Debt Ceilings and the Infrastructure & Reconciliation Bills: a Guide for the Perplexed
Yesterday's deal didn't actually change anything. Let's dive into what's really going on, in an outsider-friendly way.
I recently drafted a short explainer for a colleague who wanted to get their head around what’s happening with two major pieces of US legislation: the so-called infrastructure and reconciliation bills.
I realized in doing so that I couldn’t really answer their question without getting into the larger topic of the current fight over the US debt ceiling. Taken together, there’s an elaborate game of chicken happening—one with enormous consequences, not just for Americans, but for quite literally everyone on earth. (No exaggeration!)
What follows is an updated and expanded version of that piece, geared for everyday readers. Hopefully it brings some clarity.
Brief Housekeeping
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The long-promised Thai cave story is still coming! Part 1 will be a reply to National Geographic’s new documentary The Rescue. It’s gonna be 🌶️.
In light of recent output, I’m going to manually extend paid subs by two months. While this project is still super important to me and my team, some stories are just incredibly intensive, and going full-time is still a ways off.
Ok, now on with the show.
US Debt: a Primer
(It’s a bit useless to explain the current political fight without first establishing some context on US debt in general. While true econ nerds can skip this, I’d encourage most readers to at least sample it first. Some bits may be new.)
While commentators often (rightly) point out that the national debt isn’t quite like household debt, they rarely do much of a job of explaining what it is like.
Here’s the gist:
Imagine a massive corporation called American Success Inc.1, or ASI.
Imagine that ASI’s chief role is making it easy for Americans to create economic value2—e.g., by building roads and bridges, negotiating trade deals, funding new technologies, keeping the peace, and helping workers to gain skills and not fall out of the workforce, etc.
In exchange for these services, ASI takes say a 25% annual cut of all the money generated by the US orgs that benefit from said services.
While this sounds like a lot, it wouldn’t be nearly enough to pay ASI’s bills (as they’re always investing in things today where the payoff comes years later). So ASI would need to draw from a line of credit to cover shortfalls.
ASI’s creditors would be pretty friendly. They wouldn’t ever really want ASI to retire their line of credit by paying it off.3 They’d just want ASI to make regular interest payments with essentially zero risk of ever not paying.4
Ok, now here’s the essential-but-also-not-super-intuitive part:
ASI’s overall amount of borrowing doesn’t really matter in itself, so long as it’s a bit less than the expected returns from the growth that ASI’s investments unlock.
Put another way: ASI’s debtload doesn’t matter in absolute terms. Looking at the amount in isolation just isn’t a useful way of understanding what’s happening. What does matter is what ASI is spending that money on, and how likely that spending is to help US orgs make more money. So long as those constituent revenues grow, ASI’s own revenues will grow too (from their 25% cut), giving them the cash they need to stay ahead of their growing interest payments.
While this cycle could happily go on forever, there are three rules to this game designed to keep ASI (mostly) honest:
While ASI can cheat a bit by printing money to pay some bills5, other countries (who do the same) may punish ASI for printing too aggressively.6 Their chief retaliation would be marking down the value of US dollars7, making things priced in other currencies (like imports) more expensive.
If ASI prints too much money, this will also reduce the value of money within the US. When the amount of money in an economy outpaces the sum growth of its companies (who can each only offer so many goods and services), those goods and services will get more scarce and thus more expensive. These rising costs, known as inflation, will force ASI to cool off on the printing.
If ASI fails at its job of helping US companies grow (thus reducing ASI’s future revenues from their cut), ASI’s creditors will start asking for higher interest rates to offset the increased risk of eventual default.8 While ASI can print money to pay these higher rates, they can only do so within the two constraints above. (Not making these interest payments on time is never a real option, as it would have catastrophic impacts on future rates, setting off a death spiral. The only countries that default are those unable to print new money effectively.9)
Putting this all together, we have some obvious takeaways:
The right way to judge ASI’s spending is on future impact. They could take on staggering debt in entirely responsible ways if they were spending it on investments likely to help American workers and companies. But they could also spend it on very expensive things that don’t really help (like say 20-year wars that do little to secure future peace or better trade).
