Biden aides want to force GOP to abandon debt limit threats

REUTERS/Ken Cedeno
U.S. President Joe Biden exits St. Edmond Catholic Church after attending mass in Rehoboth Beach, Delaware, U.S., January 21, 2023.

Shortly after last year’s midterm elections, a senior congressional Democrat called White House Chief of Staff Ron Klain and asked how the administration planned to prevent the new Republican House majority from using the debt ceiling – and the threat of a default that could wreck the economy – to force spending cuts.

Klain said the White House’s plan was straightforward, according to the lawmaker: Refuse to entertain any concessions, and launch a barrage of attacks highlighting the GOP position that would force Speaker Kevin McCarthy (R-Calif.) to fold.

“This debate is simple: We want to do the responsible thing, and they want to take the entire American economy hostage to cut Social Security and Medicare,” said the member of Congress, speaking on the condition of anonymity to reflect private conversations. Klain told the lawmaker that the fight could result in substantial political benefits for the Democratic Party. “The point he was making was clear: You can’t negotiate with people who take hostages.”

But the question remains what the administration will do if Republicans won’t raise the debt limit without negotiations.

House Republicans have increasingly signaled that they will force a showdown with the administration over the nation’s debt ceiling, which sets a statutory limit on how much the federal government can borrow. The Treasury Department said Thursday that the government has hit the current $31.4 trillion limit, and it’s now undertaking complex financial maneuvers so that federal agencies can operate – and bills can be paid – without borrowing more. That will work until sometime this summer, but at some point, Congress will need to raise or suspend the debt ceiling, or the United States will default on its obligations for the first time, undermining the full faith and credit of the U.S. government and potentially causing a global economic shock.

Many GOP lawmakers have said that they will not approve a debt ceiling increase without cuts to spending programs that the Biden administration has vowed to protect, creating an impasse with no clear resolution.

The GOP’s stance has forced White House officials to grapple in recent weeks with what their options would be if the Treasury Department can no longer meet the federal government’s payment obligations, according to five people with knowledge of preliminary internal conversations.

Those discussions have led administration officials to conclude, at least for now, that the only viable path is to press Republicans to abandon their demands to extract policy concessions over the debt limit – a position they have publicly reaffirmed in recent weeks. The Biden administration is focused on pressing the GOP to unveil a debt limit plan that includes spending cuts, with the hope that such a proposal will prove so divisive among Republicans that they are forced to abandon brinkmanship. This strategy stems in part from the belief among White House officials that it would be enormously risky either to negotiate policy with the GOP on the debt limit or try to solve it via executive order – and they appear willing to put that premise to the test.

A White House spokesman declined to comment on internal discussions but pointed to press secretary Karine Jean-Pierre’s prior remarks on the debt limit, including her claim that “we’re just not going to negotiate about that.”

“My sense is the White House believes that agreeing to negotiate sets an awful precedent for holding hostage the country’s creditworthiness to push policy preferences. I don’t believe they’ll go down that path, nor do I think they see any credible unilateral options to resolve the impasse,” said Daleep Singh, who served as deputy director at the White House National Economic Council for Biden and is now at PGIM Fixed Income. “They expect Republicans to ultimately end the madness.”

How to approach the debt limit could prove one of Biden’s most critical decisions this year. But the current strategy is not without risks. The most obvious danger is if House Republicans refuse to raise the debt limit without an agreement on significant spending cuts, triggering a default. That could lead to a financial panic, if not a recession, and severe economic hardship for millions of Americans as well as potential political pain for the White House ahead of the 2024 presidential election. Biden appeared to indicate on Friday that he would be willing to meet with McCarthy about the debt limit impasse, though White House aides said nothing has been scheduled.

“If the administration wants to take it to the brink, that will be their decision, but I think that that’s going to be on their hands,” said Rep. Scott Perry (R-Pa.), the chairman of the House Freedom Caucus and one of the 20 hard-liners who forced concessions from McCarthy last month in exchange for the votes to make him speaker. “Certainly it’s not going to be on mine.”

Further complicating the White House’s plan is that, so far, even moderate House Republicans have backed the GOP’s approach to demanding spending cuts. A rarely used congressional procedure known as a discharge petition that could force a vote on the House floor could take months to materialize, and McCarthy might still be able to block it.

