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U.S. Hits Debt Ceiling

On several occasions, we wrote that the debt ceiling would probably be reached sometime in July, give or take a month. We weren't making that up out of thin air; that timeline was to be found all over the place. See, for example, this report from the Bipartisan Policy Center, which says: "the 'X Date'—the day when the federal government can no longer meet all its obligations in full and on time—will likely arrive no earlier than the third quarter of 2023." Q3 begins, of course, on July 1.

It turns out that the Bipartisan Policy Center was a wee bit optimistic, as the debt ceiling was reached yesterday. Secretary of the Treasury Janet Yellen had warned that would be the case earlier this week, and whaddyaknow, she was right. The federal government has now begun using smoke and mirrors to keep paying the bills; Yellen says that will work until June 5. On that date, if the debt ceiling has not been lifted, the U.S. will theoretically default on its debt. This would be a disaster, as everyone knows, because it would do permanent damage to the credit of the United States. That, in turn, would have a ripple effect across the U.S. economy, which would then spread to the other economies of the world.

The game of chicken has already begun. In fact, it was underway even before the debt ceiling was formally reached. House Republicans (at least, the ones who are speaking up) say that they won't agree to raise the debt ceiling until the White House agrees to significant spending cuts (specifically, rolling back some of the provisions of last year's Inflation Reduction Act, like the extra money for the IRS). The White House says that it will not be blackmailed in this way. Given that the country won't be on the precipice of disaster until mid-May, this is likely to be a very slow-moving game of chicken.

We think we have a pretty firm grasp of the mindset of the White House and of congressional Democrats, who simply cannot yield to this sort of hostage-taking, and who are not likely to be the ones who are punished by voters if the nation does default. In other words, we are confident that they will not surrender here. We also have a pretty firm grasp of the mindset of Senate Republicans, particularly Senate Minority Leader Mitch McConnell (R-KY), who also know that the Democrats are not likely to get the blame if the U.S. defaults. In other words, we are confident the Senate will not be an obstacle if a bill raising the debt ceiling gets through the House.

That leaves House Republicans. If we said we truly understood their mindset here (or in many other contexts), we would be lying. In hopes of getting as close to the truth as we can, let us now switch gears for a short while to this item from New York magazine about the tax proposal that House Republicans will soon vote upon, at the insistence of Rep. Earl "Buddy" Carter (R-GA). The proposal—which Speaker Kevin McCarthy (R-CA) had to agree to bring to the floor in exchange for Carter's vote for speaker—has been floating around conservative circles for some time. The basic idea is that the IRS would be shut down, and the U.S. tax code would effectively be tossed in the garbage, with everything to be replaced by a federal sales tax on all transactions. In order to raise enough money, that sales tax would have to be very high, something like 30%.

We are not economists or CPAs, and yet it's instantly obvious to us that this plan is all kinds of stupid. To start, regardless of various tweaks like payments to low-income households, it would end up being highly regressive, and would cause rich Americans to pay less taxes at the expense of not-rich Americans (of course, that is a selling point to many conservatives). In addition, tax policy is an important tool by which Congress can steer economic activity (for example, making IRAs tax-advantaged). This would largely go away with the federal sales tax scheme. Perhaps most importantly, however, is that the proposal would put a huge damper on economic activity. People would say "Do I really need a new car this year? Do I really need to eat out tonight? Do I really need to upgrade my cell phone?" And if it's suddenly 10% or 20% more expensive to do so, many people will decide the answer to these questions is "no." If you were looking for a way to quickly plunge the country into a depression, this would be the way to do it.

Oh, and there's one other part we didn't mention. The bill, in order to make sure that the sales tax permanently replaces the income tax, requires that the Sixteenth Amendment be repealed within 7 years. If not, then the sales tax would be sundowned. Of course since the IRS and the income tax would already have been shut down, that would mean that the government could theoretically end up in a situation where its total revenues are... $0.

This silly proposal is never going to become law, of course. We can't imagine it will even get past the House, much less the Senate or the White House. Still, merely bringing it up for a vote is bats**t crazy. First, because it raises legitimate questions about what might happen to the U.S. economy the next time Republicans have the trifecta. This could cause people to decide that investing in China, or Japan, or the E.U. is a better call than investing in the U.S. Second, because the Republicans are basically giving the Democrats an early Christmas/Hanukkah/Festivus/Diwali/Kwanzaa gift: "The Republicans want to increase the sales tax to 30%! Do you have the money to pay 20%+ more for everything you buy?"

And that brings us to our point. We can only come up with three plausible explanations for what's going on here: (1) Some/many House Republicans have no understanding of macroeconomics; (2) Some/many House Republicans are so thoroughly in the thrall of wealthy/business interests that they will do anything to serve their masters; or (3) Some/many House Republicans are absolutely tone deaf. And if one or more of these three explanations is correct, it leads to this conclusion: Some/many Republicans might very well be willing to crash the economy in their quest to eliminate the federal income tax because their wealthy donors would love that.

Ultimately, we find it unlikely that the U.S. will actually default on its debt. Either a coalition of House Republicans and Democrats will overrule the MAGA crowd and get something done, or Joe Biden will declare that the debt limit is unconstitutional and he won't abide by it, or Biden will order the minting of a $1 trillion platinum coin. But it is entirely plausible, at this point, that one of these extraordinary measures will become necessary because the MAGA crew refused to blink. (Z)

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