The Debt Drama Isn’t Over Yet

The Debt Drama Isn’t Over Yet

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Plus, US records second largest deficit on record
Friday, October 8, 2021

TGIF! And what a week it's been. The Senate voted to avert a debt crisis, for now. And the latest jobs report again fell short of expectations, though that may help Democrats make the case that the economy needs their spending plan. Here's what you need to know.

Senate Approves Short-Term Debt Limit Hike, but Not Without More Drama

Senate Democrats voted Thursday night to raise the nation’s debt limit by $480 billion, a short-term fix to postpone until December the threat of economic disaster that had been looming later this month, when the Treasury Department was set to exhaust the extraordinary measures it has been employing to keep paying the government’s bills.

The 50-48 party-line vote came after 11 Republicans joined with Democrats to overcome a GOP filibuster and allow the debt limit increase to advance, enabling Democrats to approve it with a simple majority. Securing those 11 GOP votes reportedly required a furious whipping effort by Republican leaders.

But the weeks-long political drama surrounding the debt ceiling increase didn’t end there. Because of course it didn’t.

Schumer sparks criticism: Democratic Majority Leader Chuck Schumer (NY) teed up the final vote with a short speech from the Senate floor tearing into the GOP.

“Republicans played a dangerous and risky partisan game, and I am glad that their brinksmanship did not work. For the good of America’s families, for the good of our economy, Republicans must recognize in the future that they should approach fixing the debt limit in a bipartisan way,” he said. “I thank, very much thank, my Democratic colleagues for our showing our unity in solving this Republican-manufactured crisis. Despite immense opposition from Leader McConnell and members of his conference, our caucus held together and we have pulled our country back from the cliff’s edge that Republicans tried to push us over.”

Republicans complained about the partisan nature of Schumer’s remarks, as did Sen. Joe Manchin, the West Virginia Democrat. Seated behind Schumer during the speech, Manchin could be seen shaking his head and burying his face in his hands before walking away. Manchin reportedly told Schumer his speech was “f---ing stupid.” Manchin denied dropping an f-bomb but told reporters that he didn’t think the comments were appropriate. “We have to de-weaponize,” he said, adding, “Civility is gone and I’m not going to be part of getting rid of it. I’m going to try to bring it back and I speak out when I see someone do something I don’t like.”

What’s next: The House is set to take up the debt limit extension on Tuesday, and both parties will then resume their clashes over infrastructure and Democrats’ multitrillion-dollar social spending plans.

But the two sides will be revisiting their battles over the debt ceiling issue within weeks. Republicans still insist that Democrats must use the budget reconciliation process to enact a longer-term increase in the borrowing limit on their own. Democrats still insist that won’t happen.

The coming battles may be even more fraught since former president Donald Trump and his allies are accusing McConnell of folding to Democrats on the issue, which will likely make Republicans even more wary of being linked to an increase. The next debt limit deadline, December 3, may also be trickier to navigate because it coincides with a recently established deadline to again fund the government and avoid a shutdown.

It’s possible, though, that the next debt limit deadline will actually come in 2022. “An extra $480 billion on top of existing cash balances and extraordinary measures probably pushes the X date into February,” tweeted Donald Schneider, an economist at Cornerstone Macro and former chief economist for House Ways and Means Committee Republicans.

Either way, enjoy this brief intermission while it lasts.

2021 Deficit Totaled $2.8 Trillion, CBO Estimates

The federal budget deficit for fiscal year 2021 totaled $2.8 trillion, the Congressional Budget Office estimated in a report released Friday. The gap is the second-largest on record, trailing only the pandemic-fueled $3.1 trillion in 2020.

Federal outlays in 2021 rose an estimated $265 billion (or 4%) to more than $6.8 trillion. “Programs and policies implemented in response to the coronavirus pandemic—notably, refundable tax credits (particularly the recovery rebates), expanded unemployment compensation, and the Small Business Administration’s Paycheck Protection Program—substantially boosted spending, in both 2021 and 2020,” the CBO report says. It adds that federal spending in 2021 was about $2.4 trillion higher than in 2019, an increase of more than 50% from pre-pandemic levels.

While federal spending rose, the economic recovery from the pandemic helped revenues rise even more — by an estimated $627 billion (or 18%) to more than $4 trillion, according to CBO.

Those revenues resulted in a deficit that was some $362 billion smaller than in 2020, and $233 billion smaller than the shortfall CBO projected in July. “Since CBO completed that estimate, income tax receipts have been greater than anticipated and outlays have been largely consistent with CBO’s projections,” the report says.

The CBO report also estimates that:

* Individual income and payroll taxes rose by a combined $441 billion (or 15%);
* Corporate income taxes increased by $158 billion (or 75*), in part because of higher corporate profits;
* Spending on unemployment compensation was $80 billion (or 17%) lower in 2021 than in 2020.
* Medicaid outlays grew by $63 billion (or 14%) as a result of the government’s pandemic response, which included a higher federal matching rate for the program and emergency coverage requirements;
* Spending on interest payments on the public debt increased by $25 billion (or 7%), both because the debt has grown and because higher inflation drove up the cost of inflation-protected securities.

The CBO numbers are estimates. The official totals for fiscal year 2021 will be released by the Treasury Department later this month.

