US Treasury secretary Janet Yellen on Friday fired her first warning shot of the year to Congress about the need to raise America’s debt limit — and she minced no words about the potential peril ahead.
“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote to lawmakers.
At 76, and with a career spanning the White House, the Federal Reserve and now the Treasury department, Yellen has seen plenty of fiscal fights in Washington.
But the one ahead seems especially treacherous: the US is barrelling towards its riskiest debt ceiling clash since 2011, with a danger that America could default on its payments for the first time in its history after a very close brush with that scenario 12 years ago.
Newly empowered hardline House Republicans are already demanding deep spending cuts in exchange for raising the borrowing limit beyond its current level of $31.4tn, and the White House and Democrats insist that they will not entertain a deal on that basis.
“This is not a time for panic. We are many months away from the US being unable to meet all of its obligations,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center, a Washington think-tank. “But it is certainly a time for policymakers to begin negotiations in earnest. We’ve seen all too many times that they end up at the eleventh hour with their backs against the wall and no resolution in sight.”
On Friday, Yellen laid out what the Treasury estimates to be the timeline for a deal. The US will hit the debt ceiling on January 19, and at that point it will begin preserving cash using “extraordinary measures” to get around the need for new borrowing above the limit. Yellen added that there is “considerable uncertainty” around the duration of those special steps, but they should last at least until early June.
Business groups are getting nervous. Suzanne Clark, president and chief executive of the US Chamber of Commerce, the country’s largest business lobby group, said she had heard from her members a “clear, emphatic emotion about the need to not default on our debt, to not play chicken with the full faith and credit of the United States”.
She added that the Chamber was making the case for lawmakers to avoid the brinkmanship. “[We’re] helping people understand the real-life impacts to small businesses and mom and pop shops in their districts.”
Kevin McCarthy, the Republican House speaker, struck a somewhat upbeat tone on the subject during a press conference on Thursday, saying he had “a very good conversation” with Joe Biden last weekend and told the president he wanted to “sit down with him early and work through these challenges”.
But McCarthy would not explicitly guarantee that Republicans would ultimately vote to raise the debt ceiling, saying: “We want to make sure, we don’t want to put any fiscal problems into our economy and we won’t . . . We have got to change the way we are spending money wastefully in this country.”
After Yellen released her letter on Friday, Karine Jean-Pierre, the White House press secretary, reiterated that the Biden administration did not believe a debt ceiling increase should be tied to any negotiation, since it is done to fulfil past borrowing commitments made by lawmakers and presidents of both parties. “This should be done without conditions,” she said. “There’s going to be no negotiation over it.”
The Biden administration has also said it does not intend to take executive action — such as minting a trillion-dollar platinum coin, a proposal that has been floated — to avoid a default without congressional intervention.
Some centrist Republicans and Democrats have been considering whether they can circumvent their party leadership with a rare parliamentary manoeuvre known as a “discharge petition” to force a vote on a bill to increase the debt limit.
But such steps to defy the top brass on Capitol Hill rarely succeed, and involve a lengthy process that would be ill-suited to the tight timeframe of this debt ceiling stand-off. Some lawmakers are also becoming more outspoken about overhauling or even eliminating the debt ceiling, though that too may be hard to achieve quickly.
“Just saying this pre-emptively, before there’s another reckless stand-off: The debt ceiling is a grenade [in] the hands of irresponsible politicians. Reform is way overdue,” Mark Warner, the Democratic senator from Virginia, tweeted on Friday.
Ben Koltun, director of research at Beacon Policy Advisors, said part of the problem on the Republican side is that many rank-and-file House lawmakers are facing their first debt ceiling stand-off in the majority with a Democratic president. Since they do not necessarily recall the market turmoil that surrounded the last brush with a default in 2011, they see it as a “shiny object” to force budgetary concessions.
Meanwhile, McCarthy is in an especially weak position to force a compromise on any rebellious members of his party, after agreeing last week to a rule that would allow any single lawmaker to motion to remove him from his post. And former president Donald Trump has already waded in, urging Republicans to play “tough” in the upcoming talks.
One moderating force over the coming weeks could be Senate Republicans, who are warning their colleagues in the House that they will have to find common ground with the Democrat-controlled upper chamber for any legislation.
“Our friends in the House will have to realise that what passes the House isn’t necessarily going to be what passes the Senate,” John Cornyn, the Texas Republican, told Punchbowl News this week. But economists and policy watchers still see a treacherous path to any deal.
“Most policymakers would prefer to avoid a debt limit crisis, but the leverage given to the hardline Republicans in the House raises the odds that one will occur,” wrote Nancy Vanden Houten of Oxford Economics.
