The Debt Drama Isn’t Over Yet

U.S. Senate Democrats hold weekly policy lunch at the U.S. Capitol in Washington
EVELYN HOCKSTEIN
By Yuval Rosenberg

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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