One useful gauge here is interest rates. If ASI is spending on the wrong things (i.e., things not likely to boost future growth and revenues), then ASI’s creditors should be demanding more compensation for the increased risk. If they’re happy with low rates, that’s a good (if inconclusive10) sign.
While money-printing is fine, it has to be done in careful amounts. If the value of American dollars starts dropping (whether vs. other currencies or in terms of what you can buy for a dollar in the US), that’s a sign to slow down.
When people run for control of ASI, each has an incentive to say that other candidates / past leaders / current leaders are all scoundrels who’ve been irresponsible at managing the debt. But they’ll rarely have very good ideas there of their own, as the overlap between “would be an effective manager for ASI” and “can convince people to let them run ASI” is historically somewhere between thin and non-existent.11
Anyway, this all brings us to this week.
Debt Ceilings
First: what exactly is a debt ceiling?
Well, ASI (aka, the entire US government in its many parts) works on the principle of divided powers:
Congress passes bills authorizing such and such programs to exist, then informs the US Treasury (part of the Executive) “hey, when the invoices for these programs come due, please pay them accordingly”.
The Treasury handles most accounts payable from a single massive account, which most tax dollars flow into. When there’s no longer enough money in it for current/upcoming invoices, the Treasury just sells new bonds to outside investors for fresh cash. But the total value of all outstanding bonds can only reach a certain cap—i.e., the debt ceiling.
This may seem a bit odd on the surface: if Congress is authorizing the underlying programs causing the spending, why would the actual spending need to be authorized separately?
There are two main answers, weight them how you will:
Given that the Treasury/Executive always spends more than Congress intended, having a periodic check-in on total debt allows Congress to re-establish their constitutional power of the purse. [EDIT: I got a reader note about this being overstated, and I think they’re broadly right. See new footnote.12]
It’s also a way for new Congresses to balance power with their predecessors. While we fully expect for every new debt ceiling to eventually be reached13, it’s useful now and again to revisit old spending commitments to ask whether they’ve been producing the intended rewards.
But of course lmao no this is not what actually happens when the ceilings are reached. They’re not times of sober and careful reflection, or courageous adjustments. Each instance just becomes an occasion for grandstanding, where each party publicly accuses the other of bad management as they privately work out a pragmatic deal that roughly corresponds to how much leverage the party with less power has.14
One thing that has never and will never happen though: the US will never allow debt ceiling fights to keep the Treasury from paying its bills.15 Any insinuation otherwise is pure political rhetoric, meant to instill anger and fear where what’s needed is scrutiny. We don’t need to worry about whether the ceiling will go up. That will happen exactly 100% of the time. What we do need to worry about is what the majority is sacrificing for the votes they need to raise it.
Two Bills, Two Holdouts
President Biden and his Democratic counterparts in Congress have their vision of what the US should be spending its money on, based on their own philosophies of what’s most important to long-term economic growth16. And their top legislative priorities are currently split between a pair of pending bills:
The infrastructure bill. The original proposal was $2.3 trillion in estimated spending, which was then cut down to roughly $1 trillion. Why? Senate Republicans didn’t want the rest, and Senate Democrats only have 50 votes (plus the tiebreaker by virtue of holding the White House), whereas passing most legislation requires 60.17 Ergo, in the current Congress, every successful Senate bill can only contain what 10 or more Republicans will support. And naturally they disagree a lot with Democrats on spending priorities.
The reconciliation bill. There’s one exception to this rule: a once-a-year opportunity for the ruling party to pass whatever they want with just 50 votes (again plus the tiebreaker). So theoretically the Democrats were free to take everything cut from the infrastructure bill and just jam it in with all their other top priorities here.18 And they sort of have. Or at least they’re trying to.
The problem? Passing the latter bill in the Senate still requires getting all 50 votes, and there are two Democrats holding out: Joe Manchin (West Virginia) and Kyrsten Sinema (Arizona).
