Can Can Can They Kick the Can Can?

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If you have the time, please spare a thought for the poor debt ceiling: Congress keeps kicking it, again and again, just a month or two out. The poor thing is covered in dust and bruises and just wants to be extended properly so it can have time to heal. Is that too much to ask?

Perhaps not, judging from the latest plan circling the Capitol—which could cool down some politicized rhetoric and ease uncertainty a bit. Senate Majority and Minority Leaders Chuck Schumer and Mitch McConnell struck a very strange deal yesterday that, if passed, would enable Senate Democrats to quickly pass an increase along party lines—without using budget reconciliation or risking a filibuster. The plan passed the House last evening and is now percolating through the Senate, where McConnell is trying to round up 10 Republican votes. If it and subsequent legislation to lift the ceiling pass—which political observers think is likely—it would spare us all from another round of (misguided) default chatter, giving stocks one less thing to fret as the new year approaches.

In the spirit of good sportsmanship, we must tip our hats to Congress for not letting things go quite down to the wire this time. First, last week, they passed a bill to avoid a partial government shutdown with more than 24 hours to spare. Yes, they extended funding to February 18 only, teeing up another sequel after the Super Bowl, but still, credit where credit is due. Now they are compromising on the debt ceiling a whole week before Treasury Secretary Janet Yellen estimates her agency would have to start picking which bills to pay. That doesn’t guarantee they actually raise the ceiling before her estimated deadline of December 15, but standard political considerations dictate that Democrats will complete the full increase before the Treasury runs out of room.

Those who follow these things closely might wonder why a party-line vote is suddenly appealing to Democrats now, after they have repeatedly shunned lifting the debt ceiling via reconciliation. Back in October, when McConnell conceded the autumn’s first short-term debt ceiling fix, he said Republicans would allow a two-month extension to give the Democrats time to complete a longer-term increase via budget reconciliation. It was clever but doomed to fail from the start. Neither party wanted to get blamed if the government didn’t have enough cash to pay contractors and military personnel. But neither party wanted to allow the other to brand it as solely responsible for jacking up debt.[i] So it should be no surprise that Schumer did not avail himself of that two-month reconciliation window, leading to this week’s pickle and the leaders’ creative solution. Instead of increasing the ceiling with reconciliation, which is a cumbersome process that tends to attract a bright spotlight, they can duct-tape it to a popular bill that prevents Medicare cuts taking effect on January 1.

That is the gist of the House legislation, which buried the debt ceiling process in the bill forestalling automatic Medicare cuts. It doesn’t lift the ceiling itself, but creates a one-time process for a Senate debt ceiling bill that limits debate to 10 hours and disallows amendments, negating the need for a formal cloture vote—and avoiding the filibuster. That paves the way for a simple majority to pass it. The fast-track ticket requires the debt ceiling legislation to hit the Senate floor by year-end, and it expires on January 15. It also requires Congress to lift the ceiling by a specific dollar amount rather than suspend it temporarily. As Yogi Berra quipped, it ain’t over till it’s over, but if this bill passes and opens that path to a debt ceiling increase, presumably House and Senate Democrats would immediately introduce the actual debt ceiling legislation and pass it before the Treasury runs out of wiggle room.

We guess this is a win-win-win? Republicans can say they prevented a “default” (HA!) without actually having to vote for a debt ceiling increase, and any who come under fire can hide behind Medicare. Democrats can also say they prevented a “default” (HA!) and avoid the campaign-trail stench that sometimes accompanies reconciliation, with the Medicare aspects acting as a bit of deodorant. The entire country can get a break from the repeated brinksmanship. Investors can get a break from pundits’ and politicians’ misinformation about default (see this, this and this for a refresher on why hitting the debt ceiling doesn’t mean defaulting). Stocks can get a break from the theatrics, removing one potential source of short-term volatility. It isn’t much, but one less source of uncertainty is always a good thing, in our view.