The US debt ceiling and the rise of partisan politics

When forecasting the probability of any given event happening, it is typically worth paying attention to the ‘base rate’. That is the proportion of the time that the event in question has happened from a starting point similar to the one we have today.

The US government has been up and running since 4 July 1776 and has never defaulted on its debt. The US Federal debt ceiling has been successfully raised 78 separate times since 1960. As we approach the crunch point on debt ceiling negotiations, the sensible ‘base rate’ is to assume that this time will not be different, and the debt ceiling will (eventually) be raised after the usual drama is out of the way.

But it’s typically a bad idea to assume that something can’t happen simply because it has never happened before. It’s important to understand what is different today to frame our understanding of the historical precedent.

United we stand…

One thing that is objectively worse than at any other point in US history is the extent of partisan disagreement in Congress. That divide is at the heart of the recurrent difficulties in raising the debt ceiling since 2011, and it is getting steadily worse.

That is not a throwaway statement but is rooted in the data shown in the chart below. The chart shows the difference between the median member of the Republican and Democratic caucuses according to their voting record on the traditional left-right spectrum.

An increase in the line is consistent with greater ideological divide between the parties, a decrease in the line is consistent with a convergence of views.

In both houses, the 118^th congress (elected in November 2022, taking office in January 2023) is the most divided on record. Remarkably, the major political parties are even more split today than during the years running up to the Civil War (the ‘antebellum period’ for any Latin/history lovers out there).

The unsettling implication is that destabilising partisan conflict has become normalised: the world of debt ceiling fights, presidential impeachments, and lurches in tax and spend policy is here to stay.

None of this means that this is the occasion when raising the debt ceiling goes wrong, but it implies the risk is higher today than during comparable episodes in the past. We think that a genuine default (i.e. non-payment of coupon or principle on bonds) is a very remote probability, but put a relatively high likelihood (25%) on a payment prioritisations scenario that would take the US into unchartered territory.

That wouldn’t count as a default for bondholders, but it would prove extremely disruptive for the broader economy if government employees and suppliers plus social security recipients are made to wait for their payments.