Democrats’ disastrous US debt ceiling deal snatches defeat from jaws of victory

The result of Joe Biden and Democrats negotiating with Republicans is an appalling act of political surrender and an abandonment of progressive principles
Worse still, bargaining away their leverage over a divided opposition did nothing to prevent a similar crisis in the future or stand up for their constituents

James K. Galbraith

Published: 9:30pm, 7 Jun 2023

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There is an odious American political mythology concerning bipartisanship, according to which bitter adversaries, scarred by battle, find common ground, join hands and stroll off together into the sunset. It is mostly hokum.

Ulysses S. Grant did not reconcile with Robert E. Lee after Appomattox. Franklin D. Roosevelt did not reconcile with Herbert Hoover during the Great Depression, nor John F. Kennedy with Richard Nixon after the 1960 election. One does hear sugary reminiscences of Ronald Reagan and Tip O’Neill swapping blarney. But the real O’Neill fought Reagan – on principle and on politics – with everything he had.

In the spirit of the myth, US President Joe Biden recently praised House Speaker Kevin McCarthy after committing an appalling act of political surrender – on tax enforcement, social programmes, student debt, the environment and more.

Worst of all, Biden abandoned the principle that the debt ceiling should not obstruct progressive priorities in the future. But everything is all right, we are told, because Biden and McCarthy worked things out together.

But the White House and Treasury had at least three plausibly legal, wholly constitutional ways to defuse the supposed crisis without involving McCarthy and his increasingly unhinged Republican caucus. The administration could have minted a high-value platinum coin and deposited it at the US Federal Reserve, resorted to consol bonds which never mature, or issued premium bonds.

Republican House Speaker Kevin McCarthy (left) sits for debt limit talks with US President Joe Biden in the Oval Office at the White House in Washington on May 22. Photo: Reuters

Instead, they emerged from their trenches, waved a white flag and bargained away the keys to their fortress – all so the besieging army would go away for few years. Worse, the Democrats knew the Republican troops were divided and mutinous. Biden showed that when he told them, correctly, to get lost when they first approached.

But there is an even bigger truth that no one wants to admit: the Republicans’ big bomb was always a dud. The Treasury, by law, cannot stop or prioritise payments. Treasury Secretary Janet Yellen and her predecessors have long emphasised this.

Even if you cross the “limit”, the cheques must still go out. The debt ceiling only prevents the Treasury from issuing new bonds. In the worst case, the Fed’s Treasury General Account would have insufficient funds to cover the cheques.

At that point, the Fed probably could have issued a line of credit – an overdraft – to ensure the payments were honoured. Unsecured, no-interest, overnight overdrafts are not covered by the debt ceiling and are arguably a legal possibility. The Fed’s own records state the matter would be decided by its board of governors.

Pedestrians pass the Federal Reserve building in Washington on June 3. Photo: Bloomberg

The question might ultimately be tested in court, but so what? If the Fed so decided, or if a court so ordered, some of those Treasury cheques could bounce, becoming unsecured claims on the Treasury. If banks refused to honour them, how long would it take before the Fed begged Congress to resolve the “crisis”? I suspect that would happen well before markets opened the next day.

If breaching the debt limit had really risked “catastrophe”, the blame would have laid with those Republicans who decided to make an issue of it, and they almost certainly would have folded. If, against all logic, they chose political suicide, so much the better for the Democrats.

The White House held the big guns either way, yet still it surrendered. It seems that Biden’s advisers did not particularly care about the concessions made, and that at least some people had a strong economic reason to avoid the aftermath of a default.

Let’s examine that scenario. Suppose McCarthy’s forces held, Biden did not surrender, the Fed issued overdrafts and the political stalemate dragged on. Even then, life would go on normally, except that maturing Treasury bonds would be paid off in cash because they would no longer be rolled over.

US House Speaker Kevin McCarthy speaks to reporters as he walks to the floor of the House Chambers at the Capitol Building in Washington on June 6. Photo: AFP

Bondholders might not like that, and they might use their cash to buy something else. As Hillary Clinton warned in The New York Times, the international dollar would fall, implying the tiny elite who live by the international dollar would take the bigger hit. For the rest of the country, it would be analogous to when Roosevelt suspended the gold standard and launched the New Deal in 1933.

US industry would become more competitive, and industrial and manufacturing jobs would start to return. Though there are costs to a lower US dollar, these must be weighed against the benefits. Besides, a weaker dollar is coming anyway.

The “catastrophe” scenario was absurd from the start. This was really about the character of the Democratic Party. Would it continue to cater to Big Finance or would it be forced to represent the interests its own voters and the American people?

Mainstream Republicans backing US debt ceiling deal welcome sign of sanity

If Biden is re-elected, congressional Democrats will face the same choice again in 2025. They can agree to more concessions and again hide behind the rhetoric of “bipartisan cooperation”, or they can finally refuse to submit to extortion.

And if Biden is defeated? The Republicans will do whatever they want with federal programmes, regulations, taxes and the debt ceiling. This latest disgraceful episode has made such an outcome more likely. After all, who needs a Democratic Party that won’t stand up for itself or its constituents?

James K. Galbraith, a professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, was executive director of the Joint Economic Committee (1981-83) during the Reagan administration and under the speakership of Thomas P. O’Neill. Copyright: Project Syndicate