What Are the Implications of Republicans Obstructing Biden’s Agenda on the Debt Crisis?

On January 19, 2023, the US government exceeded the debt limit, $31.4 trillion, amid a standoff between the Republican-controlled House of Representatives and President Joe Biden’s Democrats on lifting the ceiling, which could lead to a financial crisis within a few months.

Treasury Secretary Janet Yellen told congressional leaders, including House Speaker Kevin McCarthy, that her department has begun using extraordinary measures to continue to honor its commitments and avoid default for a few months pending a bipartisan political deal.

Republicans aim to use the time to exhaust emergency Treasury maneuvers to force Biden and the Democratic-led Senate to cut spending, while the Democrats refuse to cut spending, calling on Congress to raise or suspend the debt limit on its own.

The White House said that the borrowing limit must be raised without conditions, considering that the Republicans are determined to hold the economy hostage.

A debt default is likely to cause panic in financial markets and subsequently in the global economy at a time when the United States is trying to get through a difficult economic period after Covid-19 without falling into a recession.

A standoff over the debt ceiling in 2011 led to Standard & Poor’s downgrading the United States’ credit rating in a historic precedent.

 

Deep Recession

Treasury Secretary Janet Yellen revealed that the United States had reached the borrowing limit ($31.4 trillion), but it can continue to pay its bills until next June 5 by resorting to the use of some exceptional measures that do not affect the American citizen, as reported by Associated Press on January 19, 2023.

Yellen warned that defaulting on US debt would lead to a recession in the United States and could lead to a global fiscal crisis.

On the other hand, Republicans in the House of Representatives called for spending cuts in return for supporting raising the US debt ceiling, while some suggested that the Treasury Department cover some obligations, such as: Ministry of Defense employee salaries and debt payments, and deferring some other expenses, but Yellen said that this is not possible.

Meanwhile, US President Joe Biden and administration officials called for an increase in borrowing capacity, noting that the risks of a protracted impasse once the extraordinary steps run out could lead to a deep recession that could reverberate dangerously around the world and erode confidence in the credit of the US government.

Among the expenses that Democrats say Republicans want to eliminate are those related to health insurance, especially for retirees, as well as food aid for the poor.

The fight between the two poles sets the stage for a high-stakes political battle in the coming months when the United States is expected to exhaust all remaining special budget measures to prevent the government from defaulting on a payment.

It is noteworthy that the failure of the United States to pay debt payments goes beyond the impact on the federal government only, as it will affect the economy and Americans, according to what was reported by The Balance on January 23, 2023.

Default will lead to an increase in interest rates in the United States, which means price increases, and contribute to inflation, which places a direct burden on Americans.

As for the US economy, the stock market will suffer, and the US credit rating will drop, as the United States will not be seen as a safe place to invest.

Many programs and services provided by the federal government will also be affected, primarily Social Security and Medicare, while many small and medium businesses that depend on federal loans will suffer, while the salaries of federal employees will stop being paid.

Together, these things may affect consumer spending in the United States, and many companies will close, which could plunge the country into a major recession.

In addition, failure to address the issue of the debt ceiling this time may lead to turmoil in global financial markets and an economic downturn; investors lost confidence in the ability of the US Treasury to pay its bonds, which is seen as the safest borrower of dollar debt in the world, and as the cornerstone of the global financial system.

On its part, Reuters revealed that signs of concern have already begun to appear in the financial markets, which was evident in investors’ demand for higher returns on some US Treasury bonds.

 

Debt Crisis

In the same context, US Republican Representative Brian Fitzpatrick revealed, on January 22, 2023, that a group of the Republican and Democratic parties is preparing a plan to defuse a looming crisis by adjusting the ceiling from a fixed amount, $31.4 trillion, to a percentage linking debt to a share of GDP.

Fitzpatrick added in a statement to Fox News that Republican House Speaker Kevin McCarthy will take the lead in negotiations with the White House on the debt ceiling.

In turn, Senate Republican Leader Mitch McConnell expected the debt ceiling to be raised sometime in the first half of 2023 under terms negotiated by Congress and the White House.

On the other hand, observers believe that if Congress refrains from raising the debt ceiling during the coming period, ministries such as the Ministry of Defense and the Internal Revenue Service will not obtain the funds they need to operate, and they must then close or reduce their work.

This has happened three times in the past decade, with a healthcare spending battle leading to a 16-day closure in October 2013, while disputes over immigration led to a three-day closure in January 2018 and a 35-day closure between December 2018 and January 2019.

According to the US Congressional Budget Office, the 2018-2019 closure cost the US economy about $3 billion, which is equivalent to 0.02% of GDP.

On his part, economist Paul Krugman said that the United States is not in a debt crisis, but it may face many economic problems in the coming years as the accumulated debt begins to be repaid.

The Nobel laureate for economics stated in an opinion article published by the New York Times: “American debt is logical, given what the world has witnessed in the past period, such as wars, recessions, and epidemics.”

The American economist predicted that the United States would return to an environment of low-interest rates during the next few years, but with zero interest again, debt repayment may lead to problems, with interest not being reduced further.

 

Political Standoff

CNN explained in its report on January 19, 2023, that there is evidence showing that facing the debt crisis this time will be political, as Republican lawmakers may allow the country to default, and it is unlikely that Biden will endorse any cuts in public spending.

The report pointed out that the history of political Standoffs in the United States shows that the debt ceiling crisis occurs when “the Congress is Republican, and the president is Democratic,” as the Democrats have not shown any interest in using the debt ceiling as a pressure card, even with Republican presidents.

According to government figures, after pandemic recovery spending, the debt is about 120% of GDP, which is considered historically high and higher than after World War II.

Meanwhile, a report published by The Hill on January 19, 2023, confirmed that the White House’s refusal to discuss spending cuts amid times of debt means that President Biden is not acting in the public interest, while Democrats believe they have more influence if they do not negotiate.

It is noteworthy that Congress had simply raised the debt ceiling, as happened in August 2019 during the Trump administration, except that it sometimes takes advantage of the opportunity to engage in a noisy debate about the fiscal policy before raising the debt ceiling until the last possible moment, as happened in 2011 during the Obama administration.

According to observers, this year may witness a repeat of 2011, when the Republicans, who control the House of Representatives, say they will not raise the debt ceiling unless Democratic President Joe Biden agrees to reduce spending, while a number of economists say they expect to reach an agreement with a few adjustments.

The current time seems more charged than previous times with regard to the debt ceiling, and reveals wide differences between President Biden and the new Speaker of the House, Kevin McCarthy.

Republicans and Democrats have a few months to reach an agreement, but growing partisan animosity threatens lawmakers’ ability to work together to avert an economic crisis.