The United States is on the verge of defaulting. Already, some borrowing costs are spiking, and undemocratic nations are smirking at the dysfunction. The president has no good options left. House Speaker Kevin McCarthy (R-Calif.) is trying to force a choice between default or draconian cuts to education, courts, NASA, transportation and many programs to aid the poor. So far, the few moderate House Republicans are showing little willingness to break ranks.
Biden’s best option is a deal, but there’s not much time before June 1. The basic framework of a compromise has been apparent for a while: a two-year freeze on discretionary spending in exchange for lifting the debt limit through the 2024 election. Brian Riedl, a veteran Republican budget expert, predicted as much this month. It’s a deal no one will love but most can live with and spin as a political victory. It’s also unlikely to send the economy into a recession because the cuts (flat funding is a cut in an era with more than 4 percent inflation) are meaningful but not massive.
There are details to work out. For example, would defense spending be frozen as well? What about additional work requirements on government aid recipients that McCarthy wants? It’s telling that the White House has already offered a one-year freeze and House Republicans rejected it. If the White House puts a two-year freeze on the table and McCarthy still says “no way,” then Biden needs to telegraph that he’s ready to pull an emergency relief valve. Here’s a realistic ranking of his options, from best to worst:
Congress has enacted many short-term extensions to avoid default. It could do so again, but five House Republicans would have to join all Democrats to vote for it. This is not a given.
Senate vote or House “discharge petition”
The Senate has largely left this negotiation up to the White House and House Republicans. But if something close to a two-year freeze is on the table, the Senate could vote on it to pressure Republicans. House Democrats have also lined up a discharge petition, which allows a bill to be brought to the House floor with 218 signatures. (There are 213 House Democrats.)
If these options fail or appear unlikely, Biden’s next-best option is to have the Treasury Department do whatever it can to make it until June 15. That’s the magic day that businesses pay their quarterly taxes, which would give the Treasury Department sufficient funding to last most of the summer.
Temporarily raid the Social Security trust funds
These contain $2.8 trillion. The money is not supposed to be used in a debt ceiling crisis, but the nonpartisan Concord Coalition points out it can be tapped during debt limit standoffs to pay Social Security recipients. There’s a big Social Security payment due on June 2, so this could help a lot. The Concord Coalition also argues that the Treasury Department could use more of these funds by insisting that it can’t prioritize some payments over others — and that to pay Social Security recipients on time, it has to pay all government bills. This is a stretch, but it could buy time.
The Treasury Department could issue “consol bonds”
A consol bond is unique in that it has no end date when all the money has to be paid back. The Treasury Department can argue that these bonds don’t count against the debt limit because, theoretically, the federal government never has to repay the principal. The catch is that the only reason anyone would buy these bonds is if they paid a high interest rate. It’s a costly maneuver, but issuing some of these bonds between June 1 and June 15 seems preferable over alternatives such as a fire sale of U.S. gold.
Let’s say the Treasury Department is able to get to June 15 but money is running out again by the end of the summer and House Republicans still won’t agree to anything remotely in the middle of the road. That’s when some of the more outlandish ideas would start to appear reasonable.
Invoke the 14th amendment
Biden could argue that the debt limit is unconstitutional by saying it violates the 14th Amendment, which states: “The validity of the public debt of the United States ... shall not be questioned.” It will almost certainly trigger a legal challenge and call into question whether any U.S. debt issued after that point is valid. Biden has shown a lot of hesitancy to do this — and rightly so.
Mint the coin
This is where the U.S. government issues a $1 trillion platinum coin that the Federal Reserve then accepts. The U.S. Mint is allowed to issue platinum coins of any denomination, but, as Treasury Secretary Janet L. Yellen has pointed out, it’s a gimmick that investors would probably view as akin to a default.
The worst option is default. No one truly knows what will happen if the United States stops paying its bills, but there will be panic and pain. Even getting close to the brink hurts. Back in 2011, Standard & Poor’s downgraded the nation’s debt rating after the deal was struck and markets kept falling for weeks. This is the other lesson from 2011: Striking a deal with harsh spending cuts that last a decade also leads to lasting harm. If House Republicans refuse to budge from their extreme position, there will come a point at which Biden — and the nation — will be better off taking a leap.