Why are they standing in the way of the full Biden Agenda? Well at a high level they want the reconciliation bill to be much smaller and for it to invoke far less new taxation. Why though? There are a few things going on:
Their voters are a bit more to the right than those of most other Democratic Senators.
There’s likely some donor pressure too, along the same lines.
They have their own personal convictions about what the US should be investing in, which also seems to run to the right of their colleagues.
While interest rates on the US debts are still quite low (implying high creditor confidence), the amount of new money printed since COVID has been historic. Inflation is rising, and there are growing concerns about how many dollars are already flying about already.
This all in mind, here’s what their hesitance means practically:
While the Senate has already passed the pared-down infrastructure bill, Democrats in the House won’t pass it until Manchin and Sinema sign off on the reconciliation bill. Their sense is that the pair and their constituents / donors want what’s in the infrastructure bill, so giving it to them without anything in exchange would be unwise.
This pressure works both ways though. While Manchin and Sinema don’t want to walk away empty-handed, the other Democrats don’t want to keep going home without a trophy either. Voters are not known for being ultra understanding of all these nuances, and tend to operate on a “what have you done for me lately” model.
But while this one game of chicken is going on, a second one is also afoot: the debt ceiling is up for renewal. And this timing is really good for McConnell and the Senate Republicans. Where they’d normally be forced into an 11th-hour compromise to raise it (after the usual grandstanding), they can now just say “hey the Democrats are going it alone on a reconciliation bill anyway: they can just raise the debt ceiling as part of it”. And that’s true so far as it goes. The Democrats can just add the debt ceiling increase to said bill. But that means an even louder ticking clock in their negotiations, as they now need to pass it before the Treasury runs out of money. And a ticking clock is good for those with the most leverage, which is to say not Biden.
So what happened last night was just a temporary extension. It was clear to McConnell and the other Republicans that Biden and the Democrats weren’t going to break their deadlock in time, so they offered Democrats another six weeks or so. And why not: they get to look a bit generous while leaving the core situation unchanged.19 That’s a great deal for them politically.
The upshot is that Biden now has about a month to get Manchin and Sinema to agree to the largest and most progressive reconciliation bill that he can convince them of. But every faction involved will be crying foul at every turn, loudly complaining about all the pressure tactics and how this gamesmanship is bad for America. And while these claims won’t be equally true, they’ll surely be accepted by each base as true, which will make it impossible to pin responsibility in any unified sense.
How this shakes out will ultimately come down to how committed Manchin and Sinema are to their stances. Biden doesn’t have much leverage, and will almost certainly be forced to blink first. The best he can do is appeal to them in terms of legacy and climate urgency. Maybe that will work, maybe it won’t. We’ll soon see.
Why This Matters
Here’s the crux of what’s at stake with a severely watered-down reconciliation bill: green investments.
We have until 2030 to get global emissions down by half. Half.
Our odds of getting there in time are much better if the most influential economy on the planet throws their utmost at the problem—by building out EV charging stations, growing clean energy subsidies, and significantly bringing down the costs of new technologies like carbon removal.
But West Virginia is a coal state, and Manchin has obvious incentives to limit what he perceives to be economic harm to a major part of his base.20
So how can Biden appease Manchin (or a Republican) to get a 50th vote on a bill that would include the sort of climate investments that we really need? He doesn’t have the means directly. But we do. It’s not too late to call, to email, and/or to pressure companies in West Virginia and Arizona to be emphatic with their local reps: while lots of normal gamesmanship is just a part of politics, and while maybe overall spending does need to cool down, this reconciliation bill needs to massively scale up investments in carbon reduction and removal specifically. It’s not a partisan issue. It’s an existential issue that’s going to affect all of us regardless of location or ideology.
The best time to get serious about these investments was decades ago. The second-best time really is now.
The Moral
As the point of this newsletter is pointing out where journalism is failing and how it can improve, here goes: it failed by not producing many (any?) explainers that are particularly useful at explaining all this, and it can do better by stopping with all the hand-wringing pieces about “without a debt ceiling increase the US could go over a cliff!” when that’s obviously never going to happen and when focusing on it obscures what actually matters.
