Even as the deadline to act inches closer, political pressure and the political fallout of a default means that lawmakers will likely come to a debt ceiling agreement before the worst happens.
House Speaker Kevin McCarthy (R-CA) and President Joe Biden are locked in a game of chicken, with Biden hoping for the debt ceiling to be raised with the fewest concessions to Republicans possible and McCarthy hoping to enact spending cuts, among other wish list items. Still, because of the politics of the situation, the two parties are not likely to allow a default, which would mark the first such lapse in history.
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Treasury Secretary Janet Yellen has said that the U.S. could suffer a default as early as June 1, giving lawmakers about two weeks to find a solution. The reality of the situation is that neither Biden nor McCarthy want a default, as it would not only wreak havoc on the economy but could spell grim prospects for their political futures.
“We’re witnessing a game of brinkmanship, and in this game, there is that constraint of not looking to be the one to be blamed for an eventual default and the implications,” Brian Marks, executive director of the University of New Haven’s Entrepreneurship and Innovation Program, told the Washington Examiner.
If Republicans ended up getting blamed for a default — which could leave millions without jobs — it would be a massive political liability for them. Likewise, if Biden refuses to negotiate and the country defaults, Republicans could cast him as the reason why the economy is tanking, souring his approval.
That is why both sides are likely to come to a workable agreement — because neither side wants to be held responsible for what could be one of the worst economic blunders in recent history. It is also not a given which side would face the most blame, meaning that it is in the best interest of both to raise the debt ceiling.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told the Washington Examiner on Friday that there is pressure for Biden and McCarthy to know that “if we were to default, there would be so much blame to go around it would tarnish everybody.”
“Nobody, most of all the country, would come out of that situation as a winner and it would be historically damaging politically for anybody who was involved and should have been there to avoid the crisis,” she said.
The effects of a default are thought to be dire. The White House Council of Economic Advisers said that a protracted default would lead to an economic downturn as bad as the Great Recession, with over 8 million people losing their jobs. The entire value of the stock market could be shredded by an enormous 45%.
The markets have already been strained under the weight of the negotiations.
Yields on Treasury securities maturing in June, around the time the government is thought to be unable to pay all of its incoming bills on time and in full, are now higher than most of the yields for those maturing before or after that month, according to Friday’s readings.
For instance, Treasurys maturing on June 15 have yields of about 5.82%, while those maturing on May 31 have yields of 4.93%.
And market leaders have also expressed optimism for a deal.
“The U.S. should not and probably will not default,” said JPMorgan Chase CEO Jamie Dimon.
Biden and McCarthy agreed to a framework of designated negotiators between their teams after a White House meeting earlier this week. But there has been some turmoil. Rep. Garret Graves (R-LA), who McCarthy picked to be his lead negotiator, walked out of a meeting with the White House over the debt ceiling on Friday.
“Until people are willing to have reasonable conversations about how you can actually move forward and do the right thing, then we’re not going to sit here and talk to ourselves,” Graves told reporters.
Markets dipped following the news, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq all in the red.
Even with both sides still far from agreement, there has been optimism from Republican leadership and the White House that the U.S. won’t default.
“I think at the end of the day we do not have a debt default,” McCarthy said this week during an appearance on CNBC.
Likewise, Biden has said he thinks a deal will be reached.
“I’m confident that we’ll get the agreement on the budget and America will not default,” the president said on Wednesday.
History also shows that the political and economic fallout from a default has always pushed lawmakers to act. The U.S. has hit its debt limit and has been forced to deploy “extraordinary measures” at least 16 times since first being deployed in 1985, according to the CRFB, and as recently as 2021.
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While it is possible that a deal is only reached at the last minute, timing that is tricky as the June 1 deadline is just an estimate and a moving target.
“No matter what it will be last month compared to what it should have been,” MacGuineas said about the timing of an agreement. “Since we don’t know exactly what the deadline is, the eleventh hour — you don’t know it until you’re in it. So I hope they’ll be able to pass it before that.”