How the deadlock on the debt limit could end
Some solutions are more likely than others, but time is running out.
WASHINGTON – How does this deadlock on the debt limit end?
Many scenarios are played out publicly and privately, but nobody knows for sure. The possibilities range from kumbaya to economic chaos with many possibilities in between.
So far, neither Speaker Joe Biden nor House Speaker Kevin McCarthy, R-Calif., are giving ground before talks scheduled for Tuesday. Biden wants to raise the government’s $31.4 trillion statutory lending limit so the federal government can continue to pay its bills and the risk of a historic default disappears. McCarthy and other GOP lawmakers want a deal that guarantees trillions of dollars in spending cuts before signing on to raise the debt limit.
Time is running out: the Treasury Department warns that the United States could default as early as June 1 if there is no deal.
A look at the potential outcomes:
WE AGREE TO DISAGREE
The president wants to disarm the entire debate by getting Republicans to publicly pledge that the United States will not fail. He would then be ready to discuss spending, taxes and other budgetary matters.
He wants a guarantee from McCarthy that the US can continue to pay all its bills while being able to continue borrowing. The president says he is ready to have a public debate with GOP lawmakers on the budget, but not with the world’s largest economy being held “hostage”.
“As I’ve always said, we can discuss where to cut, how much to spend, how to finally move the tax system where everyone starts paying their fair share,” Biden said. “But not under threat of default.”
It’s unclear how many GOP lawmakers share his definition of default. Some suggest a default would apply only to unpaid debt, while the administration wants to include federal workers’ salaries, contractor paybacks, and relief for the poor, veterans, schools, and others.
Just before the House narrowly passed a bill with $4.5 trillion in deficit savings along party lines, McCarthy said the United States would not go bankrupt. But he’s still linking the issue directly to spending cuts in a way that Biden wants to avoid.
“Tackling debt requires us to come together, find common ground and reduce spending,” McCarthy said last month. “Let’s be clear: defaulting on our debt is not an option, but neither is a future of higher taxes.”
REPUBLICANS HOLD STRONG
Republicans in Congress could hold their ground and force Democrats to falter.
McCarthy has a narrow majority in the House: 222 Republicans, compared to 213 Democrats.
His debt cap bill would reverse discretionary spending at 2022 levels, then put a 1% cap on future increases. The bill would also reverse Biden’s forgiveness of student loan debt, his increased IRS funding, and tax incentives created in 2022 to encourage clean energy adoption. Those cuts would extend the debt limit through March 31, 2024, or up to an additional $1.5 trillion.
GOP conservatives like South Carolina Rep. Ralph Norman and others say they will support nothing less than that bill House Republicans passed on April 27 by 217 votes.
But Senate Majority Leader Chuck Schumer, DN.Y., will not let that bill go through the Senate. Not even Biden. The question as the deadline approaches is whether the Republicans stick together and that causes the Democrats to fall apart. There’s also a risk that dissent within the GOP caucus could put McCarthy’s speaker at risk, which could then make reaching an agreement even more difficult.
The question is what kind of agreement could come through the House, Senate and Oval Office.
GET AN EXTENSION
Washington likes to put things off: the old “kick the can along the way” routine.
There is a possibility that lawmakers could agree to a short-term extension, pushing the debt limit deadline to Sept. 30, when a federal budget also has to be approved.
This would be in line with the GOP’s effort to synchronize the budget debate with the debt ceiling, while also eliminating the immediate risk of default. It’s the option that government officials generally discuss privately with the greatest optimism.
However, House Minority Leader Hakeem Jeffries tried to pour cold water on that idea in a Sunday interview with NBC News.
“I don’t think the responsible thing to do is throw the road down,” Jeffries said, even as he prioritized the importance of avoiding a default.
THE MARKETS ARE CRAZY
Wall Street could save the day, in a sense, by having a meltdown.
Along with economists, Senate Budget Committee Chair Sheldon Whitehouse, DR.I., indicated that a sharp sell-off in the market could force Republicans out. Their donors would howl about pending financial losses and give every legislator an incentive to be the hero and save the jobs and retirement savings of millions of Americans.
Joe Brusuelas, chief economist at consultancy firm RSM US, said in an email on Monday that talk of a potential default is already making it more expensive for investors to buy insurance on US Treasuries. But the panic is largely contained, so far, by the broader stock market followed by many voters and lawmakers.
14th AMENDMENT
Biden could play the Constitution card.
The 14th amendment became part of the Constitution after the Civil War. It states that “the validity of the United States public debt, authorized by law, … must not be questioned.”
Laurence Tribe, a Harvard University law school professor emeritus, wrote in the New York Times Sunday that Biden can argue he has a constitutional duty to avoid default and therefore can exceed the debt limit to continue the spending that Congress has already approved. On Monday, a union of government employees sued Treasury Secretary Janet Yellen and Biden to argue they are constitutionally obligated to override the debt limit.
As a former senator, Biden likes to defer to Congress. But when he was pressed to invoke the 14th amendment last week, he kept his options open.
“I’m not there yet,” he told MSNBC.
Sen. James Lankford, R-Okla., said Biden cannot act unilaterally. He told ABC News that the Constitution is “very clear that spending—all those details about spending and money actually have to go through Congress.”
MINT A COIN
This is among the many creative and improbable solutions circulating on the Internet. The idea is that the government could mint a trillion-dollar platinum coin and use it to avoid a default. Basically, there’s a loophole in the law that could allow the United States to mint a coin of any denomination if it’s made of platinum.
This has at least one major problem: Yellen dismissed the idea in a January interview with The Wall Street Journal, calling it “something that’s a gimmick.”
DEFAULT
This is the scariest possibility.
If there is no deal, the US government could reach its “X date” – the time when it will no longer be able to pay all its bills. The Treasury Department would no longer be able to use accounting strategies to keep government open. If the government were no longer able to borrow, unpaid bills would rise and the government would default.
But, but, but… not all defaults are created equal.
The US could briefly miss some payments, and the risk of things getting worse could prompt lawmakers to reach a deal. But even a “short-term” default would cost the economy 500,000 jobs, according to a White House analysis. A “protracted” default would cost 8.3 million jobs, according to the analysis, nearly the same job losses that occurred during the 2008 financial crisis.
