While negotiations between the country’s political leaders over the debt ceiling appear to have stalled, time is of the essence: the Treasury Department is warning that the United States could default on June 1 if an agreement is not reached.
There are many scenarios being discussed both in public and behind closed doors, from interim solutions to term extensions to negotiations or, in the extreme, President Biden acting independently.
This Tuesday, at the end of a meeting at the White House with House Speaker Kevin McCarthy, also attended by Hakeem Jeffries, Democratic Leader in the House, and Chuck Schumer, Senate Majority Leader, and Senate Minority Leader Mitch McConnell, mentioned the President Biden that he is considering using the 14th Amendment to unilaterally raise the debt ceiling without help from Congress.
Biden wants to raise the government’s legal debt limit to $31.4 trillion so bills can continue to be paid and the risk of historic defaults disappears.
McCarthy and other Republican lawmakers want a deal that guarantees trillions in spending cuts before agreeing to raise the debt ceiling.
Amendment 14 is one of the possible scenarios related to the debt ceiling, which we discuss in more detail below.
An ace up the sleeve in the Constitution itself
The 14th Amendment became part of the Constitution after the Civil War. It states that the “validity of the statutory United States public debt … shall not be questioned.”
Laurence Tribe, professor emeritus at Harvard Law School, wrote in the New York Times on Sunday that Biden can argue that he has a constitutional duty to avoid defaulting and therefore can skip the debt line to proceed with spending that already approved by Congress.
On Monday, a union of public employees sued Treasury Secretary Janet Yellen and Biden, saying they were constitutionally required to skip the debt ceiling.
After meeting with leaders of Congress on Tuesday, the President indicated that a 14th Amendment invocation could take too long and is not a solution at this time.
“I’ve been thinking about the 14th amendment,” Biden said, calling Tribe someone he has “tremendous respect.”
Tribe “believes it would be legitimate, but the problem is that it would have to go to court,” said the president, who does not rule out reconsidering this option in the long term.
“I’ll be very frank with you: when we’re through with this, I’m thinking about taking a look in a couple of months to see what the court would say about whether it works or not,” Biden said. to journalists.
Senator James Lankford, an Oklahoma Republican, argues that Biden cannot act unilaterally. Lankford told ABC News that the Constitution “states very clearly that spending, all the details surrounding spending and the money actually has to go through Congress.”
The risk of non-payment plays a major role in political negotiations
The President wants to defuse the entire debate by forcing Republicans to publicly commit to the US not defaulting. Then you would be ready to discuss expenses, taxes, and other household issues.
He wants McCarthy to guarantee that the United States will continue to be able to pay all of its bills thanks to his ability to keep borrowing. The president says he’s ready to have a public debate with Republican lawmakers over the budget, just not with the “hostage” of the world’s largest economy.
“Like I’ve always said, we can discuss where to cut, how much to spend, and how to finally get the tax system where everyone pays their fair share,” Biden said. “But not under the threat of default.”
Sabotage government plans or take care of the finances? What Republicans are aiming for with the debt ceiling
It’s unclear how many Republican lawmakers share his definition of default. Some suggest a default would apply only to unpaid debts, while the government wants to include federal employee wages, contractor rebates, and aid to the poor, veterans, schools, and others.
Just before the House of Representatives narrowly passed a $4.5 trillion deficit-cutting bill, McCarthy said the United States would not default. But he continues to link this issue directly to spending cuts in a way Biden wants to avoid.
“To get the debt under control, we need to come together, find common ground and cut spending,” McCarthy said last month. “Let me be clear: defaulting on our debt is not an option, but neither is a future of higher taxes.”
Republican cohesion is an important variable for an agreement
Republicans in Congress could hold their own and shake Democrats.
McCarthy has a narrow majority in the House of Representatives: 222 Republicans versus 213 Democrats.
Its debt limit law would return discretionary spending to 2022 levels and limit increases to 1% thereafter. The bill would also reverse Biden’s proposed student loan debt relief, an increase in IRS funding and tax incentives created in 2022 to encourage clean energy adoption. These cuts would extend the debt limit to March 31, 2024, or up to an additional $1.5 trillion.
Representatives from the most extreme Republican wing, such as South Carolina Rep. Ralph Norman and others, have said they will support nothing less than the restrictive bill that Republicans passed in the House of Representatives on April 27 by 217 votes.
But Senate Majority Leader Chuck Schumer, DN.Y., will not allow this bill to pass the Senate. Neither does Biden. As the deadline approaches, the question of whether Republicans are holding together is growing, causing the Democrats to back down. There is also a risk that disagreements within the Republican faction could jeopardize McCarthy’s presidency and make it even harder to reach an agreement.
The question is what kind of agreement it might get through the House, Senate and Oval Office.
There could be an agreement to extend the talks
Washington loves the procrastination, the old routine of “giving it up.”
There is a possibility that lawmakers will agree to a short-term extension and postpone the expiration of the debt limit to September 30, if a federal budget then also has to be passed.
This would be in line with Republicans’ efforts to synchronize the budget debate with the debt limit while removing the immediate risk of a default. It’s the option that government officials tend to comment on privately with more optimism.
Still, House Minority Leader Hakeem Jeffries tried to dismiss the idea in a Sunday interview with NBC News.
“I don’t think throwing the house out the window is the most responsible thing to do,” Jeffries said, though he prioritized avoiding a default.
The markets are alert but nervous
Wall Street could more or less save the day by going under.
Along with economists, Senate Budget Committee Chairman Democrat Sheldon Whitehouse has hinted that a sharp decline in markets could force Republicans to retreat. Their financiers would scream about impending financial losses and give every legislator an incentive to be the hero and save the jobs and pensions of millions of Americans.
Joe Brusuelas, chief economist at consultancy RSM US, said in an email Monday that rumors of a potential default were already making it more expensive for investors to buy insurance for US Treasuries. But the panic so far has been largely confined to the broader stock market, which many voters and lawmakers are following.
A magic “trick” that Yellen doesn’t like
Minting a coin is one of the many creative – and unlikely – solutions floating around the internet.
The idea is that the government could mint a $1 trillion platinum coin and thereby avoid a default. Basically, there is a loophole in the law that could allow the United States to mint a coin of any denomination if it is made of platinum.
That brings with it at least one big problem: Yellen dismissed the idea in a January interview with the Wall Street Journal, calling it “kind of a gimmick.”
President Biden was also questioned this Tuesday about the minting of the platinum coin, to which he replied, “I don’t think anyone has addressed the issue of minting the coin.”
And what is the price for non-payment if no agreement is reached?
If no agreement is reached, the US government could reach a point where it can no longer pay all the bills. The Treasury could no longer use accounting strategies to keep the government open. If the state could no longer borrow, the unpaid bills would pile up and the state would become insolvent.
But not all defaults are created equal.
The United States could briefly default on some payments, and the risk of worsening could force lawmakers to reach an agreement. But even a “brief” default would cost the economy 500,000 jobs, according to a White House analysis.
A “prolonged” default would cost 8.3 million jobs, almost as many as were lost during the 2008 financial crisis.
The Democrats’ Joint Committee in Congress released a report Monday arguing that this would be the largest job decline in the United States that was “not caused by a global pandemic” and that the government “would be unable to issue stimulus checks.” to send”. Increase unemployment insurance and avoid evictions to cushion the blow.
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