The Biden administration began “extraordinary measures” Thursday to prevent the federal government from breaching its debt limit and hurtling toward default, a grim scenario with the potential to destabilize markets and devastate the economy.
“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Yellen wrote to House Speaker Kevin McCarthy (R-Calif.) on Thursday.
Newly emboldened House Republicans are trying to leverage the standoff to extract major spending cuts, insisting that previous Congresses and administrations have spent too much on social programs. Some GOP lawmakers have even raised the prospect of seeking changes to entitlement programs, including Social Security and Medicare. But the White House has said it will not negotiate on the debt ceiling, and President Biden has pledged to oppose any attempt to cut entitlements.
On Wednesday, White House press secretary Karine Jean-Pierre said the issue should not be used as a “political football.”
“In the past there has been bipartisan cooperation to address the debt ceiling,” she said, “and that’s how it should be.”
Yellen has said a default could cause “irreparable harm to the U.S. economy.” Federally backed debt is the backbone of domestic and global markets. A failure to make good on U.S. borrowing could set off panic on Wall Street and spark millions of job losses.
In an analysts’ note Thursday, credit rating agency Moody’s said it expected debt limit negotiations to be “protracted, but debt-service obligations will be met.”
“In our view, a debt limit impasse will likely be resolved before a missed interest payment occurs because of public, political and financial market pressures on Congress reflecting concerns about the potentially severe consequences that a missed payment could have on financial markets and the economy,” the firm wrote.
It predicted that even if Congress and the White House did not reach an agreement, the Treasury Department would prioritize debt service payments ahead of social spending.
The United States has never defaulted on its debt. But it has repeatedly come close, particularly in 2011, amid the rise of the conservative tea party movement in the House. Those Republicans’ clashes with President Barack Obama resulted in months of political brinkmanship, generated panic globally and yielded a decade of significant caps on domestic spending that Democrats have long decried as damaging.
Under Biden, congressional Republicans have tried to hold up efforts to address the debt ceiling, prompting an array of experts to emphasize the costs of a potential failure. In one September 2021 standoff, Mark Zandi, the chief economist at Moody’s Analytics, said a prolonged crisis could have catalyzed a full-scale recession in the United States, wiping out billions of dollars in economic growth and eliminating as many as 6 million jobs.
House Republicans have begun planning a set of instructions for the Treasury Department if lawmakers and Biden cannot reach a debt ceiling agreement, The Washington Post reported last week. That plan was part of an agreement that helped McCarthy secure votes from the hard-right House Freedom Caucus to win the speakership.
Rep. Jason T. Smith (R-Mo.), chair of the House Ways and Means Committee, on Thursday called on Biden to negotiate with GOP leaders to cut spending.
“The American people rightfully recognize that maintaining Washington’s status quo, which runs up massive deficits and adds trillions to our national debt, is unsustainable,” Smith said in a statement, adding, “Instead of attacking his political opponents, President Biden should be spending this time working with House Republicans to address the debt ceiling in a way that imposes some fiscal sanity.”
Senate Majority Leader Charles E. Schumer (D-N.Y.) accused House Republicans of brinkmanship that would cause “nothing less than an economic crisis.”
“This is not complicated: If the MAGA GOP stops paying our nation’s bills, Americans will be the ones to pay the price,” he said in a statement.
The debt ceiling fight puts McCarthy in a tenuous position. His caucus risks wearing the blame for a national default and the economic catastrophe that would follow. But even fringe members of the Republican conference could force the speaker’s hand: McCarthy agreed to a rules package that significantly depleted his authority and that would allow any member to force a vote that could remove him from power.
The White House has few options to act unilaterally to avoid a debt ceiling crisis. According to some legal scholars, the president could simply continue borrowing money, drawing on an obscure passage in the Constitution that says “The validity of the public debt of the United States … shall not be questioned.” Some experts argue that clause makes it unconstitutional for the United States to default on its debt, or for Congress to establish a debt limit. But that concept would surely face a legal challenge if the White House opted for it.
Biden could also order the U.S. Mint to strike a $1 trillion coin and deposit the token into the Federal Reserve, creating new funds to make credit payments. The White House briefly considered that idea during the 2021 debt ceiling crunch but ultimately decided against it. Yellen called the coin a “gimmick.”