But journalism will basically only get better to the degree that we vote with our clicks and our subscriptions.
The second-best time to do that is also now.
If you found this post helpful, paid subscriptions are $5/mo or $50/yr. If you believe in the mission and you can comfortably afford it, we’d love your money. But even sharing this writeup and subscribing to the free version helps too!
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Speaking as a Canadian, one under-acknowledged thing is the wild degree to which the US’s self-interested investments have been good for the rest of the world. Take their navy. Securing global shipping lanes has been great for American commerce, and is a strong ROI for them. But it’s also been great for every other country that uses those lanes, who are paying far less towards those costs.
Sure, sure, yes, there are other things that the US government needs to care about. But all are effectively reducible to making the US more attractive to top talent and then helping them to create the most economic value possible. Every justice cause—be that LGBTQ+ rights, racial equality, disability support, etc.—can be understood in that framework. This is something conservatives used to think and care about: the idea that making society more just is part of how a society greases the wheels of capitalism for the long-term. (The exception here being when your top talent wants a horribly unjust world. But the 20th century happened and western culture has more or less gotten past this. If you look around the US at the top scientists, the top engineers, the top entrepreneurs, etc. the vast majority of professionals want to live in a country that’s peaceful and just according to quite progressive definitions. And while programs like social security don’t directly spur growth, they attract today’s best workers, which makes it easier for today’s best entrepreneurs to start the best companies, and so on.)
If you buy a single bond from the US Treasury, you obviously want it paid off in full when it matures! But they’re going to pay you off by issuing more debt to other creditors, so at a system level it’s more or less a perpetual line of credit. (While interest rates are attached to each unique set of bonds as opposed to a single fixed rate, we can aggregate and plot these bonds as if they had a single rate that updates every year.)
This is analogous to how we approach savings accounts. We don’t collectively want the banks to pay back what are effectively loans we’ve made to them! We just want regular interest on those savings, with the individual right to get our money back on demand.
There are two separate things that are colloquially referred to as “printing money”. The first is when a country’s treasury issues new bonds to willing buyers, increasing their national debt. The second is when a country’s central bank adjusts the digital ledger of how much total money exists in their currency, allowing them to (among other things) “buy” outstanding government bonds using this newly-invented money, which can in effect erase part of the national debt. The first of these actions is mostly fine. The second went from being heavily frowned upon to an economic inevitability. It’s complicated.
Lots of commentators fixate on the US’s debt-to-GDP ratio (i.e., debt compared to taxable economic growth). While there’s a way in which this is a super useful measure, it obscures two critical things: (1) it doesn’t tell you what impact current debt/spending will have on future GDP, (2) if every rich/powerful country is raising their own debt-to-GDP ratios, any one rich/powerful county is unlikely to get penalized by the rest so long as their ratio is roughly in line. (Though global inflation keeps a limit on how much the world can get away with this collectively. If they all print too much money, there will be inflation everywhere—too much cash chasing too few goods. Though the tricky thing is that sometimes this money chases assets like houses and stocks, where voters see this inflation as a good thing because it makes owners of those assets much richer on paper. From 10,000 feet though, that’s all still just inflation. The dollars they’ve gained from their houses going up in value are still going to purchase less stuff in the future—just in weird and unjust ways that may take many years to ripple through the economy.)
While the mechanics of this get super complex, the general idea of blocs of rich countries having a joint lever that they can pull to devalue any one currency is roughly right. Though see the next footnote for a major caveat.
The US has a unique advantage here, in that the USD is so widely used globally that most other world powers prefer to only devalue it in extreme circumstances. It’s also just a lot harder mechanically for them to do so, as the US has outsized control over how much a USD is worth.
Sometimes this is because a country lacks control over their own currency (i.e., most EU economies). In other cases it’s because their debts are denominated in foreign currencies (often USD), where printing more of their domestic currency wouldn’t change much, as the exchange rate between their currency and USD (or whatever) would just shift in rough proportion to the printing. This latter thing is what ultimately traps lots of poor countries.
