The debt ceiling has a long history (read about it here). It’s a gimmick enacted by Congress to restrain its own spending.
It’s not a budget, it’s a borrowing limit, and potentially could prevent Treasury from paying expenses previously approved by Congress, as the U.S. has run budget deficits every year since 1969 except for 1998-2001 (see chart here).
Despite steadily rising debt (chart here), the U.S. has never defaulted, and the 14th Amendment says it can’t. The relevant phrasing is, “The validity of the public debt of the United States … shall not be questioned.” This provision has never been invoked to override the debt ceiling law, but theoretically it could be, as the Constitution takes precedence over laws enacted by Congress.
The debt continued to increase under both Trump and Biden, partly because of Trump’s tax cuts and pandemic relief spending. Despite that, the federal government’s interest expense is way down over the last 25 years, due to low interest rates (see chart here).
But rising debt isn’t why Republicans are demanding steep spending cuts. This is all about politics. I’ll get deeper into that below. Today, there’s a real danger of a debt default, and economists warn of dire consequences if that happens, including a stock market crash and high unemployment (see article here).
The big question is, will it actually happen? Nobody knows. Despite past brinkmanship, a default never occurred, but might this time.
It’s just politics
Politics is about self-interest. Political activity is fundamentally selfish in nature. As political scientist Harold Laswell famously said, “politics is about who gets how much of what.” Congressmen win votes by “bringing home the bacon.” Interest groups and lobbyists vie for government funding of their pet projects.
Republicans and Democrats have different philosophies. Republicans claim to believe in small government and free markets, while Democrats believe in regulated markets and calling upon “big government” to solve social problems like poverty and racism.
Republicans and Democrats have different spending priorities. Republicans like military spending, business and farm subsidies, and spending on border security and law enforcement, while Democrats want funding for regulatory agencies, helping the poor, and the safety net.
The debt ceiling fight is about spending
Republicans aren’t against deficits or higher debt based on principle. Every Republican administration since World War 2 has engaged in deficit spending. The only recent president to run a budget surplus was Bill Clinton, a Democrat, and then only briefly. While Trump was president, Republicans in Congress raised the debt ceiling three times without a squawk.
Republicans are trying to undo spending approved by the previous Democratic Congress. The debt ceiling fight isn’t about future spending. Republicans, because they now control the House, will write the next budget. They’re trying to block the spending approved by the last Congress, when Democrats were in control.
Republican demands are extreme
Republicans are demanding huge spending cuts. They’re using 2022 instead of 2023 spending levels as a baseline, which amounts to an upfront 9% reduction in total federal spending, after adjusting for inflation. Their bill also caps future spending growth at 1% a year, with no allowance for inflation or population growth, which effectively mandates continuing spending reductions.
The GOP debt ceiling bill would drastically shrink the federal government. But they exempted the Pentagon and Social Security from cuts, the rest of government would have to absorb immediate cuts in the 22%-30% range, and the spending growth cap means those agencies would continue to shrink every year.
The spending cuts Republicans are demanding reflect their partisan priorities. This isn’t just about spending less, or smaller government. They aren’t proposing across-the-board spending cuts or limits. For example, they left ethanol subsidies to farmers intact. They’re directing the cuts to Democrat-supported programs they’ve opposed for years, such as food stamps, Medicaid, and green energy.
Their goal isn’t to reduce deficits. If it was, they wouldn’t oppose increasing IRS funding to catch wealthy tax cheaters, which brings in more tax revenues and reduces deficits.
The parties are far apart
McCarthy has no visible wiggle room. The GOP debt ceiling bill passed in the House with no votes to spare, and only after months of tough bargaining within the GOP caucus. To get enough votes, McCarthy catered to extremists. He has little room to negotiate, because he could lose his Speaker position if he makes too many concessions, and GOP hardliners will tolerate very few concessions.
Democrats will never agree to this, regardless of consequences. The GOP debt ceiling bill undoes things they fought long and hard for, and won at the ballot box. Giving in to the Republican demands would betray their voters and cost them the trust of their supporters. Also, they learned in 2011 that negotiating with Republicans over the debt ceiling is a “heads they win, tails we lose” game, so they’re digging in their heels and demanding a no-strings debt ceiling raise or “clean bill,” and Biden has the backing of Democrats in the House and Senate for this position.
There are ulterior motives in play and high political stakes. Biden wants to portray himself as a president who gets things done when he runs for re-election. Republicans want to make him look weak. They also want to force him to break promises to his voters; in particular, they’re targeting student loan forgiveness, hoping that if he can’t deliver for young voters, they won’t turn out for him in 2024 as they did in 2020.
Where things stand, and where might they go
Democrats are still insisting on a no-strings debt ceiling increase. Biden hasn’t moved off this position, and Senate majority leader Schumer called the GOP House bill “dead on arrival.” But Biden is finally meeting with McCarthy, has told him he’s willing to negotiate on next year’s budget (which he has to anyway), and also suggested he’s open to returning unspent Covid funds to the Treasury. That’s something Republicans want, and is part of their demands, which gives him a bargaining chip and a means to give them a face-saving victory without hurting his standing in his own party.
House Republicans won’t agree to a debt ceiling increase without concessions. The debt ceiling is the only leverage they have, Senate Republicans have their back, and like the Democrats they feel something to show their voters. But their demands are so extreme they’ll have to concede much more than the Democrats to reach a deal, and it’s very questionable whether they can or will do that.
Treasury Secretary Yellen said there are “no good options” if Congress doesn’t pass a debt ceiling increase. She rejected gimmicks like minting a trillion-dollar coin, and said she doesn’t believe strategies like invoking the 14th Amendment or simply ignoring the debt ceiling will work.
The political risks are high for both parties. If a default occurs, and there are severe consequences, there’s no telling who voters will blame.
Both sides are playing a game of chicken. And as in every game of chicken, there’s a possibility neither side will blink in time, so even though nobody wants a default to happen, they could stumble into one.
Biden is signaling he won’t allow a default to happen. He said “everything is on the table,” and pointedly didn’t rule out invoking the 14th Amendment.
There’s a huge potential gain for Democrats by using the 14th Amendment. If it’s upheld by the Supreme Court, it would permanently kill the debt ceiling law, and Democrats would never again have to negotiate with Republicans over the debt ceiling, or have it used against them. The worst that could happen is the court might uphold the law, which simply preserves the present status quo. Thus, the risk-reward ratio strongly favors using it.
It would turn into a separation of powers battle. Using the 14th Amendment is basically a war between two branches of government, and the court would be caught in the middle. But the conservative justices could use the case to weaken the executive branch, a longtime conservative goal.
It could have consequences for the Supreme Court. If the court upheld the debt ceiling, and a default followed, much of the public anger likely would be deflected from Congress and/or the Executive to the court. That wouldn’t bother Biden, and McCarthy probably wouldn’t mind very much. Thus, both have an incentive to push things to that point. It also would further weaken public support for the court, and its legitimacy, which would give Biden political capital to expand or term-limit the court farther down the road. It also likely would hurt Republicans in the 2024 elections. Thus, I think the odds favor the court neutering the debt ceiling law.