House Speaker Kevin McCarthy traveled to the New York Stock Exchange on Monday to deliver a speech charging President Biden with being “missing in action and misleading the public” in negotiations to raise the nation’s statutory debt limit. The media has been trying to tell this as a story of a standoff between the Republican Speaker of the House and the Democratic President of the United States where each has their point of view. McCarthy’s point of view is that President Biden is flirting with disaster by refusing to negotiate. Biden’s response is “Show me your budget.”
"Mr. President, with all due respect, enough is enough. This is not how the leader of the free world should act. Your partisan political games are provoking the very crisis you claim you want to avoid greater dependency on China, increasing inflation, and threatening Medicare and Social Security,” McCarthy said. Adding, “Make no mistake: The longer President Biden waits to be sensible, to find agreement, the more likely it becomes that his administration will bumble into the first default in our nation's history,” and then, "A no-strings-attached debt limit increase will not pass [the House of Representatives]. But since the President continues to hide, House Republicans will take action."
Nearly every sentence in the above quotes is false, and we invite you to read it again after reading this post. McCarthy is accurate when he depicts how necessary it is to avoid default, how disastrous the consequences would be for the American economy and for the global economy, and how irresponsible it is for political leaders to allow such a disaster to be within the realm of possibility. But it is McCarthy, not Biden, that is playing politics and threatening a possible default. America needs to reduce deficit spending, and this will require bipartisan cooperation and a balanced agreement to raise additional revenue and slow the growth rate of spending. This conversation cannot even begin until the House GOP drops the default threat, and drop it they will sooner, with little economic damage from the political stunt, or later, amid widespread economic destruction (and political humiliation for McCarthy as the GOP leader).
House Republicans are in a box-canyon with no way out but to reverse direction. McCarthy thinks he is in a standoff with President Biden, but instead he is locked in a standoff with the stock and bond markets.
McCarthy has a lot of problems heading into this standoff. His majority is narrow, his speakership could be challenged at any time by a small number of members on the right or in what currently passes as the Republican centrist wing, and his party has no unified answer to which parts of the budget they propose to cut or what their list of demands is for Biden to get the ceiling lifted. The House GOP met on Tuesday where McCarthy hoped he could unify his caucus, but had to adjourn the fractious meeting after hearing criticisms from all sides.
But McCarthy’s biggest problem is that he completely misunderstands his party’s strategic predicament. House Republicans are in a box-canyon with no way out but to reverse direction. McCarthy thinks he is in a standoff with President Biden, but instead he is locked in a standoff with the stock and bond markets. Biden has no incentive to assist the Republicans as they try to avoid a humiliating retreat, by negotiating concessions in exchange for their votes to raise the debt ceiling before the bond markets force them to honor the nation’s debts to bondholders.
The standoff will end when the individuals, corporations, and governments that buy United States Treasury Bonds decide they no longer want them if the United States Government stops paying the premiums it promised. When bondholders start selling, the bond market will fall dramatically, sending interest rates soaring and the stock market tumbling as well. In the speech McCarthy says resolutely that a clean debt limit cannot pass the House, and this is true today in mid-April, based on promises McCarthy reportedly made to conservative Republicans in exchange for the votes he needed to become Speaker. This will no-longer be true in June or July when the markets are in free-fall, and everyone, even The Wall Street Journal and the FOX
Business Channel are blaming the market crash on McCarthy not Biden.
In this circumstance McCarthy will not need to pass a clean debt limit increase on his own. All he will need to do is allow a clean debt limit increase to reach the House floor where nearly all the Democrats would join a handful of Republicans in passing the law. Senate Majority Leader Chuck Schumer (D-NY) and House Democratic Leader Hakim Jeffries (D-NY) should draft a 5-year clean debt limit increase, or a full elimination of the debt limit, perhaps also forming a Simpson-Bowles like deficit reduction commission, so it is ready to be passed on Democratic terms when Republicans are in full panic. After “Jeffries-Schumer” passes and markets regain a part of their decline, McCarthy would of course be voted out of leadership, and the necessary bi-partisan negotiations on the Fiscal Year 2024 budget and long-term deficit reduction strategy could fully begin (if it had not already started in the Senate.)
If this sounds like a liberal fantasy ending to this story, it is not. It is simply the path we are on if everyone does what they are doing today, and say they plan to do tomorrow. And it is well informed by the last time we saw this movie in 2011 when Barack Obama was President, and John Boehner was Speaker of the House. Republicans threatened a debt default with no shortage of bluster, but then reversed course when the stock market dropped. The debt ceiling was raised as a Supercommittee was tasked with reducing the deficit. Most of the main characters in this year’s drama were in positions of leadership in 2011 as well, including McCarthy who was House Majority Whip and Joe Biden who was Vice President and lead budget negotiator for the Obama Administration. Biden fully understands the strategic dynamic today because he learns from experience.
So far, the stock market is ignoring all the drama. They have also seen this all before and when the markets move, and the Republicans fold, the markets can recover fairly quickly. When the smoke clears there will be more political damage done to the House Republicans than the real economy. This is, of course, an avoidable catastrophe for McCarthy and the GOP. There are several ways this logically could end: 1) President Biden could reverse course out of weakness, 2) President Biden could reverse course out of strength and pity for the House Republicans’ plight, or 3) McCarthy could realize he has lost and reverse course for damage limitation.
Biden is not going to show weakness heading into the 2024 Democratic Primary and General Election. He is not at all concerned when McCarthy criticizes him in a speech. The GOP leader does that every day, and if it were not this issue it would be some other. Nor is Biden likely to take pity on the plight of the House GOP or negotiate to avoid a drop in the bond market. Saving Republicans from their stupidity is not Biden’s job. If it could be argued that caving to Republican pressure would be good for the health of the economy, he would face a difficult choice, but House Republicans are only offering a one-year extension of the ceiling and plan to threaten default again next year. The best way to safeguard the economy is to prove to McCarthy and his caucus that they gain nothing by such threats.
The only way for McCarthy to avoid losing his power in these negotiations is for him to realize that he lost before this standoff began and seek a face-saving exit from the rhetoric he repeated on Monday. He can best do this by answering Biden’s offer to work on a budget for FY 2024 and to negotiate substantial long-term deficit reduction through a bipartisan agreement for a balanced package of increased revenues and decreased rate of spending growth.