In the 14th vote to elect a speaker for the House of Representatives in January, Kevin McCarthy (Republican-California) needed just one more vote. On the House floor, McCarthy approached Matt Gaetz (R-Florida), a protégé of Donald Trump, to clinch that support. Gaetz rebuffed him. As McCarthy walked away, Mike Rogers (R-Alabama) lunged at Gaetz only to be pulled away by colleagues. One warned Rogers to “stay civil”.[1]
A short time later, in the early hours of 7 January, a 15th and more civil vote was held and McCarthy secured the leadership of the arm of Congress that shifted to Republican control 222 to 213 in elections in November. McCarthy’s problem had been that about 20 GOP colleagues refused to support him, to mark the first time in 100 years the House failed to elect a speaker on even the first ballot. It took four days of inter-party deal-making for McCarthy to shift enough of his party opponents.
Rogers’s thrust at Gaetz showed the intensity of the combat within the GOP. It’s unclear if all the concessions won by the ‘Freedom Caucus’ holdouts have been revealed. One condition, however, has. Republican lawmakers will only vote to raise the federal government’s debt limit if spending cuts are embedded in the legislation.
The issue is immediate. On 19 January, Washington reached its legal borrowing limit of US$31.381 trillion (a number that includes US$6.2 trillion the US government owes itself). Congress needs to lift the ceiling to cover Washington’s fiscal deficit, which is forecast to top US$1.4 trillion, or 5.3% of GDP, Congress, effectively, needs to raise the ceiling to pay for the programs it has already approved.
But Republican hardliners are adamant that Congress must tackle the perennial deficits from 2002 that have boosted Washington’s debt (excluding the amount the government owes to itself) to 98% of GDP, from 35% at the start of this century. The problem is that Democrat President Joe Biden says he will only sign into law a bill that raises the debt limit unconditionally.
Thus, Washington is hosting another showdown over an artificial cap on government borrowing that was first installed in 1917.[2]Since then, Congress has raised this barrier more than 100 times but not always smoothly. In 1953, Congress hesitated over raising the limit for the first time because lawmakers baulked at funding a national highway system. In 1985, 1990, 1995-96, 1997 and 2011, to cite notable subsequent showdowns, the outcomes were compromises whereby an increase in the ceiling was linked to fiscal tightenings.[3]
The fight over the debt ceiling in 2023 is shaping as another notorious brawl. Today’s game of ‘debt-limit chicken’, in fact, could be the most-damaging yet for three reasons. First, the polarisation haunting US politics means neither side’s supporters will accept a backdown – if anything, the only goal of the Republican hardliners is to resist the Biden administration. Second, the Republican party’s narrow hold of the House gives these GOP ideologues outsized sway. Finally, these GOP hardliners have no set demands, let alone ultimatums that could pass as a serious attempt to steady Washington’s finances. Where do talks with the White House even start?
The brinkmanship over the US debt ceiling threatens to boost US bond yields, the benchmark for global credit markets, and could even destabilise financial markets, especially if the US defaults. That the bluster will take place as rising interest rates are boosting government repayments (thus widening the deficit), and the Federal Reserve’s quantitative tightening (money destroying) is sapping at liquidity on US bond markets magnifies the danger.[4] A shattering outcome – a “calamity” as Biden warns – can’t be ruled out.
To be sure, the US Treasury is adept at taking the extraordinary steps (via loopholes in the ceiling) that buy time when Washington has hit its debt limit – the ceiling, thus, won’t be hit until mid-year. Even then, the Treasury can prioritise interest payments and defer payments to postpone any default until 2024. But that delay could lead to posturing that hardens the stances of both sides, especially if the US goes into default around mid-year and no immediate meltdown occurs. Republicans might retreat to avoid being linked to unpopular spending cuts. They are aware too that past debt-ceiling showdowns have hurt them in the polls. The most optimistic outcome is possible too: that Congress abandons the debt-ceiling rule and this is the last-ever such confrontation.
But this is the era of polarisation. Congress hosts too many hardliners on either side for a ready compromise. The unthinkable – global turmoil triggered by a US default (however fleeting) – could happen.
