Jan 19, 2023 - Politics & Policy

A debt-ceiling crisis years in the making

Illustration of hat with debt

Illustration: Aïda Amer/Axios

The roots of today's debt-limit standoff stretch back to 2011, when the Tea Party movement helped force then-President Obama to agree to future spending caps in exchange for lifting the ceiling.

Zoom in: For Republicans, the achievement "validated one of the animating forces of the right over the past decade-plus — that the party’s failures are a result of weak, feckless leadership, and if they fight, they win," says GOP strategist Liam Donovan.

  • For Democrats, including then-Vice President Joe Biden, the episode demonstrated why they should never negotiate with hostage-takers.

Driving the news: The Treasury Department has initiated what it calls "extraordinary measures" after the U.S. officially hit its $31.4 trillion debt limit on Thursday, giving the Biden administration and Congress six or so months to stave off a catastrophic default.

Why it matters: Every debt-ceiling standoff begins with both sides digging in their heels — and ends with one of them blinking. But the sour mood in Washington — and on Wall Street — suggests this time could be different.

  • Jeff Siegel, a former Senate staffer who's now head of U.S. public and regulatory policy at BNP Paribas, told Semafor "there's probably never been a greater chance" the U.S. defaults than this year.
  • The venerable political analyst Charlie Cook agrees, writing that the certainty of avoiding calamity through compromise is "lower than we have ever seen before."

What's happening: The Trump era's political incentives — including online fundraising that relies on hyperbole and bluster — have encouraged House Republicans to adopt a politics of grievance and intransigence.

  • Look no further than the way Freedom Caucus rebels dug in during the speaker election, forcing Rep. Kevin McCarthy to make historic concessions that empowered the conference's MAGA wing.
  • Many of those same rebels are once again in the driver's seat: With McCarthy agreeing to reduce the threshold for a no-confidence vote to just one member, any misstep on the debt ceiling could be fatal to his speakership.

The intrigue: Today's populist, culture war-driven GOP is less beholden to the business establishment than it once was, weakening the stakeholders most vocal about the dangers of playing with the country's credit.

Averting disaster

A screen shows the national debt clock after the US hit its debt limit and the Treasury started using "extraordinary measures" to avoid default on Jan. 19, 2023.
Photo: Fatih Aktas/Anadolu Agency via Getty Images

Below are five possible scenarios for how one of the most consequential political fights of the Biden presidency could end:

  1. McCarthy gives in: As outlined above, McCarthy unilaterally disarming on the debt ceiling would likely end his career. Freedom Caucus rebels have been coy about using the single-member "motion to vacate" to oust McCarthy if he fails to extract spending cuts — but it's hard to see what they would use it for, if not this.
  2. Biden gives in: The White House's official line is that they will not negotiate on the debt ceiling. That position forced Senate Minority Leader Mitch McConnell (R-Ky.) to blink during the last showdown in 2021, and Biden is determined to run the same playbook.
  3. Compromise: The "smart money" is on both sides saving face by establishing a commission to make nonbinding recommendations for spending cuts. Sen. Joe Manchin (D-W.Va.), who has at times stifled Democrats' agenda over his own debt concerns, has signaled he may reintroduce a bipartisan bill to create a "rescue committee" for every endangered government trust fund.
  4. Fed mints "the coin": Some progressives have called on Treasury Secretary Janet Yellen to use her unilateral authority to issue a small platinum token, give it a face value of $1 trillion, and deposit it at the Federal Reserve — circumventing Congress and the borrowing limit. Yellen has dismissed the loophole as a "gimmick."
  5. The U.S. defaults: Moody's chief economist Mark Zandi predicted in 2021 that a default "would cost the U.S. economy up to 6 million jobs, wipe out as much as $15 trillion in household wealth, and send the unemployment rate surging to roughly 9% from around 5%," according to WaPo.
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