Alarm bells ought to be ringing on Wall Street and across the country.
House Speaker Kevin McCarthy’s struggle to get his tiny House majority to pass a $4 trillion spending cuts bill designed to force President Joe Biden to climb down over a debt showdown fueled fresh fears Tuesday the US is heading for a default that could hurt millions of people.
The speaker met small groups of lawmakers, seeking to pressure members to fall in line in a quest for 218 votes to pass the bill and create new political heat on Biden. Party officials had hoped to hold the vote on Wednesday, but that timetable now looks in severe doubt. McCarthy on Tuesday night would only commit to a vote “this week.”
McCarthy’s camp insisted that the bill would not be changed, and he appears to be trying to jam recalcitrant members into falling into line when the vote is called. But the chaos and uncertainty over an issue of vital national importance raised new doubts about his political credibility and threatens to disrupt the so-far tempered reaction to the building crisis in financial markets.
Unless Congress fails to raise the federal borrowing limit this summer, the government will run out of money, the US will be unable to pay its obligations and the economy could tumble into a recession, causing job losses and possibly halting payment of some benefits. The long-term impact of America’s reputation as a safe financial haven could be eviscerated.
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The dispute is the first crisis point of a new period of divided government that will show whether Washington is able to overcome the country’s festering political estrangement that threatens to inflict devastating self-harm on the economy and the financial security of countless citizens.
And it’s a fresh test of the authority and political dexterity of McCarthy who had to make huge concessions to his conference’s most extreme members to win his job and has yet to show he can manage his majority in a way that advances GOP goals and to avoid harming the national interest.
Given the high stakes and horrendous consequences, House Republicans see this as a moment of leverage to force Biden to agree to cuts that would gut his agenda. But Biden is refusing to fold, arguing Congress has a duty to raise the debt ceiling with no conditions.
McCarthy’s bet would be a huge one at any time. But given the radical nature of his House GOP conference, his own compromised authority after taking 15 votes to win his job in January and a small margin in the House that means he can only lose four votes, he’s playing with fire.
Horse trading on contentious issues always looks ugly before votes in Congress, especially when divisions are played out between rival factions in public. So it’s possible that McCarthy could get his troops under control and present a united front – even if the current bill is merely a messaging effort that can’t pass in the Democratic-run Senate and is in no way a serious effort to solve the crisis. But even the current level of discord in the GOP is a poor omen for coming cliffhanger votes in the weeks to come on which the country’s economic fate could depend.
“The plan is not to open this up again,” one senior GOP source told CNN’s Manu Raju. But holdout members from across the conference could scuttle the bill. The Iowa delegation for instance is upset about a repeal of ethanol subsidies. Some far right members of the party want to stiffen new work requirements for Medicaid assistance. Several fiscal conservatives are warning that they won’t vote for a debt limit increase what ever happens. The nonpartisan Congressional Budget Office said that the bill would trim government deficits by $4.8 trillion over 10 years.
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Had McCarthy won a thumping majority in midterm elections last November, such disputes – not unusual in an ideologically diverse caucus – wouldn’t matter. But on Tuesday, they became a case study in the perils of trying to govern without an effective majority in the House.
This is not only potentially ruinous for McCarthy’s hopes for having a profitable speakership. It is a potentially grave situation for the United States since the possible fallout from failing to raise the debt ceiling would have massively damaging consequences. Furthermore, it’s unclear whether any final debt ceiling bill could make it out of the House with Republican votes. The current measure is the easy part since Republicans are currently now negotiating with themselves. Any future and theoretical deal with Biden would surely be less pleasing to most Republicans. So McCarthy would have an even more difficult job trying to pass it in the House.
The Biden administration seized on McCarthy’s difficulties to accuse him of playing politics with Americans’ lives.
“Default needs to be off the table,” Transportation Secretary Pete Buttigieg told CNN’s Wolf Blitzer on “The Situation Room.” He called on McCarthy to “proceed with a normal budget negotiation that does not involve holding the American economy hostage.”
So far, financial markets have been fairly sanguine about the approaching crisis, perhaps from a sense that Washington has long been dysfunctional and its angry partisan splits mean that it can never get much serious done until heading to the brink. But the cascading disagreements again evident in the GOP conference on Tuesday are getting noticed when fears of a recession are beginning to recirculate.
Ratings agency Fitch on Tuesday for instance painted a picture of a US capital that is unable to solve its problems with the risks of damaging fallout rising. It pointed out that “each side’s reaction to the other’s proposals underscores their divisions over fiscal priorities.” The agency also said that while it believed that ultimately the debt ceiling would be raised, McCarthy’s proposal would only permit renewed government borrowing for a year – at which point – months before the next general election, a new standoff would be likely.
“Repeated near-default episodes brought on by debt limit debates could erode confidence that the US government’s repayment capacity is resilient to political dysfunction and may affect Fitch’s view of the sovereign credit profile,” Fitch said in the analysis.
If a country’s credit rating is lowered, it must pay more to access credit, a factor that could have a serious knock-on effect on the economy and its international reputation. In 2011, after a previous debt ceiling showdown between then-President Barack Obama and congressional Republicans, another ratings agency Standard & Poor’s downgraded the top US rating.
There’s nothing ostensibly wrong with Republicans – many of whom ran in 2022 on curtailing the size of government – from seeking to rein in the Biden administration’s spending, even if the effort reeks of hypocrisy given the willingness of many to raise the debt ceiling with no conditions under ex-President Donald Trump and to endorse his deficit-expanding policies.
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The question however is whether the GOP is being responsible in choosing this particular vehicle, the full faith and credit of the US government, to achieve its goals given risks of default. The White House is insisting that Biden is willing to negotiate with House Republicans – but only within the framework of formal budget negotiations. If the administration were to play on McCarthy’s terrain it would be effectively collaborating in the neutering of Biden’s presidency and inviting future attempts at debt ceiling coercion.
There is a fairly obvious way out of the crisis. In a classic Washington fudge, the White House and McCarthy could reach a spending deal in budget negotiations that the House could pass simultaneously with a measure raising the debt ceiling with no conditions. But that would require the agreement of GOP hardliners who are likely to view a situation in which both sides makes concessions as a sell out. McCarthy may not be able to politically survive in such a scenario, given that he allowed radicals to reinstate a rule that allows any member to call a vote on the speakership in his protracted effort to win the job in January. Another factor is that the gerrymandering of many congressional districts means that the biggest threat to a conservative Republican is often from a primary opponent even more radical than themselves, which reduces any incentive to compromise with Democrats.
McCarthy is not the only leader whose political fate is on the line. After launching his reelection campaign on Tuesday, Biden can hardly afford the political blowback of climbing down to Republicans. And if he caved into Republican efforts to block his already enacted green energy policies, Biden would be effectively cratering his own domestic legacy in a way that could further create doubts among some Democratic voters who are cool to his candidacy.
The White House on Tuesday signaled it was in no mood to compromise.
“We’re not going to negotiate on something that they should be doing, which is avoiding default,” White House press secretary Karine Jean-Pierre told reporters.
Her comments, and the imbroglio unfolding on the Republican side of the House, meant that Tuesday was yet another day when the country moved ever closer to the disastrous possibility of that possible debt default. And it’s getting harder to see a way out.