Chaos as usual. This is the new normal in the US Congress and the fractured Republican Party in particular.
What’s different is that Americans are starting to pay the price.
When Republicans fired their House speaker, Kevin McCarthy, on Oct. 3, they set in motion what may turn out to be the most unsettling episode yet in two decades of US political dysfunction. The prior low-water mark was the near default on US debt in 2011, which led S&P Global Ratings to downgrade the US credit rating for the first time in history. The S&P 500 stock index fell by 7% in a day and took six months to recover.
Since then, there have been three federal government shutdowns, broadly caused by Republicans refusing to fund the government unless they get spending cuts or other concessions not popular enough to pass Congress in normal legislation. This has become a repeat GOP bullying tactic even though the public hates it and it may cost the party votes.
Earlier this year, there was another Republican-led showdown over whether the United States should raise the federal borrowing limit and continue to pay interest on the debt it owes. Congress made a last-minute deal in June, averting self-imposed disaster. But the pointless and unnecessary threat of default led Fitch to join S&P in downgrading the US credit rating.
Republicans always have a fresh chaos plan in the works, and opportunity arose when it came time to pass the bills funding the government for fiscal year 2024, which began Oct. 1. A handful of far-right conservatives want more spending cuts than Congress agreed to in June, and they couldn’t get them through regular legislation, because the votes weren’t there. So they threatened to shut down the government once again, unless they got their way.
McCarthy overruled them, aligning with Democrats to pass funding legislation to keep the government running through Nov. 17. That was the last straw for the far-right obstructionists, and they used arcane rules to remove their own leader as speaker of the House, with no plan for who should replace him.
The House can’t function without a speaker to manage its agenda, schedule votes, and establish operating rules. The process is underway to determine who will succeed McCarthy. But the outlook is for more mayhem, and further damage to the nation’s fiscal outlook, no matter who gets the job.
“We’re hurtling toward the next government shutdown,” research firm Capital Alpha Partners wrote in an Oct. 4 analysis. “Our default presumption is that the government will shut down on November 17. We would not be surprised to see all three ratings agencies downgrade US debt soon after a shutdown occurs, if not sooner.”
If if happens, the nation deserves it. The one agency that still rates the United States a AAA credit risk is Moody’s, which warned in September it was considering a downgrade like S&P and Fitch. Nobody worries about the actual creditworthiness of the United States, which, despite a $33 trillion national debt, still has the world’s most vibrant economy and vast revenue-raising potential, if needed.
The problems with America are entirely political. “A government shutdown would demonstrate the significant constraints that intensifying political polarization continue to put on US fiscal policymaking during a period of declining fiscal strength, driven by persistent fiscal deficits and deteriorating debt affordability,” Moody’s wrote on Sept. 25. “Fiscal policymaking is less robust in the US than in many AAA-rated peers.”
Top-rated Germany and Canada, for instance, routinely pass coherent federal budgets with long-term planning. The United States, by contrast, has been funding the government for years with piecemeal “continuing resolutions” that include no strategy for dealing with mounting debt. The United States also has that outdated law that limits federal borrowing, which leads to repeat battles in which Republicans threaten a federal default. Yet Congress shows no serious interest in getting rid of that law.
For most Americans, these Washington follies are little more than a sideshow. But they’re moving up the bill and may be starting to have a direct impact on Americans’ wallets. Interest rates have begun to jump by levels not fully explained by the Federal Reserve’s inflation-busting efforts, and some economists think markets are beginning to price in Washington’s worsening fiscal outlook and the dimming allure of US Treasury securities as the world’s go-to safe-haven assets.
Torsten Sl?k, chief economist for Apollo Global Management, recently posed seven possible explanations for the unusual rise in long-term rates. One was the sheer size of the annual US budget deficit, which is 6% of GDP and rising. That requires more debt issuance by the Treasury Dept. and the possibility of too much supply, which would force bond prices down and rates up. Another reason: the Fitch downgrade in August, which makes US debt less appealing relative to higher-rated bonds.
Some debt hawks have long predicted that “bond vigilantes” would eventually punish the United States for its profligacy, by demanding higher rates as a price for tolerating the fiscal shenanigans in Washington. For a long time, it didn’t happen, even as the total amount of US debt doubled from 2007 to 2014. It has now doubled again, with a huge run-up in 2020 and 2021, when Congress passed trillions of dollars of COVID relief. Former Fed board member Kevin Warsh wrote in the Wall Street Journal on Oct. 5 that the United States is “courting trouble” by blithely assuming global investors don’t care about its shabby financial management.
Democrats aren’t blameless in this infuriating saga. They green-light huge amounts of spending with little regard for deficits. Republicans cut taxes while peddling the fiction that this will somehow push federal revenues higher, not lower. And neither party has the guts to tell voters that fixing the problem will require an unpleasant mix of tax hikes and benefit cuts likely to hit most Americans. The nation’s debt problem is fixable, but probably not with the current set of jokers in charge.
