ANALYSIS: Debt Ceiling Is High Stakes, and a GOP Opportunity

With a 5 vote majority in the House, not much will likely change. But it's an opening for 2024.

President Joe Biden, left, and House Minority Leader Kevin McCarthy (R-Calif.) in file images. Getty Images

House Speaker Kevin McCarthy has thrown down the gauntlet at President Joe Biden and the Democrats over the debt ceiling.

McCarthy has said he will extend the debt ceiling through May 2024, to $32.9 trillion, but only if the president and Congressional Democrats agree to:

• return roughly $50 to $60 billion of  unspent COVID-19 funding to the Treasury;

• return spending to 2022 levels;

• roll back the Inflation Reduction Act that passed last year;

• defund the planned “army” of IRS agents, as well as other funding for the agency; and

• mandate a work requirement for Food Stamp and Medicaid recipients.

McCarthy anticipates the House will pass his proposal sometime this week and move it over to the Senate.

But Biden dismissed the proposal April 19:

“So, folks, here’s what’s really dangerous: MAGA Republicans in Congress are threatening to default on the national debt—the debt that took 230 years to accumulate overall ... unless I agree to all these wacko notions they have.”

McCarthy’s ultimatum, and Biden’s reply, set up a case of high-wire brinksmanship that will play out in the early months of this summer.  Both Republicans and Democrats will play it for political advantage.

Why It Has to Happen

Back in January, referencing Homer’s “The Odyssey“, I wrote that the debt ceiling debate had a narrow path to steer to get its fiscal house in order.

“On one side is Scylla—the risk that a prolonged fight over the debt ceiling will result in a further downgrade in the credit standing of the United States, as occurred in 2011.  On the other side is Charybdis—the risk that continued reckless over-spending and continuing trillion-dollar deficits will cause a sovereign debt crisis that, in itself, causes global investors to lose confidence in the U.S. dollar so that they seek out alternatives as as reserve” (currencies).

Some countries, at least among America’s adversaries, may already be looking for alternatives. It’s even happening among our putative allies.

After the Biden administration weaponized the U.S. dollar to sanction Russia for its invasion of Ukraine, countries started stepping away from the American currency. Just weeks after the invasion, it was reported that Saudi Arabia and China had commenced talks to trade oil in yuan instead of dollars. Last month, France’s TotalEnergies (sic) completed its first yuan-denominated sale of LNG (Liquified Natural Gas) to the China National Offshore Oil Corporation.

A file image of a U.S. dollar and 100 yuan notes on display at a bank in Beijing, China. China Photos/Getty Images

Part of the move to alternatives is geopolitical tensions, for sure. And inasmuch as the rule of law is a prerequisite for a sound economy, part of it may be a decline in faith in the U.S. rule of law, as Fox Business commentator Larry Kudlow recently said.

But a great deal of it may be because the United States has been feckless in its spending. Our national debt is 130 percent of our GDP.

We could get a debt downgrade over dawdling over the debt ceiling.  But we may also get it because of our enormous debt.

That’s why this debt showdown has to happen.

The Negotiation, the Politics

It’s clear that the Biden administration plans to politicize the debt limit. McCarthy has given the president his opening position. The White House certainly knows that, in a negotiation, McCarthy has no expectation that Biden will “agree to all these wacko notions.” It is, after all, a negotiation.

But the president has chosen to characterize some eminently reasonable positions on the debt ceiling as “wacko notions.” And he has not met with Speaker McCarthy for over 80 days.

President Joe Biden delivers remarks on the economy at an International Union of Operating Engineers Local 77 union training facility in Accokeek, Md., on April 19, 2023. Nathan Howard/Getty Images

I believe the Biden administration will shut down the government and will do so in a fashion that inflicts modest pain—more in the nature of annoyances than actual harm—but on the largest number of voters, all the while blaming the “MAGA Republicans” for the plight. National monuments and parks might shut down at the height of the summer vacation season. Federal offices may shutter. But Veterans’ Administration hospitals will remain open, and Social Security checks will still be mailed out. And most notably, the government will not default on its debt.

The truth is there is enough cash flowing into government coffers to service the debt. A default could only occur if it was deliberate, for politics. The Biden administration’s posturing is entirely performative. It will get more so as the debt ceiling debate intensifies.

That will not be the establishment media narrative, though, even in some of the financial press.  They will amplify the Democrats fear-mongering. In 2011, Standard & Poors, the credit ratings agency, downgraded U.S. debt.  (The other two agencies, Fitch and Moody’s reaffirmed the highest rating for U.S. debt.) That will cause Republican representatives and senators in swing districts and states to get antsy. There is already talk of McCarthy not being able to hold a unanimous GOP caucus together as things heat up going into the August recess. Remember, he has only a five-vote margin of control in the House.

Ultimately, the debt ceiling will be extended, although I hope not by much, but likely more than the 1 percent McCarthy has asked for. The status quo will remain largely unchanged.

Opening for GOP

Any hope of changing the status quo, and to restrain spending,  requires a Republican House with a far greater majority and a solid GOP majority in the Senate.

Going into the 2024 election, therefore, Republicans must be at the forefront of fiscal responsibility and be prepared with a detailed taxonomy of specific budget cuts, including cuts to the GOPs heretofore sacrosanct Defense Department. Those defense cuts can be framed largely by a radical reassessment of vital American interests and a reduction to those military commitments maintained by inertia that are now outmoded.

I think the failure to address spending in 2023 will force the hand of Democrats in 2024. I’ve already said the Federal Reserve terminal rate will be around 6 percent. That will slow the economy significantly, but it won’t necessarily slow inflation. “Stagflation,” a portmanteau coined in the 1970s to describe that era’s twin economic stagnation and inflation, will likely return by the fourth quarter of 2023, or possibly earlier.

When it does, Republicans should seize the opportunity and capitalize.  “Stagflation” and the reckless, feckless spending that caused it should be front-and-center in every Republican House and Senate campaign. The Republican National Committee should do the fiscal equivalent of the infamous “Daisy” ad that Lyndon Johnson used to such devastating effect in the 1964 election campaign against Barry Goldwater. Republicans should point out that reckless spending is—like a nuclear disaster—an existential threat to the well-being of America’s children and requires the fiscal sanity Congressional Democrats and the Biden administration seem to lack.