US economy on the brink as time runs low to avert debt default
America is heading close to the brink of a self-imposed economic disaster with the Republican-led House refusing to pay the country’s debts unless President Joe Biden agrees on cuts to current and future spending and new curbs on social programs.
Unless a compromise to raise the government’s borrowing authority is reached within days, the US could lose its reputation as the stable anchor of the global economy. Millions of people could see retirement and veterans benefits put on hold once the government exhausted its ability to pay its debts due to the borrowing cap set by congress.
A US default would reverberate through the financial market, likely triggering a recession that would cause serious job losses and shatter an already fragile sense of economic security for many families.
After a weekend of acrimony between negotiators for House Republicans and the White House, Biden will meet House Speaker Kevin McCarthy Monday for critical talks on pulling the economy back from the precipice. The president just returned to the US from Japan, where he was put in the stunning position of being unable to reassure fellow world leaders that Washington will not tip the global economy into chaos.
Pressure on the meeting is immense, since Treasury Secretary Janet Yellen has warned that the government will be unable to meet its obligations unless Congress raises the debt ceiling by June 1. But serious damage could occur before then because the mere suggestion that the crisis cannot be solved could send panic through financial markets and damage confidence in US creditworthiness.
Biden has already backed down from his position that he will not negotiate over the debt limit — which needs to be raised to pay for spending already authorized by Congress and authored by him and previous presidents. His officials says it’s irresponsible for the GOP to hold the country “hostage” on such a critical issue. Republicans, however, say that the government is spending too much money and see the threat of financial calamity as their premier leverage against Biden.
While Biden was in Japan, the only stop of a longer trip he was forced to cut short, negotiators from both sides appeared to make progress before talks stalled, with each side blaming the other. The president suggested that the pro-Donald Trump extremists in the House were ready to sabotage the economy in a bid to doom his reelection campaign.
“I think there are some MAGA Republicans in the House who know the damage it would do to the economy, and because I am president, and a president is responsible for everything, Biden would take the blame and that’s the one way to make sure Biden’s not reelected,” he said in Japan.
McCarthy said Sunday morning that Biden was shifting positions because of pressure within his own party. “So I think he’s got to get away from the socialist wing of the Democratic Party and represent America,” the speaker told reporters.
The rhetoric eased a little, however, after Biden and McCarthy spoke as the president flew home on Air Force One. “I believe it was a productive phone call,” McCarthy said, adding that his proxies, Reps. Garret Graves and Patrick McHenry, were resuming talks with the White House.
Roller coaster negotiations, suspended talks and accusations of bad faith are part of any spending showdown in Washington. The acrimony is often greatest when bargaining hits a critical point prior to an eventual deal. And both McCarthy and Biden have a political interest in showing members of their own parties that they are being tough on the other side.
But there are reasons to think that this is not like feuds between previous presidents and congresses – a factor that makes the current situation so grave.
To begin with, there’s no guarantee that a Biden-McCarthy deal could make it through Congress. McCarthy already passed a bill raising the debt ceiling in exchange for a wish list of Republican demands. Even that measure — which had no chance in the Democratic-led Senate — only passed by a single vote. Any deal acceptable to Biden would, by definition, be far less attractive to Republicans – raising doubts over McCarthy’s capacity to pass it.
Given his tiny House majority, the Californian is one of the weakest speakers of modern times. In order to win the job in January, he offered multiple concessions to GOP hardliners, including the restoration of a rule that any single member could call a vote on his ouster. That means he could again be held hostage by the right-wing of a party that includes many members who see compromise as defeat.
Biden may not be wrong hat some pro-Trump partisans are willing to risk economic disaster if it ruins his presidency and helps his predecessor win a non-consecutive second term. Trump fueled these suspicions by suggesting at a CNN town hall earlier this month that defaulting on US debts may not be that serious.
If anything, Republican demands are getting tougher. The budget proposal the GOP presented over the weekend included at least two items that were not in the original GOP bill – immigration provisions and additional changes to the work requirements for food stamps, a source with direct knowledge of the matter said.
McCarthy won the support of Republican Sen. Bill Cassidy of Louisiana, who told CNN’s Jake Tapper on “State of the Union” Sunday that “the President has been jacking up spending his first two years of the presidency. Now he wants Republicans to accept that as a new baseline.”
“I think Republicans and the American people are reasonable to say, ‘Mr. President, just because you have artificially inflated spending for the first two years of your presidency, by the way, given us all kinds of inflation, to boot, does that become the new baseline?’”
Republicans have every right to seek to curtail spending — they won the House, albeit narrowly last year on a platform partly rooted in the issue. But the House GOP’s willingness to use the debt ceiling to trim expenditures at the risk of pitching the country into an economic nightmare is an example of the radicalism of the House majority.
McCarthy could have chosen to seek concessions in the lower risk process of budget talks. The GOP has also faced accusations of hypocrisy after being willing to raise the debt ceiling when Republicans were in the White House, notably under the free-spending Trump.
Yellen on Sunday pushed back on claims by Republicans that the administration could stretch the deadline for raising the borrowing limit to June 15, saying the probability that government finances could hold out that long was quite low.
“My assumption is that if the debt ceiling isn’t raised, there will be hard choices to make about what bills go unpaid,” Yellen said on NBC’s “Meet the Press.”
The dynamics of the standoff rest on each side’s assumption that the other will pay the greatest political price if the economy goes into free fall because of a default.
It is questionable whether the House GOP’s refusal so far to compromise with Biden fully reflects the will of Americans. While they control the chamber with a tiny majority — McCarthy can only lose four votes to pass a bill — Democrats run the Senate (with an even smaller majority) and also hold the White House.
This is a balance of power that ought to drive both sides towards a compromise, but extremist elements in the House GOP could make that impossible.
How this showdown plays out will be critical for the power dynamic in Washington since, if Biden caves, the GOP is sure to try to jam him again on the debt limit before the next election. The confrontation will also be vital to Biden’s legacy, since the GOP is seeking to curtail some of the president’s earlier achievements, including his efforts to fight climate change.
Like McCarthy, Biden also faces political pressure within his own party after some progressive Democrats expressed fears he would offer the speaker too much in any deal. Democrats are especially angry about GOP efforts to impose new work requirements for Medicaid and supplemental food benefits for needy families.
Democratic Rep. Summer Lee of Pennsylvania accused Republicans of “cruelty,” telling Tapper on “State of the Union” that the GOP proposals would push people further into poverty.
Some Democrats have called on Biden to invoke powers under the 14th Amendment to the Constitution to unilaterally raise the debt ceiling – a duty that is reserved to Congress under the law. The president said in Japan that he believed he had the authority to do so, but raised doubts about whether such a move was possible in the limited time-frame available and whether it might be upheld in legal challenges that could go all the way to the Supreme Court.
But as well as protecting his own legacy, Biden does have to be conscious of the discomfort in his own party. Any final deal with McCarthy will need Democratic support in the Senate. And polls already show limited enthusiasm in the party for his reelection bid that will rely on huge turnout at the polls among Democrats in November 2024.
While the primary victims of a default would be millions of Americans, the fraught politics of the moment mean the careers of both Biden and McCarthy could depend on how their confrontation plays out in the coming days.
In the meantime, the US is heading towards an economic cataclysm of its own making.
“We’re in an insane situation,” Maryland Democratic Sen. Chris Van Hollen said on ABC “This Week.”