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Today, Joe Biden and Kevin McCarthy are meeting to discuss the debt ceiling/budget maelstrom which is gripping Washington and threatening to blow up the global economy. Because there’s still about three weeks to go until the day when the federal government won’t be able to pay its bills, don’t expect much to come out of that meeting. Little real discussion is going to take place this far from the deadline, and it’s mostly designed to allow both sides to set up the other to take the blame for failing to find a resolution to the crisis.
The crisis is, of course, that around about June 1st, the United States government will not be able to continue to operate its normal functions and to make interest payments on the debt that it owes without taking on additional debt. Most sane countries automatically authorize the government to take on new debt in order to make commitments that have already been entered into, but in the United States these two processes are not linked. Congress approves spending, but then it also has to separately approve the issuing of new debt. Republicans in Congress did that three times under former President Trump, but now a Democrat is in office they’re refusing to do it again unless the Biden administration agrees to massive spending cuts to welfare, food assistance, and green energy programs.
As with all previous iterations of this drama, there’s a strong likelihood that eventually some fudge will be found to allow everyone to claim victory. But there’s also a higher-than-usual chance that it will end in disaster, with the U.S. defaulting on its debt and the consequences wreaking havoc on the global economy. To understand why, it’s useful to split out what’s going on into three tracks: the Biden-McCarthy negotiations, the intra-coalition negotiations on both sides, and the unilateral options.
Biden-McCarthy
For a long time, the Biden administration’s position was that it would refuse to acknowledge any linkage between the debt ceiling and the budget. The administration pointed out that it’s completely reckless for Republicans to threaten to force the United States into a default on its debt, and that because they raised the ceiling so many times under Trump, it’s hypocritical into the bargain.
Both of these things are completely true, but the White House strategy never really made sense to me. The fact is that Republicans are reckless and Republicans are hypocritical, so there was never much chance of getting them to listen to reason. The White House’s preferred outcome - a so-called “clean” debt ceiling raise, meaning one without any preconditions related to the budget - was something that McCarthy was just never going to deliver. He made too many promises to reckless and hypocritical people in order to become Speaker. And because McCarthy has the power to deny Biden the clean rise that he wants, negotiations over the budget are going to have to happen.
Even in the run-up to today’s meeting, the White House is sticking to its line. As the NYT reported today, “even the terms of the discussion are in dispute: Mr. McCarthy insists the president negotiate a debt ceiling deal with him, while Mr. Biden insists the meeting will just be an opportunity to tell the speaker that there will be no negotiations over the limit.” The White House instead wants to use the meeting to demand that McCarthy be more specific about exactly what his budget would cut, figuring that the public will turn against the Republicans when they realize the extent of the planned cuts to things like food stamps and Medicaid.
McCarthy figures that eventually the White House will back down. And I think he’s basically right that the White House has more to lose from the current situation than he does. Polls show that Americans say they would blame both sides basically equally in the event of a default, but the party of the incumbent president pretty much always suffers much more from a poor economy than the other party does. A default would not only be a severe sign of political dysfunction, but it would almost certainly push the economy into recession - something Biden would have hung around his neck in the 2024 election.
That’s why the most likely result of the Biden-McCarthy channel is going to be some sort of fudge allowing both sides to claim victory. Right now, the sticking point is that McCarthy wants budget cuts linked to the debt ceiling while Biden says he’ll talk about budget cuts but won’t allow them to be linked to the debt ceiling. On the most macro level, those two positions are not actually that far apart. All it takes is for them to reach a budget agreement which Biden swears is not linked to the debt ceiling, but McCarthy says is. That’s the most likely way this thing will end, but getting there in practice is very difficult - largely because of intra-coalitional politics.
The intra-coalitional politics
It’s unlikely but possible that there will be a budget agreement before the debt ceiling deadline, but more likely Congress will pass a short-term extension of the ceiling - say one month - in order to create the room for a serious budget negotiation. When that negotiation begins, it’s as much going to be about debates within the Democratic and Republican coalitions as it is between them.
McCarthy is famously in hock to a group of very far-right members of the Congressional Republican Party who can force his removal as leader at basically any time. He’s formed a major strategic partnership with Marjorie Taylor Greene and generally relies on the votes of members of his party who want very severe budget cuts. But he also has to please a sizeable group of more fiscally moderate members of the GOP who don’t want such massive budget cuts because they think it might cost them their seats at the next election.
