The Debt Ceiling: How Bad Might Things Get, and Will Congress Raise It?

Treasury Secretary Janet Yellen has warned that a "global financial crisis" could ensue should Congress allow the U.S. to default on its debt obligations come June. Still, the Republican-controlled House has indicated it may be willing to do just that if President Joe Biden proves unwilling to negotiate a deal with House Speaker Kevin McCarthy to reduce the nation's spending.

"Everybody should negotiate," Congressman Scott Perry, chair of the Freedom Caucus, said when asked on ABC This Week whether he would allow the U.S. to default on its debt if Democrats do not agree to spending cuts. "I don't know why President Biden says he's not going to negotiate. That's what this is all about, so all the voices of the American citizens are being heard."

The federal debt ceiling, or debt limit, represents the total amount of money that the federal government is allowed to borrow to pay expenses authorized by prior legislation, including established programs such as Social Security and Medicare, as well as recurring obligations including military salaries and interest payments on the national debt.

With that debt currently totaling over $31.5 trillion, many members of the House Republican Conference argue that raising the debt ceiling amounts to fiscal irresponsibility.

"We can't just keep doing the same thing under the same conditions with the same management and expect different outcomes," Perry said on ABC. "The American people are sick and tired of this endless debt increasing."

In contrast, Democrats note that raising the debt limit is necessary to meet financial obligations already incurred under both Democratic and Republican control.

"Addressing the debt limit is about meeting obligations the government has already made," Senate Majority Leader Chuck Schumer and House Democratic Leader Hakeem Jeffries said in a joint statement. "A default forced by extreme MAGA Republicans could plunge the country into a deep recession and lead to even higher costs for America's working families."

McCarthy stated flatly during a January 29 CBS appearance that "we're not going to default," casting Schumer and the Biden administration as engaging in partisanship for their refusal to negotiate.

The Speaker expressed some optimism following a February 1 conversation with the president, indicating that he thought a bipartisan solution may be attainable, saying discussions "would continue."

Republican Congressman Don Bacon, who represents Nebraska's 2nd Congressional District, which was carried by Biden in 2020, has warned that the U.S. cannot allow itself to default on its debt, but agrees with McCarthy that the administration should engage in negotiations.

"The president saying that he refuses to negotiate; that's unacceptable," Bacon told Newsweek. "We're in divided government with checks and balances, he's got to negotiate."

"This cannot be a Republican-only solution," he added, "or a Democrat-only on the mandatory side."

Bacon, who serves on and has led a number of caucuses dedicated to bipartisanship and problem solving, said the two parties need to come together and decide how they can save mandatory spending programs like Social Security, Medicare, and Medicaid.

He argues that the country has an opportunity to cut costs by keeping discretionary spending increases below the rate of inflation.

"Let's say, right now, inflation is at 5%," he explained. "If we just did a 3% increase, or 2%, somewhere in there, you're actually lowering the deficit over time, because the revenues are gonna be exceeding faster than the spending.

""I think these agencies can live well within a couple percent below inflation," he added, "but that will be the negotiable point."

Bacon added that were this to happen, revenues would overtake spending, driving the deficit down. He argues that if Congress were to take this approach to the debt ceiling controversy, the country would score a "tremendous win" during a time of divided government.

The U.S. has struggled with the debt limit for decades in both Democratic and Republican presidential administrations. The last time the nation saw a budget surplus was in 2001, following the 1990's tech boom under President Bill Clinton. That surplus was immediately turned into a deficit when incoming President George W. Bush enacted a large tax cut.

Louise Sheiner, economic studies policy director at the non-partisan Brookings Institution, told Newsweek that spending to pull the nation out of the Great Recession of 2008, which occurred toward the end of George W. Bush's last term and was handled by the Obama administration, was a major contributor to U.S. debt.

Subsequently, the Tax Cuts and Jobs Act of 2017 passed under the Trump administration decreased the government's revenue stream and further increased the debt. Spending tethered to the COVID pandemic response under Trump and Biden led to unanticipated historic spending that increased it even further.

"I think basically there hasn't been a really concerted effort to lower the debt in quite a while," Sheiner told Newsweek. "In the last, let's say, five to eight years, people just haven't been that worried about the debt, partially because our interest rates have been so low, so it just didn't seem like a really pressing issue."

Those low interest rates could be what's at stake should Congress fail to raise the debt ceiling, Sheiner said.

In addition to these macroeconomic factors, Sheiner points out a demographic one. Like many other Western nations, the U.S. has an aging population, with the median age jumping from 30 in 1980 to nearly 39 in 2022. She said this has put additional pressure on programs like Medicare and Social Security. Rising demand for costly health care, some of which is financed through federal programs, adds to the problem, she said.

America's status as the world's top economic power has made U.S.treasuries, bonds issued by the U.S. promising repayment over a period of time, one of the most "perfectly safe liquid assets" available in the world, Sheiner said. If perceptions around the safety of these treasuries shift due to a debt default, the U.S. would likely face higher interest rates on the debt.

"We have very high national debt," Sheiner told Newsweek, "so the rate at which we pay interest on that debt just sort of takes our tax revenue and has to go to paying the debt. So when interest rates go up, it just makes [paying off that debt] more expensive."