“The idea that they’re saying, ‘We’re not going to negotiate,’ is laughable,” said Rep. Michael Lawler (R-N.Y.), a freshman who is among the moderates whose support Democrats would probably need for a discharge petition. His moderate Republican colleagues feel the same way, he added.

Sens. Joe Manchin III (D-W.Va.) and Mitt Romney (R-Utah) have floated creating a set of committees that would make nonbinding recommendations on how to shore up the Social Security, Medicare and highway trust funds as part of a deal to raise the debt limit, but conservative lawmakers are already ruling out those suggestions.

“Having a commission doesn’t solve anything,” Perry said.

Other GOP lawmakers have discussed using the debt limit to insist on major cuts to domestic spending outside of Medicare and Social Security, trying to secure additional funding for border security, or forcing the administration to rescind covid policies. All of these, though, would require the Biden administration to reward GOP demands with policy concessions, which White House aides have said they won’t do.

Still, circumventing congressional Republicans altogether also appears to be a nonstarter. As they did during a debt limit standoff in 2021, White House officials have in recent weeks discussed the feasibility of minting a so-called $1 trillion coin to circumvent the debt limit, or invoking the 14th Amendment of the Constitution to declare the debt ceiling unconstitutional. Dean Baker, a White House ally and liberal economist, said he has also pitched administration officials on a plan to have the Treasury buy back previously issued government bonds that are now trading at a discount because interest rates have increased. That could give the administration more time to avoid hitting the borrowing limit, because the amount of outstanding debt will be reduced at a cheaper rate than its official value.

Yet there are major concerns with these unilateral options as well. Congressional Republicans would almost certainly immediately denounce any executive action to resolve the standoff as unconstitutional, and litigation would probably ensue, which could in turn wreak havoc on the Treasury Department’s ability to auction U.S. government debt on the market, administration officials fear. Uncertainty around whether new bonds are legal could lead purchasers to demand much higher interest rates, leading to hundreds of billions in additional federal costs, according to one Democratic adviser, who spoke on the condition of anonymity to cite conversations with senior White House staff. The Supreme Court’s conservative majority could also strike down any unilateral action such as the coin, forcing the administration back to the negotiating table with the GOP in a potentially weaker position.

“What does a Treasury auction look like when one party claims the debt being issued is invalid? What happens to that auction?” asked David Kamin, a law professor at New York University who previously served as deputy director of the National Economic Council in the Biden White House, but stressed that he was not speaking on behalf of the administration. “If the president gets forced to pick between bad options, he’ll have to do something. But we can’t pretend there aren’t really significant downsides to the actions on the other side of the X Date.”

Rohan Grey, a professor at Willamette University College of Law and public finance expert, said that if the Supreme Court rules against unilateral White House action, Biden could respond by declaring its decision inconsistent with the president’s constitutional duties and ignoring the judiciary, citing similar moves by Abraham Lincoln during the Civil War. Grey and Nathan Tankus, another expert in public finance, said it would be unlikely to come to that because the administration would be on safe legal ground in minting the coin, with Tankus pointing to the obligation of the central bank to manage stress in the market for government treasuries.

“An option that involves the Treasury being able to make payments without holding auctions and does not involve any defaulted securities should be far easier to manage than liquidity strains from risking default or even outright defaulting,” Tankus said.

Sen. Chris Van Hollen (D-Md.) was part of a small group of lawmakers and Obama administration officials that Biden convened in 2011 while he was vice president to try to strike a deal with Republicans to raise the debt limit. Van Hollen said he and Biden took away the same lesson: Never negotiate over the debt limit again.

“The internal thinking in the White House reflects the public statements, which is: We’re not going to negotiate with those who take our economy hostage to try to implement their extremist agenda,” Van Hollen said in an interview.

“Getting closer to the cliff may clarify the issue for some House Republicans who aren’t willing to consider doing this the responsible way from the get-go,” he said.

For many Democrats, a debt limit standoff could bring political benefits because they believe the public will not side with Republican attempts to extract concessions at the risk of default. The lawmaker who spoke with Klain about the debt limit shortly after last year’s elections, for instance, put it this way: “If we can’t win on that, we can’t win on anything.”