The budget plan that McCarthy unveiled recently impressed a lot of people because they didn’t think he’d be able to get these two factions to agree on any one document. He outdid these expectations, but only because his plan was incredibly vague about what actually would be cut. It says that it will protect defense and veterans’ affairs without spelling out what that means for the things that it does cut. Some estimates say that his budget plan will force cuts of nearly 50% in some welfare programs within a few years, but because the document doesn’t explicitly say that he can pretend that it won’t.
Actually having a line-by-line negotiation is a completely different matter, but that’s what McCarthy will eventually have to do if gets what he says he wants. Anyone negotiating with McCarthy has to simultaneously negotiate with the various groups holding guns to his head, a difficult dynamic which could easily end in miscalculation and disaster.
This is even more likely to occur if the White House refuses to insert itself as a controlling force on the Democratic side, which also has its own internal politics to deal with. One of the things that McCarthy’s budget would definitely cut are the huge subsidies for green energy that were passed as part of the Inflation Reduction Act last year, and that’s something that the White House absolutely wants to protect. Other things are less clear - nobody in the Democratic coalition really wants any other spending to be cut, but they disagree profoundly on what’s most important to protect in a situation where something has to go.
The risk that these two parties, which are really themselves collections of different factions, might fail to reach an agreement is very real, particularly close to a deadline. My sense is that it would be best for the White House to at least admit that it needs to insert itself into the budget negotiations and find a way to do it, and that increases the chances of success. But there’s still a non-zero chance of failure, and that means unilateral options might become necessary.
Unilateral options
The final track on which this drama is unfolding is the track of unilateral actions based on legal and constitutional theories about actions that the executive branch might be able to take to avoid a default even in the event that Congres doesn’t pass a budget. Some progressive commentators would actually prefer the White House to try to invoke of these options, but most people inside and outside the administration see them as a risky last resort.
There are basically two flavors to these proposed actions. The first is based on the 14th amendment, which reads “the validity of the public debt, authorized by law … shall not be questioned.” Some people argue that this clause - which was adopted just after the American Civil War - means that it is actually unconstitutional for Congress to try to impose any debt ceiling at all, and so the president could just ignore it.1
During a showdown in the Obama administration in 2011, Bill Clinton even claimed that if he was still president, he would just ignore the debt ceiling and force the Supreme Court to rule on whether it was constitutional or not. But it’s a lot easier to say this from retirement than it was while you’re in the Oval Office. If Biden tried to just ignore the debt ceiling by ordering that more debt be issued, a court could order an immediate halt to the issuance while the judiciary ruled on the matter, which could take a long time. This would throw the country into immediate default. Even if the courts allowed the administration to continue to issue new debt in the meantime, borrowers would probably demand much higher interest rates to compensate for the fact that a court might retroactively declare the debt they had purchased to be unconstitutional.
The other flavor of unilateral options are various tricksy workarounds that people think the government could use to increase its supply of cash without really issuing more debt. Among the more outlandish ideas is that the government could mint a trillion dollar coin and give it to itself, then use the trillion dollars to pay off debt. Another is that the government could issue bonds with abnormally high interest rates. This would mean the government could ask people to pay - say - $200 for what is actually only $100 of debt, and investors would be willing to do this because the high interest rate makes it worthwhile.
These schemes have been defended by some very knowledgeable economists, but there are big potential legal and political problems with them. They once again suffer from a problem with the judiciary - any court could order them immediately halted pending hearings, meaning a default. The administration also views from as politically risky because they would likely cause U.S. borrowing costs to skyrocket, creating an unsustainable situation which would still require some sort of agreement with Congress.
The administration is keeping very quiet about exactly how seriously it takes options like these. They don’t want to talk about it because there will be less pressure for success in the McCarthy-Biden and intra-coalition tracks if everyone thinks the government has some whizz-bang plan to just unilaterally solve, or at least delay, the crisis anyway. But you can bet that somewhere deep within the Treasury and the Federal Reserve, officials are working on a plan to deploy unilateral actions if they become necessary.
We can hope it doesn’t get that far, and things stay on the first two tracks, which is where an ultimate solution has to come from anyway. But there’s a good chance one won’t come, and we’re less than a month away from needing to buckle up for a seriously bumpy ride.
This amendment was passed because after the Civil War, Union supporters feared that the South might become dominant in Congress and then repudiate debt owed to the banks and individuals who had financed the Union war effort.