The Biden administration began "extraordinary measures" Thursday to prevent the federal government from breaching its debt limit and hurtling toward default, a grim scenario with the potential to destabilize markets and devastate the economy.
Treasury Secretary Janet Yellen told lawmakers that officials will alter certain federal investments to preserve the nation's credit until summer -- largely through technical moves that will buy lawmakers time to pass legislation that raises or suspends the amount the government is allowed to borrow, currently capped at $31.4 trillion.
"I respectfully urge Congress to act promptly to protect the full faith and credit of the United States," Yellen wrote to House Speaker Kevin McCarthy, R-Calif., on Thursday.
Newly emboldened House Republicans are trying to leverage the standoff to extract major spending cuts, insisting that previous Congresses and administrations have spent too much on social programs. Some GOP lawmakers have even raised the prospect they might seek changes to entitlement programs, including Social Security and Medicare.
In reality, both parties have approved policies that fueled the growth in government borrowing.
Republicans repeatedly passed tax cuts when they controlled the White House in the past 20 years. Democrats have expanded spending programs that have often not been fully offset by tax increases. Both parties have voted for large economic aid packages to help people and businesses endure the 2008 financial crisis and the 2020 pandemic recession.
The White House has said it will not negotiate on the debt ceiling, and President Joe Biden has pledged to oppose any attempt to cut entitlements. He says lawmakers should lift the cap with no strings attached to cover spending that previous Congresses authorized.
On Wednesday, White House press secretary Karine Jean-Pierre said the issue should not be used as a "political football."
"In the past there has been bipartisan cooperation to address the debt ceiling," she said, "and that's how it should be."
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Yellen has said a default could cause "irreparable harm to the U.S. economy." Federally backed debt is the backbone of domestic and global markets. A failure to make good on U.S. borrowing could set off panic on Wall Street and spark millions of job losses.
Treasury officials estimate the measures that they began using Thursday will enable the government to keep paying federal workers, Medicare providers, investors who hold U.S. debt and other recipients of federal dollars at least until early June.
But economists warn that the nation risks a financial crisis and other immediate economic pain if lawmakers do not raise the limit before the Treasury Department exhausts its ability to buy more time.
CREDIT AGENCY PREDICTION
In an analysts' note Thursday, credit rating agency Moody's said it expected debt limit negotiations to be "protracted," but ultimately "debt-service obligations will be met."
"In our view, a debt limit impasse will likely be resolved before a missed interest payment occurs because of public, political and financial market pressures on Congress reflecting concerns about the potentially severe consequences that a missed payment could have on financial markets and the economy," the firm said.
It predicted that even if Congress and the White House did not reach an agreement, the Treasury Department would prioritize debt service payments ahead of social spending.
The United States has never defaulted on its debt. But it has repeatedly come close, particularly in 2011, amid the rise of the conservative tea party movement in the House. Those Republicans' clashes with President Barack Obama resulted in months of political brinkmanship, generated panic globally and yielded a decade of significant caps on domestic spending that Democrats have long decried as damaging.
Under Biden, congressional Republicans have tried to hold up efforts to address the debt ceiling, prompting an array of experts to emphasize the costs of a potential failure. In a September 2021 standoff, Moody's said a prolonged crisis could have catalyzed a full-scale recession in the United States, wiping out billions of dollars in economic growth and eliminating as many as 6 million jobs.
House Republicans have begun planning a set of instructions for the Treasury Department if lawmakers and Biden cannot reach an agreement. That plan was part of an agreement that helped McCarthy secure votes from the hard-right House Freedom Caucus to win the speakership.
NEGOTIATION URGED
Rep. Jason Smith, R-Mo., chair of the House Ways and Means Committee, on Thursday called on Biden to negotiate with GOP leaders to cut spending.
"The American people rightfully recognize that maintaining Washington's status quo, which runs up massive deficits and adds trillions to our national debt, is unsustainable," Smith said, adding, "Instead of attacking his political opponents, President Biden should be spending this time working with House Republicans to address the debt ceiling in a way that imposes some fiscal sanity."
Senate Majority Leader Charles Schumer accused House Republicans of brinkmanship that would cause "nothing less than an economic crisis."
Senate Republican Leader Mitch McConnell of Kentucky said Thursday that he was unconcerned about the situation because debt ceiling increases are "always a rather contentious effort."
"America must never default on its debt," McConnell said. "We'll end up in some kind of negotiation with the administration over what are the circumstances or conditions under which the debts are going to be raised."
The fight puts McCarthy in a tenuous position. His caucus risks wearing the blame for a national default and the economic catastrophe that would follow. But even fringe members of the Republican conference could force the speaker's hand: McCarthy agreed to a rules package that significantly depleted his authority and that would allow any member to force a vote that could remove him from power.
The White House has few options to act unilaterally to avoid a crisis.
According to some legal scholars, the president could simply continue borrowing money, drawing on an obscure passage in the Constitution that says "The validity of the public debt of the United States ... shall not be questioned." Some experts argue that clause makes it unconstitutional for the United States to default on its debt, or for Congress to establish a debt limit. But that concept would surely face a legal challenge if the White House opted for it.
Biden could also order the U.S. Mint to simply strike a $1 trillion coin and deposit the token in the Federal Reserve, creating new funds to make credit payments. The White House briefly considered that idea during the 2021 crunch but ultimately decided against it. Yellen called such a maneuver a "gimmick."
REPUBLICAN STRATEGY
Most Democrats have solidified in their position that negotiations over the debt limit only enhance the risks of calamity by encouraging Republicans to use it as leverage. That is particularly true of Biden, who successfully stared down Republicans and won an increase in 2021 with no stipulations.
Newly elected Republicans, emboldened by anger among their base and conservative advocacy groups over failures in the past to exact concessions for raising the limit, have pledged not to let that happen again.
White House officials say Republicans are not serious about reducing deficits, pointing to the first bill the new House took up this month.
That legislation would cut new funding for the Internal Revenue Service to crack down on wealthy tax cheats, which the nonpartisan Congressional Budget Office estimated would generate $180 billion over 10 years. The bill to repeal that funding would add more than $100 billion in additional budget deficits over the next decade, according to the office's estimates.
The nature of the fight is just starting to take shape. House Republicans have been calling for sweeping "fiscal reforms." And while Democrats would like to see a debt-ceiling increase with no demands attached, some have suggested that they are prepared to look for ways to reduce spending.
Sen. Joe Manchin, D-W.Va., said in an interview with the Fox Business Network on Wednesday that he believed that Congress should revive the 2010 Bowles-Simpson deficit reduction plan and combine and tie a debt-limit increase to some of those ideas.
Although he mentioned looking for bipartisan ways to trim wasteful spending, Manchin did not appear prepared to back any cuts to the nation's social safety net programs.
"We're not getting rid of anything, and you can't scare the bejesus out of people saying we're going to get rid of Social Security, we're going to privatize -- that's not going to happen," Manchin said.
Information for this article was contributed by Jacob Bogage of The Washington Post; by Jim Tankersley and Alan Rappeport of The New York Times; and by Josh Boak, Lisa Mascaro and Dylan Lovan of The Associated Press.