These things may seem contradictory. They are not, and the somewhat subtle distinction between the two is important for understanding what is happening in Washington, DC, this summer.
Congress has two important deadlines coming up.
One is the day that the US officially hits the debt ceiling, and cannot borrow more money from bond markets without further congressional authorization.
We don’t know when that day will be, exactly — but we have a guess. In a Monday letter to McCarthy and other lawmakers, Treasury Secretary Janet Yellen said that “our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1” without a debt ceiling increase.
Once we reach that date, the federal government will not be able to pay its bills, or for things like Social Security checks, payroll for service members and other federal employees, and Medicare reimbursements. Interest payments on past debt could go unpaid, which would mean the US government would default on its debts.
The US would almost certainly enter a recession, probably a quite severe one, and the whole world could face a massive financial crisis. Beth Ann Bovino, chief US economist at Standard and Poor’s, was hardly alone in 2017 when she predicted that “the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008.”
The second deadline is September 30, 2023, the date that funding for the federal government runs out. If Congress does not pass funding bills lasting beyond that date, then on October 1, the federal government will “shut down” as it has done many times before, with many federal employees going without pay and “non-essential” services shutting down, but ordinary operations like Social Security, Medicare, and the military continuing.
Biden is willing to negotiate over the latter. He is not willing to negotiate over the former, as he reminded everyone anew in his invitation to congressional leaders for a May 9 debt ceiling discussion at the White House.
Whether he and McCarthy can navigate those distinctions and negotiate in good faith will likely determine whether the US tips into crisis in the next few months.
The reason for the debt ceiling/budget distinction
Joe Biden has a personal history with debt ceiling negotiations.
In 2011, as Barack Obama’s vice president, he was deputized to lead a series of talks with members of Congress on the issue in what would become the closest call the US has ever had with a debt limit breach. As my colleague Li Zhou writes, that experience “contributed to the country’s credit rating getting downgraded by Standard & Poor’s ... markets plummeted, and the country’s borrowing costs went up by $1.3 billion.”
According to many reports, Biden and Obama made a pact after those talks to never negotiate over the debt ceiling again. As a Biden spokesperson told NBC News, “in 2011, the Obama-Biden administration negotiated in good faith but congressional Republicans’ recklessness caused an historic blow to our economy. That’s why the administration didn’t negotiate in 2013 or after.”
Biden’s principled case against bargaining over the debt ceiling is that doing so is effectively bargaining over policies Congress has already passed.
When Congress passed an omnibus spending bill in December 2022, it authorized specific amounts of funding for the rest of the fiscal year, which ends on September 30.
Congress has also, through literally hundreds of bills over the years, dictated the levels of tax on personal income, corporations, payroll, tobacco, etc. The revenue from these taxes do not come close to paying for the spending Congress has also authorized — meaning it has to borrow to pay for its obligations.
So the White House sees a debt ceiling bill as simply Congress agreeing to pay for spending it’s already approved, and obeying the 14th Amendment’s dictate that the federal government must always pay its debts.
“Like the President has said many times, raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” press secretary Karine Jean-Pierre explained in January. “Congress has always done it, and the President expects them to do their duty once again. That is not negotiable.”
By contrast, arguing over the budget is arguing over future spending, which is a proper thing for the White House and Congress to debate with each other.
In that context, a proposal like McCarthy’s Limit, Save, Grow Act, which foresees sweeping cuts to discretionary spending — a category that includes the military as well as funding for operating government agencies like the FBI and CDC — as well as to renewable energy and Medicaid, would be a totally reasonable opening bid.
Biden is unlikely to agree to the proposal in full, not least because the proposal includes explicit provisions rolling back many of Biden’s accomplishments from his first two years. But he’s willing to sit down with McCarthy and try to reach a middle ground between Limit, Save, Grow and the White House budget proposal.
He’s not willing to discuss the proposal, though, as part of a discussion over the debt ceiling.
The strategic case for split negotiations
But there’s also a less principled case for making these distinctions — and a reason why Republicans want to lump the two negotiations together. In recent decades, when the two parties couldn’t reach a budget agreement and government has shut down, the result has usually been a victory for Democrats.
