Yellen Warns US on Track to Default in October

Democrats are still wrangling over the size and scope of their spending plan, while the Treasury Secretary warns Congress to move fast on the debt ceiling to avoid the threat of U.S. default. Here’s what you need to know.

US on Track to Default in October, Yellen Warns

Treasury Secretary Janet Yellen issued another warning to lawmakers Wednesday: Raise or suspend the debt ceiling as soon as possible.

In a letter addressed to House Speaker Nancy Pelosi (D-CA), Yellen said that according to the latest internal estimates, the Treasury could run out of money at some point in October. “Once all available measures and cash on hand are fully exhausted, the United States of America would be unable to meet its obligations for the first time in our history,” she wrote.

The Treasury has been using its cash surplus to make payments since the suspension of the debt ceiling expired last month and has employed “extraordinary measures” to postpone as many payments as possible to delay the threat of default as long as possible. Those measures include “a suspension of certain investments in the Civil Service Retirement and Disability Fund, the Postal Service Retiree Health Benefits Fund, and the Government Securities Investment Fund of the Federal Employees' Retirement System Thrift Savings Plan,” Yellen said.

While there is some uncertainty about the exact date, in part due to substantial tax payments expected on September 15, Yellen urged Congress not to wait.

“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” Yellen wrote. “A delay that calls into question the federal government's ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets. At a time when American families, communities, and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to put the full faith and credit of the United States at risk.”

Pelosi blames Trump: The Speaker told reporters Wednesday that Democrats plan to act on the debt ceiling in the coming weeks, though she offered no details on how they plan to do so. She did, however, say that they will not add a debt ceiling increase to the $3.5 trillion spending bill they hope to pass on a purely partisan basis.

“We won't be putting it in reconciliation,” Pelosi said, rejecting the approach recommended by Republican leaders, who have said they will not vote to increase the debt limit.

Pelosi invoked former President Donald Trump’s policies as she discussed the debt limit, while also chiding Republicans for their refusal to cooperate with the effort. “The Trump administration … amassed over $7 trillion in debt, and that's what this debt ceiling lift is paying for ... We're paying the Trump credit card with what we would do to lift the debt ceiling,” Pelosi said. “It's the responsible thing to do. I would hope Republicans would act in a similar way.”

Sen. Majority Leader Chuck Schumer (D-NY) also criticized Republicans Wednesday for their stance on the debt ceiling. “It would be just the height of irresponsibility for Republicans to play games to take the debt limit hostage,” Schumer said. “It would be a horrible act — a despicable act really.”

Quote of the Day: The Cost of Budget Brinkmanship

“The short window between the start of the congressional calendar and the debt financing deadline carries with it the possibility of another debt ceiling crisis like those in 2011 and 2018. While the causes of those crises differed, the prolonged shutdowns extracted a financial and economic price on the public. ... The 2011 debt ceiling crisis caused a decline in the Standard & Poor’s 500 of roughly 17% between July 22 and Aug. 8 … The most recent shutdown, in 2018 was because of a budget standoff over funding of a proposed border wall. It lasted five weeks and shaved 0.1% of gross domestic product from fourth-quarter growth that year and 0.3% from first-quarter growth in 2019, or about $7 billion per week from the economy.”

—Joseph Brusuelas, chief economist at the consulting firm RSM, who has called for Congress to do away with the debt ceiling, in part to avoid potentially damaging political showdowns. “Default is not an option,” Brusuelas says. “Default is a recipe for chaos across global financial markets and would take the economy back to the depths of the financial crisis in 2008. Individual policy actors who speak of default as an option should not be taken seriously.”

Manchin Wants Spending Bill Cut by More Than Half: Report

Staking out his position on Democrats’ proposed $3.5 trillion reconciliation package, Sen. Joe Manchin (D-WV) reportedly told the White House that he would support as little as $1 trillion in new spending.

According to Axios’s Hans Nichols, Manchin has indicated that he’s willing to go as high as $1.5 trillion, though he insists that all spending be offset by revenue increases or cuts elsewhere.

Manchin has also expressed concerns about specific provisions within President Joe Biden’s economic plan, including a proposal to spend as much as $400 billion on home-based care. And the West Virginia Democrat wants to means-test several proposed programs, including a larger child tax credit, universal preschool and free community college.

Speaking to reporters Tuesday evening, Biden seemed optimistic that an agreement could be reached: “Joe at the end has always been there. He's always been with me. I think we can work something out. I look forward to speaking with him.”

Comments from Senate Budget Committee Chairman Bernie Sanders (I-VT) Wednesday indicate that it may not be easy to reach a consensus within the Democratic caucus. “That $3.5 trillion is already the result of a major, major compromise, and at the very least this bill should contain $3.5 trillion,” Sanders told reporters.

Though he has rejected Manchin’s call to slow down on the reconciliation bill, Senate Majority Leader Chuck Schumer (D-NY) said Wednesday that he, like the president, is confident that things will work out. “There are some in my caucus that believe $3.5 trillion is too much, there are some in my caucus who believe it's too little,” Schumer said. “We're going to all come together to get something big done and second it's our intention to have every part of the Biden plan in a big and robust way.”

Top 1% Evading More Than $160 Billion a Year in Taxes: Report

The top 1% of households did not pay about $163 billion in taxes they owed in 2019, according to a new analysis from the U.S. Department of the Treasury.

The report, written by Natasha Sarin, deputy assistant secretary for microeconomics, is part of an effort by the Biden administration to close the so-called tax gap, the difference between what is owed and what is actually collected by the IRS. Treasury estimates that the gap is upwards of $600 billion a year and will total about $7 trillion over the next decade.

The magnitude of the tax gap is stunning: “It is equal to 3 percent of GDP, or all the income taxes paid by the lowest earning 90 percent of taxpayers,” Sarin writes. And most of that revenue loss is concentrated among the wealthy, who are able to evade many of the taxes they owe due to the structure of the tax system.

“The wealthiest 1 percent of Americans are the nation’s most egregious tax evaders,” says The New York Times’ Alan Rappeport.

The tax gap “has meaningful implications for fiscal policy,” Sarin adds. “These unpaid taxes mean policymakers must choose between rising deficits, lower spending on important priorities, or further tax increase to compensate for lost revenue—which will only be borne by compliant taxpayers.”

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