Unsound footing
Biden’s insistence that he will only sign an unconditional increase in the debt ceiling appears grounded into the debt-ceiling fights of 2011 to 2013 when he was vice-president to Barack Obama. In that era too, the House or Representatives was under Republican control while the Democrats held the Senate.
In the 2011 torment, Obama accepted a budget deal to raise the ceiling but was determined to never do so again. In 2013, an unflinching Obama forced a Republican backdown and the debt limit was raised without conditions.[5] Biden is expected to seek a second term. Any folding on the debt limit could undermine party support for this ambition, especially when many think Biden, at 80 years of age, is too old to be president until January 2029.
The Republican side contains a clique of lawmakers described as ‘hardline conservatives’ who are adamant they will not raise the debt ceiling without spending cuts because they want Washington to act responsibly with public finances.[6] The Republican’s slim House majority gives this hardline faction the power to cement the party’s position on the issue.
The Republicans, when formulating a budget plan for the coming financial year, should need to spell out where they are seeking spending cuts, a politically fraught exercise and one that is contentious within the party, let alone with the public. Already Republicans are arguing over cuts to the military budget. Some want reductions to welfare and health spending, which is politically risky.[7] But no one is outlining deep cuts. The lack of a set of demands limits the Democrats ability to negotiate.
However hardline some, most or even all Republicans might or might not be, they have a point that the Washington’s debt binge is unsustainable. Washington last recorded a surplus in 2001 and none is in sight. If all government taxing and spending remains in place, the Congressional Budget Office forecasts Washington’s debt to reach 131% by 2037 and 195% by 2053.
Investors seem blasé about the debt fight. The problem is that this reduces pressure on the Republican hardliners to capitulate. Such twists are how comes about the calamity of which Biden warns.
ENDNOTES
All US federal government finance data comes from the Congressional Budget Office, which can be found at cbo.gov.
[1] See, ‘Kevin McCarthy wins election as House Speaker after days of gruelling negotiations.’ The Wall Street Journal. 7 January 2023. wsj.com/articles/kevin-mccarthys-house-speaker-bid-heads-to-fourth-day-as-talks-continue-11673002595. See also ‘Kevin McCarthy wins House speaker bid after gruelling 15-vote saga.’ The Observer of the UK. 7 January 2023. theguardian.com/us-news/2023/jan/06/kevin-mccarthy-republican-wins-house-speaker
[2] The ceiling of 1917 allowed Congress to group bonds into categories rather than approve each issue separately, to smooth funding for the war. In 1939, with another world war likely, Congress created an aggregate debt limit.
[3] The Balanced Budget and Emergency Deficit Control Act of 1985, the 1990 budget omnibus, 1996’s Contract with American Advancement Act and the Balanced Budget Act of 1997 raised the debt ceiling, as did the Budget Control Act of 2011 after the near default. See ‘Unfreezing the debt-ceiling debate.’ City-Journal. 26 January 2023. city-journal.org/unfreezing-debt-ceiling-debate
[4] See Gillian Tet ‘The Fed finds itself in a nasty hole.’ Financial Times. 27 January 2023. ft.com/content/44289101-b03f-4c84-b50b-0e6969b0a17a
[5] See ‘The logic behind Biden’s refusal to negotiate the debt ceiling.’ The Atlantic. 28 January 2023. theatlantic.com/politics/archive/2023/01/biden-debt-ceiling-negotiation-republicans-congress-obama/672858/
[6] See ‘In debt-ceiling fight, some in GOP don’t care if a ransom is paid.’ MSNBC. 1 February 2023. msnbc.com/rachel-maddow-show/maddowblog/debt-ceiling-fight-gop-dont-care-ransom-paid-rcna68343. See also ‘The lessons of the 2011 debt-ceiling crisis, explained by the negotiators who were there.’ Vox. 1 February 2023. vox.com/policy-and-politics/2023/2/1/23581229/debt-ceiling-crisis-2011
[7] See ‘House GOP grits its teeth for the ‘big lift’: A budget battle.’ Politico. 30 January 2023. politico.com/news/2023/01/30/house-gop-budget-battle-00079997
