What’s happening in Congress right now will have a big impact on the economy and American families

A government default would be catastrophic for the economy, many warn. Democrats are trying to avoid that while also advancing major legislation that would shape the nation for the next 10 years.

What’s happening right now in Congress has major implications for the fate of the U.S. economy — and many Americans’ pocketbooks.

There are four big things happening at once, which is what makes this so complicated and consequential. First of all, Congress needed to approve a budget so the federal government can keep operating after Sept. 30. Lawmakers did that Thursday, avoiding a government shutdown by only a few hours. The second issue is the “debt ceiling.” If that isn’t lifted by Oct. 18, the government will run out of money and will not be able to pay all of its bills, a scary situation for bondholders, Social Security recipients, military members and more. Republican are refusing to help lift the debt ceiling.

The third item is the infrastructure bill. This has bipartisan support, and it already passed the Senate, but liberal Democrats in the House don’t want to approve it unless Congress also votes on President Biden’s roughly $3.5 trillion climate and “care economy” bill. Right now, liberal and moderate Democrats don’t agree on what should be in the “care economy” bill and what the final price tag should be. Republicans are staunchly against the “care economy” bill because it includes tax increases on the rich and large corporations, and because it would greatly expand government funding of social problems.

What must get done: Taking action to lift the debt ceiling so the United States does not default on its debts for the first time ever within the next three weeks. Failure to get that done would cause a lot of pain and could trigger a recession and financial crisis.

The infrastructure and “care economy” bills would play a big role in shaping the U.S. economy for the next 10 years. They would be a huge part of Biden’s legacy. Many Democrats say they must pass these bills now while their party has a slim majority in Congress and Biden is pushing for more-equal recovery. But centrist Democrats are worried about the substantial increase in government spending, and Republicans do not want the government playing a larger role in Americans’ daily lives.

Here’s a rundown on what’s ahead and how likely it is to impact the economy and you.

1. A government shutdown was (narrowly) avoided. Republicans and Democrats managed to pass a bill Thursday to continue funding the government beyond Sept. 30. Lawmakers added a little bit of extra money to help states dealing with natural disasters such as Hurricane Ida cleanup and some funding to help resettle refugees from Afghanistan. Democrats had hoped to also vote on raising the debt ceiling along with this budget bill, but Republicans shot down that plan.

In Washington and other parts of the country with a lot of federal government jobs, memories are fresh of the last government shutdown that lasted over a month (35 days) in early 2019 under President Donald Trump. That shutdown cost the nation $3 billion, according to the nonpartisan Congressional Budget Office. It was largely the result of a standoff over funding for Trump’s border wall. Trump did not end up getting more money and ultimately reopened the government after intense public outcry. About 800,000 federal employees missed multiple paychecks, causing a severe hardship for many security guards, janitors and other low-paid workers. There have been 14 shutdowns since 1981. The one under Trump was the longest so far.

2. The debt ceiling is the biggest worry for the economy. Failing to lift the debt ceiling would be a big deal. It would almost certainly cause financial markets to plunge and could easily lead to a recession and millions of job losses. It’s telling that former treasury secretaries of both parties have been urging Congress to act ASAP on this.

The debt ceiling is the limit on how much the United States can borrow. In theory, it’s supposed to prevent Congress from overspending. In reality, it hasn’t worked that way in years. Both Republicans and Democrats have overspent and added to the national debt to pay for wars, tax cuts, recession relief and more. Congress spends the money and then, months later, has to lift the debt ceiling to pay for all the spending it already approved. It’s a quirky system. Other countries don’t do it like this. Many people compare it to spending on a credit card and then Congress acting shocked when the bill is due.

Republicans are refusing to raise the debt ceiling this time, because they say they’ve been boxed out of the debate over the new Democratic spending package. So they allege Democrats should have to deal with the difficult debt-ceiling vote on their own. GOP lawmakers also blame Democrats for seeking too much new spending, but the reality is Republicans also ran huge deficits under Trump, including enacting a nearly $2 trillion tax cut that now has to be paid for.

If Congress does not lift the debt ceiling before Oct. 18, the Treasury will not have enough cash on hand to pay all of its bills because it won’t be able to borrow any more money. That means someone won’t get paid. The government could stop paying Social Security or members of the military. Or it could opt not to pay bondholders, which affects many retirement funds. The bottom line is potentially millions of people won’t get the money they expected. It would mark the first time the United States has not paid all of its bills on time.

