The 18th Century English writer Samuel Johnson is perhaps best known for the quote: “When a man knows he is to be hanged in a fortnight, it concentrates his mind.”
The saying might well describe the behavior of Congress this week after Treasury Secretary Janet Yellen told lawmakers on Monday that the government would run out of money to pay its bills by early June – about two months earlier than previously anticipated.
Officially, the government will need the White House and Capitol Hill to agree on a plan to raise the debt ceiling – the $31.4 trillion limit beyond which it cannot raise any more funds by selling debt – in less than a month. And even though all sides seem to agree the limit must be raised, coming to consensus on how to go about it is another issue unto itself.
Absent agreement, action was still swift. In a matter of hours after Yellen’s update, President Joe Biden had reached out to House Speaker Kevin McCarthy, Senate Majority Leader Chuck Schumer and the minority leaders of both chambers of Congress to convene a meeting on May 9.
Although the White House is still holding to its stance of no negotiations, the move is a symbolic first step toward resolving the standoff. The House has already passed a bill extending the limit for a year while also demanding budget cuts from Democrats. Even so, Schumer has made clear the legislation has no future in the Democrat-controlled Senate, while Biden has already pledged to veto the bill – which takes aim at some of his key legislative accomplishments.
A day later, House Minority Leader Hakeem Jeffries informed his colleagues of a backup plan that House Democrats had been quietly preparing for months, one that would utilize a rarely used mechanism called the discharge petition to force a Democratic proposal to raise the debt limit to the House floor.
“House Democrats are working to make sure we have all options at our disposal to avoid a default,” Jeffries wrote in a letter on Tuesday. “The filing of a debt ceiling measure to be brought up on the discharge calendar preserves an important option.”
Democrats may begin collecting signatures on the petition as soon as May 16 to force action on the bill. But it would require the signature of at least five Republicans, complicating the strategy’s outlook.
Meanwhile, in the upper chamber, Schumer and Senate Minority Leader Mitch McConnell stuck to familiar refrains this week, while escalating the urgency of their messages.
Schumer, who put two debt limit bills on the calendar in a procedural move after Yellen’s announcement, railed against the House GOP legislation and called for a clean debt ceiling increase. McConnell said there is no solution in the Senate, pointing to the issue as one to be handled by McCarthy and Biden.
“The Senate majority offers plenty of angry noises, but zero plan,” McConnell said on Wednesday. “The only solution is presidential leadership. President Biden has been sleepwalking toward this crisis. Mr. President, it’s time to wake up.”
Behind the scenes, various parties are busy modeling worst-case scenarios and exploring exit ramps that would let both parties claim some credit for a deal without being seen as capitulating to one side or the other.
Political Cartoons on Congress
The ideas range from punting the matter down the road with an extension of the debt limit; invoking the Constitution’s 14th Amendment clause that says that “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned”; to hoping the Federal Reserve will come to the rescue of the Treasury by providing needed funds as it has done often to banks and other financial institutions in crisis.
But the White House has suggested it would not entertain alternatives to Congress raising the debt ceiling, saying it’s “their constitutional duty.”
“We’re not going to entertain scenarios where Congress compromises the full faith and credit of the United States,” press secretary Karine Jean-Pierre told reporters on Wednesday. “The president has been very clear that Congress must act.”
In political terms, it is unclear which side holds the better cards or would suffer worse in the eyes of the public.
The standoff spells trouble for McCarthy, who just months ago gained the speakership by the skin of his teeth after 15 rounds of votes and ample concessions made to the fringe of his party. Among them was modifying a rule to allow just a single lawmaker to bring up a vote to oust him, should they deem him unfit to wield the gavel.
Since then, McCarthy has surprised onlookers by successfully corralling his narrow majority to pass key legislation, while appeasing the hard-right members of the House Freedom Caucus. And the GOP’s legislation to raise the debt ceiling while slashing government spending was no exception, though it involved some hand-wringing 11th-hour negotiations.
But should McCarthy bow to Biden, agreeing to a clean debt ceiling increase or otherwise paring down the Republican spending cuts, he risks losing his delicate grasp on the gavel.
“He got this bill passed by one vote by pledging to the Freedom Caucus people that it was the floor, not the ceiling. So he has very little running room here,” says Norm Ornstein, emeritus scholar at the American Enterprise Institute. “And if you have some face-saving measure, his speakership is probably over.”
For Biden, the calculation is equally precarious. And should the country default, it’s the president who will bear the brunt of the blame.
Biden has been steadfast in his no-negotiations stance, despite decades of being a bipartisan dealmaker in the Senate.
His posture stems from personal history: In 2011, with then-Vice President Biden leading negotiations with Republican lawmakers, the nation came close to defaulting on its debt after talks abruptly fell apart, leading to a precedent-setting credit-rating downgrade. According to multiple reports, Biden and then-President Barack Obama vowed never again to let the debt limit be used as a negotiating tool.
Republicans have pounced on the inaction from Biden, and even some Democrats have called for him to negotiate with McCarthy. But in doing so, experts say the president risks enabling future debt-limit maneuvering or bringing about an end to his key legislative achievements, some of which are targeted in the GOP legislation. Biden intends to campaign for reelection touting those achievements.
But sending the nation into default – no matter who is at fault – would likely give the GOP even more ammunition heading into 2024. And Biden, who many blame for juicing the economy after the COVID-19 pandemic and then being slow to recognize the threat of inflation, could also be staring at a recession in the coming months and into 2024.
