How Joe Biden could defuse a debt ceiling battle with House Republicans

2023 brings the United States a new Congress with a new Republican majority in the House, and (after many many hours of voting) a Republican speaker of the House, and you know what that means: There will be a massive fight over the debt ceiling.

The ceiling, a legal limit on how much outstanding debt the federal government can hold, sparked standoffs between the Democratic White House and Senate and the GOP House in 2011, and again in 2013, and is now set to unfold yet again. The Republican House rebels who voted against Kevin McCarthy in the speaker election over a dozen times finally forced a promise to never pass a “clean” debt ceiling increase (that is, one without spending cuts attached) in exchange for their votes.

Breaching the ceiling would be almost incomprehensibly bad: Beth Ann Bovino, chief US economist at Standard and Poor’s, was hardly alone in 2017 when she predicted that “the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.”

And yet America keeps running this apocalyptic Groundhog Day. Luckily, there is a way out of the dilemma: ending the debt ceiling once and for all. The best way to do this is through legislation, but given the stranglehold of Republican hardliners in the House, that looks impossible. The administration couldn’t raise the debt ceiling on its own, but experts have floated a few options for the president to consider to avert a crisis. None of these are free from risk, and all would likely spark considerable litigation that could in turn cause market turmoil. But all would be preferable to defaulting on US debt.

How Biden can kill the debt ceiling

There are at least four different ways a president could nullify the debt ceiling without Congress.

1. Mint the coin

It’s strange but true: As blogger Carlos Mucha pointed out back in 2010, an existing law gives the US Treasury secretary the power to issue platinum coins of any value she wishes.

The intention of the original 1997 law was about making it easier to produce platinum coins for the international coin collector market, but in 2011 Much, revived the idea in the context of that year’s debt ceiling standoff. The Treasury secretary could issue, say, a platinum coin worth $2 trillion, deposit it into the Treasury’s account at the Fed, and use those funds to sustain the government until the debt ceiling is raised.

The Obama administration found the idea too unserious there to use, but the legal case for minting the coin is as solid as platinum. Just ask debt-ceiling hardliner Sen. Mike Lee (R-UT), who was sufficiently concerned about the option to introduce legislation to close the platinum coin loophole. The plain text of the 1997 law clearly allows the Treasury secretary to do this, and Jay Powell, the Fed chair who in a past career was an expert on the debt ceiling and its dangers, is arguably legally required to accept the coin as a deposit.

You can also imagine more serious variations on the concept. Progressive economist Mike Konczal once proposed issuing a $20 billion coin every day to keep the government running until Congress agrees to abolish the debt ceiling for good. And a $20 billion coin is, what, 1 percent as silly as a $2 trillion one?

2. Invoke the 14th Amendment

Some legal scholars have argued that Section 4 of the 14th Amendment, which specifies that “the validity of the public debt of the United States, authorized by law … shall not be questioned,” renders the debt ceiling unconstitutional, as it threatens the validity of the US’s public debts by creating the possibility of default.

This is hardly a consensus position among constitutional law experts, but if Biden were to declare he was ignoring the debt ceiling because it’s unconstitutional, it’s not clear that anyone would have legal standing to sue Biden and challenge the decision. That helped encourage a number of political actors, from then-House Minority Leader Nancy Pelosi to former President Bill Clinton, to urge Obama to invoke the 14th Amendment during his debt ceiling showdowns.

Obama declined repeatedly, arguing in 2013 that “if you start having a situation in which there’s legal controversy about the US Treasury’s authority to issue debt, the damage will have been done, even if that were constitutional, because people wouldn’t be sure.”

3. Declare ignoring the debt ceiling to be the “least unconstitutional” option

University of Florida law professor Neil Buchanan and Cornell law professor Michael Dorf have, in a series of papers, proposed a way out of the debt ceiling that’s related to but distinct from the 14th Amendment option.

Buchanan and Dorf note that Congress, by setting spending and tax policy as well as a debt limit, has given the president three mandates: to spend the amount Congress authorizes, to tax the amount Congress authorizes, and to issue as much debt as Congress authorizes. When the debt ceiling is breached, it becomes impossible for the president to obey all three of these legal requirements.

Prioritizing spending on certain activities and cutting it elsewhere usurps Congress’s spending power by cutting spending unilaterally. Raising taxes without congressional authority would usurp Congress’s taxing power. And ignoring the debt ceiling would usurp Congress’s power to set debt limits.

The last option — respecting Congress’s taxing and spending powers while ignoring its debt limit — is the “least unconstitutional” option, Buchanan and Dorf argue. This judgment would no doubt be challenged in court, but it’s arguably less dramatic than the president unilaterally declaring the debt ceiling a violation of the 14th Amendment.

