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The politics and economics of a potentially costly showdown over the debt ceiling

ARI SHAPIRO, HOST:

The federal government is now living on borrowed time and borrowed money. Last week, the U.S. bumped up against its debt ceiling. So now the Treasury Department has to juggle funds until Congress agrees to relax the government's $31 trillion borrowing limit. House Republicans have threatened to use the debt ceiling as a bargaining chip in hopes of extracting concessions. That sets the stage for a showdown that could be costly. We're going to talk through the politics and the economics of this, starting with NPR's Deirdre Walsh. Deirdre, what are House Republicans exactly demanding?

DEIRDRE WALSH, BYLINE: Well, as part of his negotiations to be elected House Speaker, Kevin McCarthy agreed he would not allow any vote to increase the debt limit without spending cuts. President Biden and Democratic leaders have repeatedly argued they don't want to negotiate over paying the country's bills. Right now, there's no unified House Republican position. Speaker McCarthy did float the idea of doing what then-Speaker Pelosi did under then-President Trump. They had a deal that capped federal spending for two years in order to raise the debt limit, but many conservatives really didn't like that idea. McCarthy is saying he will protect Social Security and Medicare. Some House Republicans, Senate Republicans, have floated changes. But I talked to a lot of GOP members this week who just don't want to go there in terms of any cuts to politically popular retirement programs. Here's Louisiana Republican Clay Higgins. He's a member of the conservative House Freedom Caucus.

CLAY HIGGINS: Most of us will have no business cutting any kind of Social Security benefit or Medicare benefit. It's referred to as a benefit, but it's a contract with our elders.

SHAPIRO: Deirdre, it sounds like there's not agreement among Republicans, let alone between Republicans and Democrats. What is the leader of the Senate Republicans, Mitch McConnell, who's been part of these talks in the past, saying about this one?

WALSH: Well, McConnell was a key player in the last big standoff, but right now, he's saying the House is controlled by Republicans, and he doesn't see any deal that the Senate could negotiate that would actually pass in the narrowly controlled House Republican - House controlled by Republicans, only a four-seat margin. He told reporters yesterday a final deal would have to come between Speaker McCarthy and President Biden. They have agreed to sit down and are still sorting out a date. There are some Republicans who've gone through these past standoffs who say there needs to be a serious discussion about future reforms to programs like Social Security. And they say it's impossible to deal with the debt without looking beyond the annual spending bills. Arkansas Republican Steve Womack stressed that the current spending fights really only focus on a third of the total federal budget.

STEVE WOMACK: You have to look at the entire spending portfolio, and that means that you do have to have a full-throated discussion on entitlements because that's two-thirds of spending.

WALSH: Some moderate Republicans are making the argument that both parties help drive up the debt, so both need to come to the table with some kind of longer term budget plan.

SHAPIRO: We're talking about the financial standing of the United States government here. So I want to bring in our chief economics correspondent, Scott Horsley, who, Scott, you also chronicled an earlier debt ceiling showdown when your title was White House correspondent.

SCOTT HORSLEY, BYLINE: Right.

SHAPIRO: So what's your take on Republican demands here?

HORSLEY: Well, as you can tell, it's easier to talk about cutting government spending in the abstract than to say what you really want to do without. Just keep in mind, for every dollar the government spends, 25 cents goes to Medicare and other popular health care programs, 21 cents goes to Social Security, 13 cents for defense, 7 cents for veterans and retirees and another 7 cents for death service. So that's almost three-quarters of all government spending right there.

SHAPIRO: So how are markets reacting to what's happening in Congress?

HORSLEY: So far, markets believe this is going to get taken care of. They expect lawmakers to eventually cut a deal and avoid a disastrous default. But that's not to say they think it's going to be easy. Joan Feldbaum-Vidra keeps an eye on government debt for the Kroll Rating Agency, and she acknowledged this is a challenging political environment.

JOAN FELDBAUM-VIDRA: It's definitely more strained this time around. You know, there's greater polarization within the beltway. And the construct of the House with a narrow Republican majority on the heels of, well, we've all been following McCarthy's epic leadership vote creates more uncertainty. So it's going to be a battle. It's going to be messy.

HORSLEY: It's worth remembering, though, Republicans in Congress easily raised the debt limit during the Trump administration, even as the federal government was running up trillion-dollar deficits even before the pandemic.

SHAPIRO: These fights tend to come down to the wire. So where is the wire? How much time does Congress have?

HORSLEY: Yeah, it's a ways in the distance. The moves the Treasury Department is making right now should buy time, at least until early June, maybe a bit longer. Although it's tough to know for sure because government spending and revenues can bounce up and down with the economy. So if, for example, we were to slide into recession this year, the crunch time could come sooner. As you say, Congress has a bad habit of waiting to the last minute. And we did learn back in 2011, the last time there was a showdown like this, that that can be costly. The government managed to avoid an actual default that time, but just flirting with it sent the stock market swooning, which hurt people's retirement accounts. Short-term interest rates rose. Feldbaum-Vidra says, if you're worried about government debt, higher interest rates should be the last thing you want.

FELDBAUM-VIDRA: It's not pretty. We've been to this rodeo before, and it makes the cost of debt higher. And the more we pay in interest, the less money there is for other priorities, right? So it's not constructive.

HORSLEY: Now, some have suggested that even if the debt ceiling were not raised, the government could avoid a technical default by just paying bondholders ahead of everybody else. But there are both legal and practical questions about just how workable that would be. And there's also a political challenge. I mean, who wants to tell grandmom she's not getting her Social Security check or some young Marine he's not getting paid because bondholders have to be paid first? That's another reason Congress shouldn't play chicken with the full faith and credit of the United States.

SHAPIRO: And if they do, there could be political consequences. Deirdre, who do you think would get the blame if there were a default or even a messy near miss?

WALSH: I mean, well, since House Republicans really push for this debate as part of the debt limit, they would likely get most of the blame if there were any kind of default. A lot of them are worried that they need to show voters that they can govern. There's also another debate coming over spending in the fall around the annual process of approving government spending bills.

HORSLEY: And I'll just say that fall budget process, that's really the appropriate time to have an argument over government spending, not threatening to walk away from the bills the government has already run up.

SHAPIRO: That's NPR's Scott Horsley and Deirdre Walsh. Thank you both.

FELDBAUM-VIDRA: Thank you.

HORSLEY: Good to be with you. Transcript provided by NPR, Copyright NPR.

Scott Horsley
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
Deirdre Walsh is the congress editor for NPR's Washington Desk.