On Wednesday, the White House Council of Economic Advisers weighed in with a scary scenario of what could happen even if the two parties push the debate to the last second. The council mapped out what could happen to the economy based on political infighting that does not result in a default all the way to a protracted period of the government not paying its bills.
“Analysis by CEA and outside researchers illustrates that if the U.S. government were to default on its obligations – whether to creditors, contractors, or citizens – the economy would quickly shift into reverse, with the depth of the losses a function of how long the breach lasted,” the CEA said. “A protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions.”
To seasoned Washington hands, the standoff has all the hallmarks of a common Capitol Hill drama, where the sky-is-falling narratives prevail early only to have Congress eke out a deal at the last moment. It has happened numerous times before. But the current hyperpartisan mood on the Hill, coupled with McCarthy and Biden’s historically weak political standings, have many observers uncertain how it will play out.
It’s not even clear that Yellen’s forecast is the last word on the matter.
“Her estimate, which we view as relatively conservative, was likely aimed at putting pressure on Congress,” economists at Nomura wrote on Tuesday. “Despite significant uncertainty, we still believe the X-date will be sometime in July. Yellen also recognized the possibility of a later X-date by saying ‘the actual date that Treasury exhausts extraordinary measures could be a number of weeks later than these estimates.’”
On Thursday, Mark Zandi, chief economist at Moody’s Analytics, told the Senate Budget Committee at a hearing on the House GOP debt limit legislation that he expects the Treasury will not be able to pay its bills on June 8. He urged Congress to suspend the debt limit until the end of the fiscal year since there’s “no time to get this done before the x-date.”
“This is an especially inopportune time to have a political debate over the debt limit,” Zandi said. “Recession risks are uncomfortably high … the economy is struggling with the increase in interest rates … the banking system is struggling as well at this point. And while it feels like the worst of the crisis is over, it’s still simmering, and the fallout is yet to be felt.”
Not only did Yellen’s letter serve as a wake-up call to politicians who a day earlier had been reiterating their my-way-or-the-highway approach, but a steadily weakening economy served to remind the elected officials that their gamesmanship and a potentially unprecedented default could be catastrophic for the country.
On Monday, the government found itself having to close down another failing bank, San Francisco’s First Republic, and arrange a sale to JPMorgan for an estimated cost to the Federal Deposit Insurance Corp. of $13 billion. It is the third bank failure since March and the second largest on record.
Also weighing on minds was the Federal Reserve’s meeting that ended with yet another increase in interest rates, by 25 basis points, as the central bank confronts slowing but still stubborn inflation. Fed Chairman Jerome Powell, who has studiously avoided any specific comments on what would happen were the government to default, did offer a sobering comment in his press conference Wednesday.
“No one should assume that the Fed can really protect the economy and the financial system and our reputation globally from the damage that such an event might inflict,” he said.
Having the Fed ride to the rescue is one of the options that some have put forth as a way out of the present divide. In an article for Politico last month, the research director for The Money Network cited comments Powell made in 2013 during another showdown on the debt that the Fed could buy or swap defaulted Treasury securities in order to provide funding to the government. However, Nathan Tankus pointed out that Powell, then a Fed governor, considered the idea “loathsome.”
That is considered a fairly draconian response and one the Fed – already under fire for keeping interest rates too low for long and then missing how serious inflation would become – is not eager to add credence to.
“Powell’s willingness to purchase defaulted Treasury securities – however “loathsome” he finds it – casts the entire debate over bypassing Congress on the debt ceiling in a new light,” Tankus wrote. “No option under discussion is more extreme, from the Federal Reserve’s point of view, than stepping in and buying compromised securities of uncertain underlying value. If Powell will buy Treasury securities in the face of government default, he will almost certainly fulfill the Federal Reserve’s legal responsibilities as a fiscal agent and allow the Treasury Department to avoid government default in the first place.”
It’s hard to say whether this “loathsome” option is more plausible than another idea of minting a $1 trillion coin that would be used to evade a default. The coin would essentially be new money from the U.S. Mint that could be held at the Fed for use by the Treasury.
But there are some more realistic options, such as those summarized by the U.S. Chamber of Commerce on Wednesday in a note to its members.
“We continue to believe that a clean debt limit increase cannot pass Congress,” Neil Bradley, executive vice president and chief policy officer, wrote. “We currently see three potential successful outcomes, two more likely and one less likely.”
The potentially successful outcomes include a short-term extension of the debt ceiling until later in the year when Congress and the White House will be engaged in negotiations over the 2024 budget, a longer-term extension that includes a package of future budget cuts but pushes the debt limit into 2025 and a deal brokered from a bipartisan “gang” in the Senate.
The short-term deal is considered the most appealing and one with some history, as it has been used before at least five times, according to the chamber, including as recently as 2021.
“A short-term extension aligned with the beginning of the fiscal year … would align the debate over the debt limit with the debate over appropriated funding levels,” Bradley said. “On one hand, this might make it easier to raise the debt limit because it would now be part of keeping the government open and, for example, funding the troops.”
The counter argument? Congress has shown a willingness in the past to allow the government to shut down over budget disputes.
“Extending the debt limit until the fourth quarter of next year (a few months longer than in the House proposal), combined with extraordinary measures should effectively push the next deadline into the new Congress and administration (early 2025),” Bradley wrote.
“It is impossible to overstate the negative consequences that would occur if the United States were to default on its debt,” Bradley concluded. “The emergence of an early June deadline is providing more clarity to possible paths to lifting the debt limit. Perhaps the most relevant fact about any resolution is that to become law, it will have to be bipartisan; such is the nature of divided government.”
Clarity, perhaps. Resolution? That’s to be seen.