4. Issuing quasi-debt while the crisis plays out

Steven Schwarcz, a professor at Duke Law and expert on capital markets, has proposed getting around the debt ceiling by having the Treasury Department create a “special-purpose entity” to issue new securities, distinct from traditional Treasury bonds, that can pay for government expenditures. Because they’re not Treasury bonds, these securities would not be subject to the debt limit.

This may seem bizarre, but Schwarcz got the idea from state and municipal finance in the US; many states raise most of their debt with special-purpose entities, rather than by directly issuing bonds, often so they can get around their own state debt limits.

What a 2023 budget deal might look like

Ideally, Biden will use one of the above methods to evade the debt ceiling and prevent Kevin McCarthy and his caucus from using the threat of federal government default to extract policy concessions.

But these are all relatively dramatic steps, and it’s possible that Biden will, like Obama before him, demure and ultimately accept that he needs to bargain with McCarthy and agree to spending cuts to get a debt ceiling increase passed. If that happens, it’s worth considering what such a spending cut deal will look like.

The best guide here is the 2011 Budget Control Act, the result of that year’s debt ceiling standoff. The Obama White House took a firm line against any deal that cut Social Security or Medicare without increasing taxes. For a brief time, House Speaker John Boehner seemed to be playing ball, agreeing to as much as $800 billion in revenue increases, but it soon became clear that he could not get his caucus to support major tax increases. Without the tax hikes, the Social Security and Medicare cuts that Obama was open to — like slowing cost-of-living adjustments for the former and raising the age for the latter to 67 — went off the table.

And while Republicans have ideological reasons to want to cut Social Security and Medicare, their older-than-average voting base, combined with those programs’ overwhelming popularity, also give them reasons to avoid cuts in this area.

So the ultimate 2011 deal kicked the can down the road. It included $917 billion in direct spending cuts, mostly implemented by capping “discretionary” spending, which includes defense programs and everything else the government does that isn’t a mandatory entitlement program like Social Security, food stamps, or veterans’ benefits.

The bill then mandated another $1.2 trillion in deficit reduction to be determined through a congressional committee (colloquially called “the supercommittee”). If the supercommittee failed to put together a package slashing $1.2 trillion through tax hikes or spending cuts, indiscriminate spending cuts would ensue through forced decreases in the caps on defense and non-defense discretionary spending. Unless Congress passed spending bills with totals below these new, even lower caps, a “sequestration” process forcing across-the-board cuts to every affected program would ensue.

The across-the-board cuts included as a backup were never meant to take effect. They were an enforcement mechanism meant to pressure Congress into making a deal, the equivalent of paying a guy from Craigslist to punch you if you don’t get your work done on deadline.

But the supercommittee failed, forcing those spending cuts. Because the deal took cuts to Social Security, Medicaid, and the beneficiary side of Medicare off the table, the toll on Americans was lighter than it could have been. (Medicare payments to providers were cut, though, which some studies have found reduces quality of care received.) Further, Congress agreed in another deal at the end of 2012 to delay the sequestration cuts for two months, so they began on March 1, 2013. But they took effect then, as planned.

The consequences of the 2013 sequestration

The sequestration led to 7.7 percent across-the-board cuts to defense and 5.1 percent across-the-board cuts to domestic discretionary spending. Military operations funding fell by $17.1 billion, the National Institutes of Health by $1.6 billion, nuclear weapons security by $903 million, border security and immigration enforcement by a combined $890 million, and on and on.

Perhaps worse, agency heads had little to no flexibility in distributing these cuts; every “program, project, and activity” had to be cut equally, and “activity” was defined to include things as small as a single buoy the government floated in the Chesapeake Bay. That buoy, somehow, had to be cut by 5 percent (in practice, that meant scraping 5 percent less bird poop off the buoy).

Center on Budget and Policy Priorities

These across-the-board cuts, though, only came because Congress approved spending bills totaling more than the caps they set for themselves (again, assuming the cuts wouldn’t actually take effect). After 2013, Congress knew it had to pass spending bills that did abide by the caps, after which no across-the-board cuts would ensue. It simply had to make decisions about what spending it wanted to prioritize, subject to those limits. It also could, and occasionally did, change the caps, as in the 2013 and 2015 budget deals, which raised defense and non-defense spending caps in the short term, partially offsetting that with lower spending later on. The 2018 and 2019 budget deals under Trump increased the caps still further and barely included any offsets, driven largely by a Republican desire to restore defense spending.

