If you think this summer of presidential campaign politics has been wild, and the news from Wall Street a bit scary, wait until Congress gets back after Labor Day. The federal government is heading toward a fiscal train wreck and, at the moment, it's far from clear how lawmakers will avoid it.
Due to partisan polarization on Capitol Hill, the United States currently taxes and spends on the basis of temporary legal authorities which, in turn, reflect the barest minimum of political consensus necessary to keep the federal government operating. Discretionary spending levels, for both defense and non-defense programs, were set by the nearly 2-year-old Ryan-Murray Bipartisan Budget Act, which relaxed across-the-board sequestration spending caps, but which expires at the end of September. Absent new appropriations bills — and this Congress hasn't passed a single one — or a stop-gap continuing resolution, the government could shut down on Oct. 1. Even avoiding a shutdown would leave the question of funding levels, because the act's expiration would cause a reversion to sequestration.
The current short-term transportation bill expires Oct. 30, at which point the federal highway trust fund also will be perilously low on cash. Sometime not long after that, the government will need an increase in the $18.15 trillion debt limit, lest a U.S. default further destabilize global finance. Oh, and one more thing: Congress only has until Dec. 31 to reinstate about 50 special tax breaks, such as those for wind energy or state and local tax payments, in time for businesses and individuals to claim them on their 2015 returns — at a cost to the Treasury of $40 billion.
In a best-case scenario, the Obama administration and the Republican Congress will find a compromise on spending that loosens sequestration limits on both defense and non-defense budget categories, offset by real revenue increases or spending reductions on lower priority items. That is, they will engage in actual governance. More likely, they will paper over the situation with more budget gimmicks or a series of short-term continuing resolutions. Likelier still, there will be much drama, up to and including at least a threatened shutdown, due to GOP attempts to defund Planned Parenthood or administration insistence that any defense increases be matched dollar-for-dollar by higher domestic spending.
The big picture here is that, at a time when financial markets are already showing serious signs of stress caused by events in China, Europe and emerging economies, U.S. politics loom as yet another source of uncertainty rather than stability. The increasingly populist, decreasingly sensible election season discourse in this country is veering far away from practical issues — such as how best to raise and spend money for public purposes at the federal level — that ultimately determine the economic well-being of Americans and, indeed, the world. Instead, the ostensibly most powerful nation on earth has a federal budget patched together out of temporary law and borrowed private savings, and all of the people who aspire to lead that nation are talking about other things.