On Tuesday afternoon, the Oval Office saw America’s top executive and legislative leadership come together. President Joe Biden and vice-president Kamala Harris were flanked by House speaker Kevin McCarthy, House minority leader Hakeem Jeffries, Senate majority leader Chuck Schumer, and Senate minority leader Mitch McConnell.
Biden began the meeting by telling the gathered press, “Get a good picture of all of us. We are having a wonderful time. Everything is going well.”
The sarcasm was unmistakable, for Americans knew things
On Tuesday afternoon, the Oval Office saw America’s top executive and legislative leadership come together. President Joe Biden and vice-president Kamala Harris were flanked by House speaker Kevin McCarthy, House minority leader Hakeem Jeffries, Senate majority leader Chuck Schumer, and Senate minority leader Mitch McConnell.
Biden began the meeting by telling the gathered press, “Get a good picture of all of us. We are having a wonderful time. Everything is going well.”
The sarcasm was unmistakable, for Americans knew things were not going well. And, just minutes later, the world knew it wasn’t going well either, as the White House formally announced that Biden was cancelling the Australia and Papua New Guinea leg of his visit. The US President had decided to return home after attending the G7 summit in Japan to meet Congressional leaders again and ensure that America did not default on its debt obligations.
What’s the debt ceiling crisis that prompted the US President to cancel such a strategically significant visit? What’s the politics behind the White House-House of Representatives gulf? And why is June 1 crucial?
The debt ceiling ritual
In the US, the Congress has the authority to decide how much money is spent and how. It also, separately, has the authority to decide how much the executive can borrow to bridge the deficit and spend what’s been decided. As the US Government Accountability Office puts it, “The debt limit does not restrict the Congress’s ability to enact spending and revenue legislation that affects the level of debt or otherwise constrains fiscal policy; it restricts the Treasury’s authority to finance the decisions already enacted by the Congress and the President.”
In 1917, the US, to muster up resources for the First World War, began issuing liberty bonds to citizens. Through the Second Liberty Act, the Congress imposed a limit on the number of bonds that could be issued. At this point, the legislature was actually creating an enabling provision so that the executive did not have to repeatedly turn to the Congress to sanction borrowing. In 1939, the Public Debt Act aggregated all federal debts. Ever since, the Congress has amended the ceiling defining how much the executive can borrow over 80 times, from $65 billion in 1941 to $985 billion in 1981 to $4.6 trillion in 1996 to $31.4 trillion this year.
But what was once meant to empower the executive has become a provision to limit the executive’s room for action in a polarised political climate. Each time a Democrat is in the White House, and Republicans control either or both chambers of the US Congress, the Grand Old Party uses the debt ceiling deadline to tell the executive to cut its spending, and unless that is done, threatens it with the prospect of US defaulting on its debt obligations. This happened most visibly in 2011 during the Barack Obama presidency, and is repeating itself in 2023.
The politics behind the deadlock
What makes this crisis more acute is that both sides have adopted rather entrenched positions. The US hit the debt ceiling on January 19, and since then the Treasury Department has resorted to extraordinary measures. Janet Yellen, the Treasury secretary, has now warned that unless the Congress raises the ceiling by June 1, the US risks defaulting on its debt obligations.
Biden, who negotiated with the Congress during the 2011 crisis, decided that the lesson was not to make debt ceiling a subject of negotiation at all. His repeated message to the US Congress in the past four months has been simple — it is your job to raise the debt ceiling since this is about money that you have already authorised we spend. The Democrats have hoped that public opinion will squarely blame the Republicans for the impasse and lead to flexibility.
But McCarthy has adopted a strong position as well. The speaker only became speaker because he had to make concessions to the far-right flank of his party which made a tough position on the debt ceiling a precondition for their support. At the end of April, the speaker succeeded in pushing through a bill in the House that made raising the debt ceiling by $1.6 trillion contingent on drastic spending cuts. With Democrats controlling the Senate, this was not a serious exercise in legislation but a political message to the White House. In effect, McCarthy has been telling Biden — get to the table, cut spending, or be ready to take responsibility for witnessing US default under your watch for the first time in its history.
Both Biden and McCarthy are also locked in by political constraints. The President knows that Democratic progressive caucus within the House won’t take kindly to spending cuts; as elections approach, he also does not want to roll back any provisions of his signature legislations from the past two year which have a welfarist element. McCarthy knows that if he is seen as too flexible, he could well lose his job because in the quest to become speaker he agreed to a provision where even a single member can call a snap vote to remove him from office. The far-right members of his party, who constitute what is called the Freedom Caucus, won’t hesitate to pull the trigger. With many of them owing their loyalty to Donald Trump, who is once again the front runner for the Republican nomination, a crippled Biden administration, even if is at the cost of US defaulting, is a tempting proposition.
The risks
In 2011, the Obama White House and the Republican Congress finally struck a deal two days before the deadline that would have resulted in US defaulting on its obligations. The Republicans agreed to raise the debt ceiling by $900 billion, Obama agreed to spending cuts worth $917 billion over the following decade. But, by then, stock markets had tumbled, S&P downgraded US credit ratings for the first time in history, and according to GAO, America’s borrowing costs had risen by $1.3 trillion.
The risks this time are even greater. As Arvind Subramanian, India’s former chief economic adviser and a scholar of global economic trends, told HT earlier this year, “If the US breaches the limit then financial markets panic because trust in the single most trusted borrower in the world — Uncle Sam — is jeopardised. And literally every interest rate in every market in the world is priced off US government bonds (the debt). So, if this market is rattled, the risk is of all global markets being rattled.” He added that the episode also highlighted how US politcal polarisation undermined US credit and global standing. “You can’t be a superpower if you cant pay your bills domestically because there is so much infighting.”
On Tuesday, both sides appeared to walk away with some hope. McCarthy said there was a structure and format to negotiations as he and Biden delegated their top aides to meet daily to find a compromise. Biden said that the talks with the Congressional leadership had been productive and there was an overwhelming consensus in the room that defaulting wasn’t an option.
But if the US failed, the President warned, “Our economy would fall into recession. It would devastate retirement accounts, increase borrowing costs. And according to Moody’s, nearly 8 million Americans would lose their jobs. And our international reputation would be damaged in the extreme if we were to let that happen.” He added that both sides may have policy differences but this was not the time to battle that. “We have never defaulted on our debt, and we never will.”
Given the stakes involved, both for the US and the global economy and his own political record, it is not surprising that Biden decided staying home, rather than going to Papua New Guinea and Australia for important foreign relations engagements, was more important.
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