The U.S. is as few as four weeks away from defaulting on its debt for the first time in the nation’s history, the Treasury Department warned. On Tuesday, May 9, President Joe Biden is set to meet with Republican congressional leaders for the first time in months to discuss raising the limit.
The stakes couldn’t be higher. Economists agree defaulting on debt would result in a financial calamity. Moody’s Analytics Chief Economist Mark Zandi testified to the Senate Budget Committee Thursday, May 4, that even a short default would cost at least one million jobs and trigger a severe recession.
But aside from agreeing to meet, Republicans and Democrats don’t appear any closer to a compromise. House Republicans, led by House Speaker Kevin McCarthy, passed the Limit, Save, Grow Act, which trades raising the ceiling for spending cuts. But Democrats are insisting on a clean debt hike.
“Right now they’re playing a game of chicken, and they’re both taking strong stances in order to drive the eventual bargain in their direction,” said economist Kevin Hassett, former senior advisor during the Trump administration. “The fact is that most debt limit increases in the past have included the kind of concessions that Speaker McCarthy is asking for. And President Biden doesn’t necessarily want to make those concessions, certainly in a bargaining game, he doesn’t want to make them up front. But in the end, you know, presidents have budged in the situation that he’s in.”
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Though there have been many debt ceiling standoffs in history, the U.S. has never defaulted on its debt, which gives Hassett confidence a deal will be reached, even if that deal is to “kick it down the road a little bit,” suspending the ceiling for a month at a time. The White House is said to be weighing fallback options in lieu of solidifying a more permanent agreement with Republicans.
According to the Congressional Budget Office, the narrowly-passed House bill would cut federal budget deficits by $4.8 trillion over the next 10 years. But an independent analysis by Moody’s economists also said it would cost 780,000 jobs in 2024 compared with a clean debt hike, slowing growth and causing a rise in unemployment.
Meanwhile, the White House said its own proposed budget would cut federal budget deficits by $3 trillion over the next 10 years, mostly through raising taxes on families with high incomes. Biden’s budget is not part of current debt ceiling negotiations, since Democrats are advocating for a clean hike.
“If you look at history, then what tends to happen is that you get spending cuts and a debt limit increase, but not tax hikes,” Hassett said, pointing back to the Obama-era negotiations.
“We always come to an agreement in the end,” Hassett said. “My expectation is that they’ll come to a deal eventually. It might not even happen that they come to a long term deal anytime soon. But if they don’t, then probably they’ll kick the can down the road a month or two.”