Again, the US is an exception here. Apart from that though, interest-rate pricing tends to follow common assumptions among all rich/powerful countries—all of which have resigned on some level to “well we’ll never have to default on payments anyway because we can always just print money to bail ourselves out, so high interest rates are really only for poor countries who can’t do that”.
While this is hardly some original comment, I feel we downplay just how damning this is.
This correction comes courtesy of Timothy B. Lee, one of the two minds behind the great Full Stack Economics newsletter. His point is that Presidents can’t do a whole lot of overspending relative to what Congress has allowed. I should have been more careful to put this in proportion. As to how they can overspend, see here and here. But Tim is fundamentally right that said overspending is quite small relative to overall budgets, and isn’t itself much of a justification for the debt ceiling protocol. Instead of giving Tim a corrections bounty, I’m going to give the first reader to acknowledge this note a paid subscription to their newsletter. (EDIT: Claimed.)
Contrary to popular belief, no administration in recent memory has ever run true surpluses, nor would this be something that Americans should really want! So long as the population and inflation are both growing within healthy ranges, total spending/debt is going to follow. This is totally fine, again so long as that spending/debt is goosing future revenues. (If you think Clinton or anyone else was actually paying down debt, you’ve been duped by a complicated accounting fiction. More on that here.)
The rare exception is when a single party has a filibuster-proof majority in the Senate (see note 17), along with holding the White House and the balance of power in the House (meaning they don’t need any votes anywhere from the weaker party). Even then though, that weaker party will cry theft and murder, and the majority party still has to gets its own membership in agreement. Practically, this is very hard!
Never, ever, ever. This would be the equivalent of the minority party nuking the global financial system for the sake of maybe gaining a ~2% edge in the next election. There are too many failsafes and emergency intervention options for this to happen.
Democrats may bristle at this framing! But I think it’s true all the same. Even if they care about justice causes for moral reasons (which I suspect many do!), they’re also operating with a view to making the US “better”. How do we measure that? GDP basically. Just as corporate profits are the applause of happy customers, sustainable GDP gains are ultimately the applause of happy citizens. And lots goes into happiness. Today’s Republicans tend to think that rolling back to some prior cultural save-point will make the most important people happy (or at least that this will avoid some maximally unhappy future). Today’s Democrats tend to think that happiness comes from a higher and more equitable standard of life for everyone—and they’re largely happy to break some eggs to get there.
While you technically only need 50+1 votes to pass something, you need 60 procedural votes to actually get the bill to a final vote. Enforcing this extra requirement is known as filibustering. While any party with 50+1 votes can exempt certain types of legislation from that 60-vote requirement, this is typically done very conservatively because parties tend to regret doing so once they’re no longer in power and the other side now has much less need to cooperate!
This isn’t entirely true based on some arcane rules that aren’t all that worth getting into here. The point is that you can throw more or less whatever you want into a reconciliation bill, so long as you can get 50+1 votes in the Senate plus a simple majority in the House plus the President’s signature. The big caveat is just that you need to demonstrate that there are means of paying for it all with future savings/revenue. But historically this hasn’t been an enormous hurdle.
A sweetener for McConnell is that the next major global climate summit is happening in Glasgow in early November. Forcing Biden to show up empty-handed as far as major new climate investments would be a real wound for his image.
A point that Manchin makes a lot is that the clean energy translation is happening anyway, so why should the US be spending billions or trillions to make it happen a bit faster. And this might be a fine argument if we had more time. But we don’t. Getting to net-zero on carbon emissions by 2050 is the necessary minimum, and even that quite ambitious target is going to involve extreme collateral damage. Speeding up progress will have a massive impact on protecting future growth, and is trivially worth the risk of a bit of overpayment and extra inflation today.
> Instead of giving him a corrections bounty, I’m going to give the first reader to acknowledge this note a paid subscription to their newsletter.
Does this comment count? ;)
Thanks for the post Jeremy (& team).