President Biden and congressional leaders will meet this afternoon to discuss what, if anything, they will do to prevent a looming economic crisis.
The talks at the White House are about the kind of deal Democrats and Republicans might reach to increase the limit on money the federal government can borrow. The stakes are high: If the debt limit is not increased, the government could default on its debts. The U.S. has borrowed tens of trillions of dollars, so a default could trigger chaos in global financial markets.
Today’s meeting is the first time in months that Biden and House Republican leaders are directly discussing the issue. Since they last spoke, House Republicans passed their own bill calling for sweeping but largely unspecified government spending cuts. And the Treasury Department warned that the country has until June 1 to raise the debt limit before it runs out of money.
The sides are not expected to make a deal, or anything close to it, today. Most likely, the talks will set the contours for future discussions. Today’s newsletter will look at four scenarios for what could come next.
1. Clean increase
Congress could raise the debt limit with no conditions. This is the outcome that Democrats want and historically the most common result when the U.S. comes close to breaching the limit. Such increases occurred three times during the Trump administration and dozens of times during previous presidencies.
After Congress created a debt limit in 1917, it remained little more than a technicality for decades. Congress’s big fights over government spending would largely center on the federal budget, which sets taxes and spending levels, separate from the debt limit. But over the past few decades, lawmakers — particularly Republicans — have seized on the debt limit as a tool to try to get additional concessions on spending. The Biden administration has tried to end those tactics by refusing to negotiate.
2. Negotiated raise
Another possibility is that both sides hash out a deal that raises the debt limit while also cutting spending. This is House Republicans’ preferred outcome.
The parties are far from an agreement on how to balance the budget. Republicans have said they want to reduce spending on just about everything besides Social Security, Medicare and the military, potentially shrinking programs as varied as Medicaid, food stamps, border security and grants for local police. Democrats have called that proposal a nonstarter. In turn, Democrats want to raise taxes on the wealthy and large corporations — a nonstarter for Republicans.
“While both sides say they want to reduce the nation’s future debt burden, there is almost no overlap in how they aim to achieve that outcome,” my colleague Jim Tankersley wrote.
Given the impasse, the parties could agree to a small debt limit increase to give themselves time to reach a deal. (My colleagues Jeanna Smialek and Ashley Wu explored that possibility in greater detail.)
3. Executive action
If no deal is reached, the Biden administration could take the unprecedented step of using executive action to bypass the debt limit. No one wants this outcome, but the White House has been privately considering it.
Many White House officials dislike this idea because it is untested and can veer into the absurd. The White House could declare that the debt limit is unconstitutional, arguing it violates the 14th Amendment’s clause that “the validity of the public debt of the United States … shall not be questioned.” The administration could then ignore the debt limit and continue paying the government’s bills. In a weirder scenario, the government could mint a $1 trillion platinum coin to infuse the government with money to pay those bills.
These approaches would likely end up in court, and it’s unclear whether they could survive legal challenges. That uncertainty could hurt financial markets and increase costs for the federal government. Consider an investor’s perspective: If you believe that the only thing holding up the value of government debt is an untested executive maneuver, you will likely charge a higher price — or interest rate — to buy that debt.
Yet even that outcome looks better than the one remaining alternative.
4. Government default
The last possibility is that the U.S. government hits the debt limit and can no longer pay for anything, including federal programs or debt payments. It could then be forced to default on at least some debts — meaning it will admit that it cannot pay back the money that others effectively lent the government.
Mark Zandi, the chief economist at Moody’s Analytics, has described a default as “financial Armageddon.”
Why? For decades, investors have considered U.S. debt the safest of safe investments because the government always pays them back. So they used U.S. debt as a backstop for riskier opportunities — knowing that, whatever else happens with their less certain bets, they would at least make money from government debt. But if the U.S. no longer repays debts, then that reliability disappears. And the financial system could recoil, taking the economy down with it.
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