- There are at least three ways the rapidly approaching federal debt ceiling crisis could end.
- Democrats and Republicans could agree on a deal raising the debt limit.
- The government could go into default, severely damaging the economy and causing unemployment to surge.
- President Joe Biden could ignore the debt limit, as two prominent law professors have advised.
The government is on track to run out of money to pay its bills this summer, setting the stage for a partisan confrontation that could spiral into an economic or constitutional crisis or both.
Politicians are once again locked in a standoff over raising the national debt ceiling—Republicans in control of the House of Representatives say they won’t do it unless President Joe Biden makes concessions on spending. Experts say the situation could enter uncharted and dangerous territory this summer if the government runs out of options and can no longer borrow money to pay its bills.
Ever since January, the government has been running its finances on borrowed time. That month, the Treasury reached the $31.4 trillion limit that Congress allows the government to owe to pay for obligations Congress has already authorized.
Accounting maneuvers by the Treasury have kept the lights on at government agencies, and have continued paying Social Security benefits, military salaries, and the government’s other bills while Republicans and Democrats grapple over how to avert the impending crisis—which they may or may not do.
The Treasury’s “extraordinary measures” will work for a while—depending on how much the IRS collects in taxes, that could be until early June or as late as mid-August, economists say.
Alternatively, President Joe Biden could decide to defy Congress and order the Treasury Department to ignore the debt limit, setting up a possible high-stakes case in the Supreme Court.
Experts say there are three possible ways the situation could play out:
Congress Raises or Suspends the Debt Limit, As They Always Have
One likely possibility is a deal is reached at the last minute, the crisis fizzles out, and everything goes back to business as usual.
Since 1960, Congress has raised or suspended the debt limit 78 times. The country has never defaulted on its debts in the modern era. Why should this time be any different?
Indeed, when Kevin McCarthy went to Wall Street earlier this month and laid out his demands to Biden for a debt ceiling deal, Wall Street didn’t seem to care. Financial markets didn’t discernibly react to McCarthy’s saber rattling.
“Wall Street has yet to take a serious look at the debt limit standoff as they feel it is a couple months away from any serious talks from happening,” said Edward Moya, senior market analyst at OANDA, in an email. “Expectations are for the latest standoff to go down to the wire and for the country to just avoid default.”
A last-minute deal to settle the crisis would not necessarily leave the economy unscathed—past debt limit crises in 2011 and 2013 during the Obama administration hurt financial markets and made interest rates go up even though the issue were resolved at the last possible moment.
There’s No Deal, and The Government Finds Itself Unable To Pay the Bills
In the most dire scenario, the government would stop paying its many obligations on time, dealing a far-reaching blow to an economy already sliding towards a recession.
While Congress has always dealt with the debt limit in the past, that’s not necessarily true for the future. Failure is always an option.
“The current battle over the debt limit looks to be even more vexed than in times past,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a commentary last month analyzing what would happen if the debt deadline clock ticks down to zero without intervention. “Odds that lawmakers are unable to resolve their differences and avoid a breach of the debt limit appear meaningfully greater than zero.”
If the Biden administration abided by the debt ceiling, the government would have to pay its bills with the tax money coming in, which would not be enough to cover everything.
In the event of a prolonged standoff, the government would be forced to slash spending by $350 billion, sending a “cataclysmic” ripple effect through the economy, and undermining the confidence of consumers, financial markets, and businesses alike, according to Zandi’s analysis.
The economic fallout would be similar to the Great Recession, and the unemployment rate would more than double, spiking to over 8%.
Biden ignores the debt limit
If push comes to shove, Biden can, and should, simply ignore the debt limit, according to two prominent law professors, University of Florida’s Neil Buchanan and Cornell’s Michael Dorf, who wrote an article for legal website Justia last week urging Biden to defy Congress.
Buchanan—a longtime critic of the debt ceiling—argues that if the government found itself unable to pay its bills without breaking the debt limit, doing so would be the “least unconstitutional” option.
Ignoring the debt limit would clearly be against the law. But following the debt limit, not paying debts, and picking and choosing which bills to pay—to say nothing of more exotic and questionable options such as selling off national monuments or issuing a trillion-dollar coin—would also be illegal.
“If the president defaults on payments when they come due (especially if he ‘prioritizes’ paying some bills over others, as some Republicans and even some Democrats say he should), he would be taking on a legislative role, choosing winners and losers and overriding Congress's choices, which is a massive violation of the Constitution's separation of powers,” Buchanan wrote in an email.
Given the choice between illegal options, Biden should choose the least damaging one, which would be to continue paying bills as if the debt ceiling did not exist, Buchanan and Dorf contend.
There is little sign, however, that Biden is considering going this route.
“They seem to have decided that they can ‘win the politics’ by outlasting Republicans in a staredown, rather than following our advice and be accused of acting lawlessly,” Buchanan wrote. “But today's Republicans are too rigid (and honestly, too confused) to be counted on to blink when they need to blink.”
Should Biden decide to take that advice, the case could end up in the Supreme Court. Buchanan said he believes the high court would decline to rule on it, but if it did take the case, the court’s conservative composition would favor the Republicans.