In the winter of 1995 to 1996, the government shut down twice. Republicans in Congress had passed steep cuts to Medicaid and Medicare, and tax cuts aimed at high earners, only for President Clinton to veto it, leading to two shutdowns, separated by a four-week interim when Congress briefly passed funding.
Polls showed the public overwhelmingly blamed House Speaker Newt Gingrich and fellow Republicans for the impasse, a situation worsened by Gingrich telling reporters the shutdown was partially a result of his anger that Clinton made him sit in the back of Air Force One during a trip to Israel. Republicans finally buckled and agreed to fund the government, with Clinton offering minimal concessions.
When first-year Sen. Ted Cruz (R-TX) and his House allies effectively forced House Speaker John Boehner to shut down the government in October 2013 as part of a plan to end Obamacare, they failed miserably. The public once again blamed Republicans and Republicans won no significant policy concessions.
Democrats even got the better of shutdowns during the Trump years. In January 2018, during a three-day shutdown sparked by Trump’s efforts to end DACA, a program protecting some undocumented immigrants, polls showed that more people blamed Trump or Republicans in Congress than Democrats.
A much longer shutdown occurred later that year when Trump demanded funding for a border wall with Mexico. It lasted 35 days. “Through it all, Trump seemed as dug in as ever, even tweeting just the day before: ‘We will not Cave!’” my colleague Li Zhou wrote at the time. “And yet, by any real measure, he caved.” Once again, the public blamed Trump.
It’s easy to understand how Biden would look at this history, imagine a budget negotiation where the worst thing that could happen is a government shutdown, and say, “Bring it on.”
By contrast, the US has never knowingly and purposefully breached the debt ceiling before. Depending on how you define “default,” it may have defaulted in the past, but in bizarre situations that bear no resemblance to the current moment (one was the aftermath of the War of 1812). The closest it has come was in 2011, where then-Vice President Biden served as the lead Democratic negotiator, and Republicans won trillions of dollars in spending cuts over the next decade.
Because a debt ceiling breach has never happened before, and the White House believes it will lead to a major financial crisis and recession, they care deeply about avoiding it. That gives McCarthy and House Republicans, whose support are needed to pass any increase in the debt limit, a huge amount of leverage, much more than they have in an ordinary budget negotiation where the worst they can threaten is a government shutdown.
We’ve had government shutdowns. They’re bad, but bearable. A debt ceiling breach might be much, much worse.
Where do we go from here?
The lesson Biden learned from the 2011 experience was to never negotiate over the debt ceiling again. It’s not favorable terrain relative to ordinary budget battles, it sets a bad precedent, and when he did negotiate over it, the result was devastating cuts that his administration never wanted.
But if neither Biden nor McCarthy blink, and if Biden chooses not to mint a trillion-dollar coin or otherwise circumvent the debt limit, then the US starts barreling toward a breach, and the full-blown economic crisis that would ensue.
So, how do we get out of this jam? One suggestion gaining steam is that Biden should actively start negotiations with McCarthy, right now, over the budget — not the debt ceiling. Sen. Amy Klobuchar (D-MN) and Reps. Greg Landsman (D-OH) and Debbie Dingell (D-MI) have called on Biden to do just this. It’s not clear how viable this idea is when the X-date for breaching the debt limit falls so much earlier (as soon as June 1) than when spending expires (September 30).
Further, it might be hard for McCarthy to pursue a budget-only negotiations path. McCarthy cannot pass a clean debt ceiling bill right now; he won the speakership on a promise to not pass a clean debt ceiling bill. Given that, passage of a debt ceiling bill will inevitably be a bargaining chip, whether acknowledged as such or not, in any negotiations between him and the White House, even if those negotiations are said to be just about the budget. You can’t necessarily “not negotiate over the debt ceiling” simply by declaring you’re not negotiating over it — and then start negotiations over a closely related issue simultaneously.
But such theatrics, while silly and artificial, may be necessary to craft a deal before the ceiling is breached. Liam Donovan, a Republican lobbyist, has argued that it would give “a permission structure for Biden to engage, and both sides an opportunity to save face.”
The alternative is a humiliating capitulation by House Republicans, a unilateral circumvention of the debt limit by Biden, or an economic calamity. McCarthy won’t abide the first. Biden has shown little interest in the second. None of us would fare well during the third.