September Job Growth Weakest This Year

Battered by a wave of Covid-19 infections and a major storm in the Southeast, the U.S. economy added just 194,000 jobs in September, the Labor Department announced Friday, falling well short of economists’ expectations for an increase of 500,000 or more. The month saw the weakest pace of job growth this year.

Despite the disappointing job numbers, the unemployment rate fell to 4.8%, down from 5.2% in August. But that decrease was driven in large part by workers leaving the labor force and no longer being counted as unemployed.

“With the expiration of enhanced jobless benefits, rising vaccination rates and higher wages, many economists predicted that workers would resume the job search,” The Wall Street Journal’s Josh Mitchell reports. “But last month, the labor-force participation rate—or the share of workers with a job or actively looking for one—dipped slightly to 61.6%, down from 63.3% in February 2020 ahead of the pandemic.”

Businesses are still reporting a lack of workers, at least at the wages they are willing to pay, and worker reluctance to return to the labor market appears to be playing a role in the disappointing job growth.

“This was the time when a lot of people were expecting labor shortages to be getting better, but in fact they’re getting worse,” said Michael Pearce of Capital Economics. “It’s a pretty worrying situation.”

Economist Justin Wolfers summed up the worry succinctly: “The recovery has stalled,” he tweeted. “We're missing about 8 million jobs, and at this rate, we're not bringing them back any time soon.”

Biden heralds ‘real progress,’ calls for more investment: The White House sought to put a positive spin on the report, with President Joe Biden heralding the drop in the unemployment rate. “Today’s report has the unemployment rate down to 4.8%, a significant improvement from when I took office and a sign that our recovery is moving forward, even in the face of a Covid pandemic,” Biden said.

“Right now, things in Washington — as you all know — are awfully noisy,” Biden added. “When you take a step back and look at what’s happening, we’re actually making real progress.”

At the same time, Biden said the jobs report highlights the need to pass his plan to invest in the economy. Saying the U.S. has fallen behind in the world in areas like infrastructure and education, Biden said, “we have taken out foot off the gas and the world has taken notice.”

House Speaker Nancy Pelosi (D-CA) echoed the theme, saying the latest job report shows the need to move forward with the public investments Democrats have proposed. “The September jobs report is additional proof of the need for House Democrats’ jobs-creating #BuildBackBetter agenda,” Pelosi tweeted. “While historic progress to create jobs, lower unemployment and defeat the pandemic has been forged, more must be done to protect families’ financial security.”

Unemployment benefits not a factor: The federal program providing enhanced unemployment benefits was terminated nationwide in early September, but that doesn’t appear to have pushed workers back into the labor market, as some economists had argued it would. Although it’s too early to draw any firm conclusions, the numbers seem to confirm that Covid-19 has played a bigger role in keeping workers on the sidelines than unusually generous aid for the unemployed.

Joseph Brusuelas, chief economist at the consulting firm RSM, told The Washington Post that the monthly results should be taken with caution, given the one-time events that appear to have weighed on the month. “What I see is Hurricane Ida that delayed reopening of schools and day-care centers, contributing to the weaker than anticipated total change,” Brusuelas said.

A decline in public-sector jobs was notable, with the sector losing 123,000 jobs last month, mostly in schools.

One eye on inflation: Wage growth was significant in September, with average hourly earnings rising 0.6% on a monthly basis, which translates to 4.6% on an annual basis. The numbers provide another piece of data for those who are concerned that inflation may be more persistent than the Biden administration and the Federal Reserve have predicted. They could also provide more ammunition for those who cite inflation concerns in their battle to trim or defeat Democrats’ social spending plan.

Global Minimum Tax Deal Takes a Big Step Forward

A group of 136 nations has agreed on the framework for a massive overhaul of international tax rules that would include imposing a minimum income tax of 15% on multinational corporations.

Led by the Organization for Economic Cooperation and Development, the effort got a big boost this week when Estonia, Hungary and Ireland joined the agreement. All OECD nations now back the deal, as do all members of the G20, which includes the world’s largest economies.

The new minimum rate would apply to corporations with more than 750 million euros, or $866 million, in annual revenues. Once imposed, the tax is projected to generate about $150 billion in additional tax revenues each year.

Major hurdle ahead: Although the agreement itself is a victory for the finance ministers who have been working on the project, including Treasury Secretary Janet Yellen, as a treaty it will have to be approved by two-thirds of the U.S. Senate. Winning that level of support in an evenly divided Senate seems like a long shot at best.

“I think that’s unlikely to happen,” Republican Sen. Pat Toomey (PA) said a few weeks ago, speaking to Bloomberg News about the tax treaty.

Concerned that Yellen may try to implement at least part of the agreement through executive action and without Senate approval, as she suggested she might do recently in testimony before the Senate Banking Committee, Republican Sens. Toomey, Mike Crapo (ID) and Jim Risch (ID) released a statement Friday asserting their authority on the issue.

“As you know, under the U.S. Constitution, a bilateral or multilateral tax treaty would require the advice and consent of the Senate, with a two-thirds vote of approval,” they wrote. “Further, we are unaware of any existing congressional authorization that would permit the Administration to conclude a lesser international agreement, such as a congressional-executive agreement.”

In a note to clients, analysts at the Eurasia Group said that U.S approval seems unlikely, at least in the near term: “While European finance ministers are hoping Yellen can deliver swift US implementation through a legislative shortcut, that scenario remains unlikely and — if at all possible — it would not materialize until after the next presidential election.”

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