Taking all these changes together, the Committee on a Responsible Federal Budget’s Goldwein told me, the Budget Control Act of 2011, the fruit of the debt ceiling crisis, resulted in $1.2 trillion or so in overall deficit reduction. This was less than the $2.1 trillion originally promised (due to the repeated deals which raised the budget caps), but it was still a sizable hit. Overall spending was substantially lower from 2011 until the Covid-19 pandemic hit (and threw the federal budget into general chaos) than previously planned.

So, what did this all mean for actual users of government services? For some, the impact was temporary. Head Start, the pre-K program for low-income children, kicked 57,000 kids off its rolls when the sequestration hit, kids who permanently lost access to the program. But the next year, funding was restored and stayed roughly on track for the rest of the decade. Some affected spending categories rose dramatically over this period, most notably health care for veterans, which members of Congress prioritized in appropriations bills.

Center on Budget and Policy Priorities

So what did suffer? The Center on Budget and Policy Priorities’ David Reich co-authored a category-by-category report and found that, between 2010 and 2021, every single category of non-defense discretionary spending besides veterans’ programs saw declines after adjusting for inflation and population growth. Economic security, health care, and scientific research programs were close to stagnant, falling by 4 percent or less. But funding for environmental protection and parks fell by 15 percent; general government operations by 26 percent; education and job training by 14 percent; diplomacy and foreign aid by 19 percent; agriculture, energy, and commerce by 19 percent.

Housing vouchers through the Section 8 program could not keep up with rents; the Center estimated that between 2010 and 2017, voucher funding fell by 9 percent after adjusting for rent inflation, resulting in “significant decreases in the number of families that were being served over that time,” Peggy Bailey, the Center’s vice president for housing and income security and a former senior adviser to HUD Secretary Marcia Fudge, told me last year.

A study from the American Association for the Advancement of Science found that aggregate research and development spending from the federal government was $200 billion lower due to the Budget Control Act; health research from the National Institutes of Health and the VA fell by over $7 billion a year relative to previous historical trends, while the National Science Foundation got almost $2 billion a year less.

This was all bad news for people interacting with government programs. The two biggest social assistance agencies in the US are the Social Security Administration (which administers old-age and disability payments) and the Internal Revenue Service, which administers tax credits that are crucial for reducing poverty. Adjusted for inflation, funding for the agencies fell by 13 and 19 percent between 2010 and 2021, respectively.

Perhaps the single worst category of cuts that took effect — given what followed — were to programs related to pandemic preparedness and effectiveness. As Reich and Katie Windham note, the Centers for Disease Control and Prevention’s budget fell by 7 percent between 2010 and 2021, and its grants to state and local public health agencies fell by 20 percent. That almost certainly hampered America’s ability to anticipate and respond to pandemics like Covid-19, and almost certainly cost lives.

How will this play out?

In short: We don’t know.

For one thing, experts say there’s a huge amount of uncertainty about when the ceiling will be hit this year. July or August 2023 has been thrown about as a likely deadline, but the ceiling might not be hit until 2024 if tax revenues surpass expectations, allowing the government to pay its own way temporarily. While House Speaker Kevin McCarthy got his job by promising a fight on the debt ceiling, his majority is very narrow, meaning that six or more Republican defections could enable Democrats to pass a “clean” increase using a tool called a discharge petition, through which a majority can force a floor vote in the House even if leadership doesn’t want one. (This is an important plot point in the 2003 classic Legally Blonde 2: Red White & Blonde, our modern-day Mr. Smith Goes to Washington.)

J. Scott Applewhite/AP

Personally, though, I’m steeling myself for a repeat of the 2011 budget deal, precisely because the dynamics that led to it narrowly focusing on a small sliver of the budget are still there. Republicans are if anything even more vehemently opposed to tax increases, and Democrats are equally vehemently opposed to tax hikes affecting all but the richest 1 percent or so of Americans. Social Security and Medicare are still hot potatoes, and while other “mandatory” programs like food stamps are less popular, Democrats have historically held firm against any cuts to them.

That leaves discretionary programs, both defense and non-defense, covering everything from the FBI to medical research to US embassies abroad. Those programs took a severe battering during the 2010s under the Budget Control Act, and there’s every reason to expect them to take a battering in whatever deal emerges in 2023. The consequences are not straightforward, but could weaken important parts of the government that have already been underfunded for a decade. And the odds of a showdown actually addressing the drivers of the long-run budget deficit — inadequate tax revenue, an aging population with growing health and pension bills — are basically zero.

The one thing debt ceiling fights never do is solve the debt issue.