When there’s a default, it triggers a chain reaction of pain. Bondholders demand higher interest rates on U.S. debt going forward. That raises costs for the government and for Americans trying to get loans, since loan rates are often based off government bond yields. All of this is likely to cause panic selling in the stock market and make consumers hesitant to spend during a crisis, hurting growth across the country. If the default stretches on for weeks, a recession and big job losses are a real possibility. In a warning sign, bond yields started rising Tuesday, triggering a 569 point drop in the Dow Jones industrial average. Wall Street analysts say that’s a mild taste of what would happen if the nation gets really close to default — or actually does default.

3. What happens to Biden’s “Build Back Better” agenda? Biden pitched an ambitious agenda to upgrade the nation’s infrastructure, both physical infrastructure such as roads and pipes as well as care infrastructure including child care and elder care.

Biden reached a deal on physical infrastructure this summer with Democrats and some Republicans. The Senate passed the infrastructure bill in early August. House Speaker Nancy Pelosi (D-Calif.) is trying to figure out a way to pass it soon. Liberals refuse to pass this bill on its own because they worry if the infrastructure bill passes now, then the rest of Biden’s agenda may not happen.

The bill contains about $550 billion in new investments that are mostly paid for by repurposing unspent coronavirus relief money and tightening enforcement on cryptocurrency investments. While senators like to call it a $1.2 trillion bill, the reality is about half of that is money that would be allocated to roads and bridges in a typical year.

The CBO estimates the infrastructure bill would add about $256 billion to the federal debt. Some outside groups such as the Committee for a Responsible Federal Budget and the Penn Wharton Budget Model say the amount is likely to be closer to $400 billion after adjusting for accounting gimmicks.

The bill has widespread support, but economists say it would have only a modest effect on the economy. The reason is it’s just not that big. It is an extra $50 to $60 billion a year. That’s less than 0.25 percent of extra spending in a $20 trillion-plus economy. At the peak of the spending in 2025, Moody’s Analytics predicts as many as 660,000 new construction jobs, but those are unlikely to last. The Penn Wharton Budget Model forecasts no noticeable change in growth in the next decade because of the bill.

4. Biden’s $3.5 trillion ‘care economy’ bill. Biden’s big pitch to make a substantial impact on the economy is his $3.5 trillion package. The details are still being debated among Democrats, but the basic idea is to give paid parental leave to all new parents, offer free preschool to all young Americans, offer two years of free community college to all, expand home care for the elderly, expand Medicare to cover dental and vision coverage, continue generous child tax credit payments to low- and middle-income families and make significant investments in clean energy. The White House wants to largely pay for these initiatives by raising taxes on the rich and large corporations.

Biden got into trouble recently for saying the plan “costs zero dollars." The Washington Post Fact Checker gave Biden two Pinocchios for that statement. First of all, it’s unclear what the final deal is going to be. Second, some taxes would go up to fund this. Third, the plans that have come out so far rely on some fuzzy math, where some programs wouldn’t start right away, and some would end after a few years. In reality, Democrats want most of these programs to continue. It would not make sense, for example, to have preschool offered for a few years and then halt the whole program. Outside budget experts say the costs are likely to be much higher than $3.5 trillion, and it remains to be seen what tax increases Democrats are ultimately willing to pass.

On Wall Street, many investors and economists predict Democrats will pass something smaller — along the lines of $1.5 trillion to $2 trillion in new spending over the next decade, if anything gets done at all. If a smaller bill passes, it would raise government spending from about 21 percent of the total economy (where it was pre-pandemic) to about 22 percent. Biden’s aim is to boost the economy by making it easier for parents to work, increasing the education of the U.S. workforce and spurring more innovation in the green economy. These initiatives could translate into higher growth and more jobs, but they would be offset, to some extent, by the impact of higher taxes. The details matter, economists say.

Biden and Democratic leaders are trying to figure out how bold they can go. Right now at least two moderate Democratic senators, Joe Manchin III (W.Va.) and Kyrsten Sinema (Ariz.), want a much more modest proposal.

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