, the government in the past and currently takes “extraordinary measures” to avoid defaulting on loans.  In short, some government ‘obligations” to continue services and functions are trimmed or halted. The most extreme measure is not paying federal employees to work or furloughing them. Yet, this is precisely what happened during the past three most extended shutdowns and has yet to occur. 

Under the shutdowns listed, Clinton’s shutdown saw 420,000 federal working without pay, and another 380,000 were furloughed without payment; Obama’s shutdown brought about 850,000 workers (40 percent of the federal workforce) being furloughed; the most recent shutdown under Trump again saw about 800,000 furloughed workers, based on data from the U.S. Office of Personnel Management (OPM).  

Laying off federal employees will not hurt the Republicans. These are union members whose organizations reliably endorse Democrats. In addition, reducing the number of federal employees fits into the larger conservative paradigm of shrinking government. Republicans, led by the reactionary House Freedom Caucus, can continue to stall on reaching an agreement with the Biden Administration to raise the debt ceiling as long as they know that the Administration could lay off employees. 

Taking this “extraordinary measure” can buy Republicans time for pressing concessions from Biden. Their risk is triggering an economic depression if the Administration goes nuclear and doesn’t pay interest on loans – something past Democratic and Republican Administrations have refused to do – and wisely so.

However, this strategy has a downside and one that the Biden Administration has yet to draw notice of it. Even if a loan default does not happen, the threat of one and a dramatic slowdown in public services and employment can hit the economy hard. 

The Congressional Budget Office (CBO) estimated that the last shutdown during Trump’s administration delayed $18 billion in federal spending, thus lowering the projected level of real GDP in the first quarter of 2019 by $8 billion. 

Obama’s budget crisis in 2011, initiated by the Republicans threatening not to lift the debt ceiling, resulted in the Dow Jones average falling 2,000 points. According to the nonpartisan Government Accounting Office (GAO), federal borrowing costs increased by $1.3 billion that year.

During the Clinton Administration shutdown, the Centers for Disease Control and Prevention stopped disease surveillance, toxic waste cleanup at 609 sites was halted, and more than 20% of federal contracts, representing $3.7 billion in spending, were affected adversely.

These consequences may not concern the Freedom Caucus members as the MAGA wing of the Republican Party. Former President Donald Trump, MAGA leader, spoke bluntly in a CNN interview. Advising his Republicans in Washington, “If they don’t give you massive cuts,” he said, “you’re going to have to do a default.” 

Trump has a certain charm in exposing his desires, like when he said, “If we have to close down our government, we’re building that wall,” he said at one of his rallies. He got his wish with the longest government shutdown in our history, but not the $5 billion he demanded.

In line with this attitude, the MAGA Republicans, who fought against McCarthy becoming the Speaker, had extracted a commitment not to increase the debt ceiling without significant cuts. As a result, four Republicans, three of them HFC members, voted against McCarthy’s bill, the Limit, Save, Grow Act. It would have increased the debt ceiling by a smaller amount than Biden requested. It also required more stringent work requirements to receive federal benefits. If one more Republican had voted against the Act, it would have failed. However, the more moderate conservative Republicans voted favorably and stayed loyal to McCarthy. 

The close vote demonstrates that the most conservative Republicans will refuse to raise the debt ceiling unless there are significant cuts to Biden’s programs. Given this attitude among the core House MAGA supporters, the only way for the debt ceiling to be raised, even slightly, will depend on some Republicans voting for it. Biden administration’s most relevant pitch to get their votes is to zero in on the fear they and the Democrats share. A prolonged government shutdown or defaulting on its bonds will kill our economic recovery.

If the Republicans reject a modified Biden proposal, their party and candidates will be blamed for a failing economy come election day, not the Democrats. In addition, Biden will have shown that he presented a more acceptable budget, which the Republicans still rejected. The opinion polls will likely replay how Bill Clinton’s popularity increased after the Republicans dragged on the government shutdown during his first term. Clinton then went on to win a second term.

The critical swing voters, who are not entrenched in either party’s camp, will only remember that Biden offered something. And no matter what, they will recognize that Biden tried to avoid damaging the economy while the Republicans were not as concerned. Trump and his MAGA supporters’ hubris in beating Biden and not appearing weak will once again steer the Republican Armada into the shallow shoals of defeat. 

Nick Licata is the author of Becoming A Citizen Activist and Student Power, Democracy and Revolution in the Sixties. He is the founding board chair of Local Progress, a national network of over 1,300 progressive municipal officials.

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