In 2011 Congress faced a similar partisan battle over the debt ceiling, one which led to the credit-rating agency Standard & Poor's downgrading the United States government's credit rating for the first time in the nation's history.

Although the U.S. did not ultimately default, the uncertainty around the mere possibility of a default had serious consequences for American taxpayers. A 2012 report by the Government Accountability Office estimated delays to raising the debt limit "led to an increase in Treasury's borrowing costs of about $1.3 billion in fiscal year 2011."

Should such an event unfold this summer, it would "undermine the faith" in U.S. treasuries, Sheiner said, which could make these bonds far less attractive to foreign investors.

The United States holds the largest external debt in the world in terms of sheer amount. The percentage of that debt held by foreigners has increased in recent years, according to a May 2022 report by the Congressional Research Service. Foreigners hold roughly 33% of the publicly held debt, with China holding nearly 14% of that amount.

The issue of an undermined treasury market and increased interest rates would likely be the most enduring problem should Congress fail to raise the debt ceiling by June, Sheiner said. In the short term, she says uncertainty will likely cause fluctuations in other markets. If the public begins to fear U.S. instability there could be a stock sell-off that would be harmful to the market, and mortgage rates could rise as well. Sheiner said she could "easily see a recession" being triggered by such events.

While Congress agreeing to raise the debt limit stands at the most surefire way to resolve the problem, others have proposed alternate solutions. Jamelle Bouie of The New York Times recently argued in an opinion piece that under the Constitution Biden could "reject the debt limit itself as an unconstitutional use of congressional power."

In this argument, Bouie draws on language in the Constitution stating that the president must "take Care that the Laws be faithfully executed" to make the case that the president is obligated to "fulfill the terms" of the previous budget signed into law. He writes that Section 4 of the 14th Amendment suggests the administration could make the case that the debt limit is unconstitutional because of "the threat it poses to the validity of the nation's debt."

Constitutional law expert Michael Gerhardt of the University of North Carolina School of Law told Newsweek he sees the argument as "creative," but said it's also a "stretch." Were the president to raise the debt limit, he said this would essentially constitute a "remaking" of the budget, which would stand outside the purview of executive authority.

When it comes to the role the 14th Amendment could play in the argument, he said the historical context would likely be accounted for in a legal argument. He noted that the 14th Amendment arose in the aftermath of the Civil War, and was written to clarify that the public debt of the United States does not include that of the Confederacy. Gerhardt said this context would make it difficult to apply the Amendment to current circumstances.

Further, he noted that attempts to read the 14th Amendment in a broad fashion are something the Supreme Court has indicated it will not do.

"If they were to read it broadly, which is what the article is suggesting, not just broadly but even creatively, then the Court presumably could do the same thing with other parts of the 14th Amendment," Gerhardt said, "which this Court already repeatedly said it won't do. Even overruling Roe was an attempt to read the Amendment narrowly."

"It's a reason why this is what I call a 'non-starter,'" he added.

Others have floated the idea of the Treasury Department putting together a "platinum coin" worth $1 trillion that could be deposited in the Treasury's account within the Federal Reserve, providing the government a workaround to pay its debts without Congress raising the limit. But Secretary Yellen has already shot down that idea.

Sheiner said while such a move would likely not harm the economy directly, it would likely face legal challenges and create uncertainty that in turn could harm markets. She argues that such a move could also compromise the Fed's standing as an apolitical entity, which could lead to regulations harming its independence and potentially jeopardizing its ability to manage the economy.

In terms of economic solutions addressing this issue, along with Congress raising the limit, Sheiner said the body could also improve the nation's long-term economic situation by abolishing the debt ceiling altogether.

"It's not a useful thing in my view," she told Newsweek. "It's really risky. We've never actually gone over it, and we don't want to because that would be a terrible thing to do. We have these laws that said, 'this is what we're agreeing to pay, and these are the revenues that we're collecting,' and therefore we have the obligation to make those payments."

Sheiner also argues that the debt ceiling law violates existing law. She said Congress sets laws defining its tax code, spending programs, and other efforts. To have a law stating the government cannot borrow to fulfill these programs means the government cannot abide by all the laws it sets. To address the debt, Sheiner said Congress should instead focus on tax and spending legislation.

Newsweek asked Congressman Bacon whether he would support abolishing the debt ceiling.

"I'm not sold on it yet; I'm not saying I'd be unwilling to discuss it," he said. "I do think this is an opportunity to make our economic future more healthy. If we didn't have the debt limit ceiling coming up, would we be having this discussion with Joe Biden on reducing spending? We wouldn't."

If negotiations between Biden and McCarthy do not reach a solution, Bacon may be required to take a tough vote on raising the limit. Newsweek asked him about that possibility of default.

"I think it's a real threat, and it would be bad for our country, but I don't want Joe Biden saying, 'I'm gonna refuse to do anything and you got to just raise the debt,'" he told Newsweek.

"We really do need to get together and find some common-sense middle ground," Bacon added, "but we don't want to default —I think it would be bad."