Treasury Secretary Janet Yellen said Thursday that the U.S. has reached the debt ceiling, and that the Treasury will begin taking "extraordinary measures" to prevent the country from defaulting on its debts.
The debt limit could present the first major battle of a divided Washington, with a Republican-controlled House breaking with two years of Democratic control of both chambers of Congress and the White House. Lawmakers last took action in late 2021 to raise the debt ceiling.
“The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. government months into the future,” Yellen wrote in a letter to House Speaker Kevin McCarthy and Congressional leaders. “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”
Democrats and Republicans still have several months to come together and hash out a deal, though both sides appear to still be far apart.
Democrats are calling for Republicans to pass a clean increase to the debt limit, contending that they have done so multiple times regardless of which party controlled the White House and Congress – including three times under former President Donald Trump. The White House has thus far expressed a refusal to negotiate on this matter.
"Our posture on this hasn't changed," White House principal deputy press secretary Olivia Dalton told reporters aboard Air Force One on Thursday. "There will be no negotiations on the debt ceiling."
But Republicans, who recently reclaimed a narrow majority in the House of Representatives after last year's midterms, want to tie a debt ceiling increase to spending cuts or other concessions from Democrats, saying that they would only raise the debt ceiling to secure an overhaul in federal spending.
Earlier this week, Speaker McCarthy rejected calls from Democrats to do a clean increase to the debt ceiling without any strings attached.
“That’s totally off the table,” McCarthy told reporters. "We've got to change.”
“If you had a child and you gave them a credit card, and they kept raising it, and they hit the limit, so you just raised it again, clean, increase — and again, and again,” McCarthy continued. “Would you just keep doing that, or would you change the behavior?”
“We’re six months away,” McCarthy said Tuesday. “Why wouldn't we sit down now and change this behavior, so that we would put ourselves on a more fiscally strong position?”
For his part, Trump encouraged Republicans in a post on his Truth Social platform that they “can get back almost everything that McConnell gave up to the Radical Left” in debt ceiling negotiations.
“Be tough, don’t give in,” the former president wrote.
In an interview Monday, McCarthy’s Democratic counterpart, House Minority Leader Hakeem Jeffries, D-N.Y., called on Republicans to set aside “partisan and political gamesmanship” when it comes to the debt limit.
“One of the things that we will definitely have to do over the next few months is to raise the debt ceiling in order to protect the full faith and credit of the United States of America,” Jeffries told Spectrum News on Monday.
“In our country’s history … the United States of America has never defaulted on our debt,” Jeffries said. “If we were to do so, because of extremist Republicans in the House, that will have grave consequences for Social Security, for Medicare, for the economy and … not just for the country, but for the world.”
Asked twice Wednesday if there was evidence that House Republicans can ensure that the government will avert a default, White House press secretary Karine Jean-Pierre said it's their "constitutional responsibility" to protect the full faith and credit of the United States. She did not say whether the White House saw signs at this stage that a default was off the table.
"We're just not going to negotiate that," Jean-Pierre said. "They should feel the responsibility."
For his part, McCarthy said Biden needs to recognize the political realities that come with a divided government. He equates the debt ceiling to a credit card limit and calls for a level of fiscal restraint that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.
"Why create a crisis over this?" McCarthy said this week. "I mean, we've got a Republican House, a Democratic Senate. We've got the president there. I think it's arrogance to say, 'Oh, we're not going to negotiate about pretty much anything' and especially when it comes to funding."
Any deal would also need to pass the Democratic Senate. Many Democratic lawmakers are skeptical about the ability to work with Republicans aligned with the "Make America Great Again" movement started by Trump. The MAGA movement has claimed that the 2020 election lost by Trump was rigged, a falsehood that contributed to the Jan. 6, 2021, insurrection at the U.S. Capitol.
"There should be no political brinkmanship with the debt limit," said Senate Majority Leader Chuck Schumer, D-N.Y. "It's reckless for Speaker McCarthy and MAGA Republicans to try and use the full faith and credit of the United States as a political bargaining chip."
In order to keep the government open, the Treasury Department on Thursday was introducing a series of accounting maneuvers known as "extraordinary measures." These measures put a hold on contributions and investment redemptions for government workers' retirement and health care funds, giving the government enough financial space to handle its day-to-day expenses until roughly June.
What happens if these measures are exhausted without a deal to raise the debt limit is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporated in a cornerstone of the global economy, according to the Treasury.
Yellen sounded the alarm about the consequences of a first-ever default, or even the threat of a default, in a letter to Congressional leaders earlier this month.
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote in a letter earlier this month to Congressional leaders. “Indeed, in the past, even threats that the U.S. government might fail to meet its obligations have caused real harms, including the only credit rating downgrade in the history of our nation in 2011.”
Past forecasts suggest a default could instantly bury the country in a deep recession, right at a moment of slowing global growth as the U.S. and much of the world face high inflation because of the pandemic and Russia’s invasion of Ukraine.
If the government were to default, financial markets could be expected to crash. Several million workers could be laid off. The world could feel the aftershocks of the crisis for years to come. Moody's Analytics called this risk “cataclysmic” in a 2021 forecast ahead of the previous debt ceiling increase, suggesting that the resulting chaos would be due to government dysfunction, rather than the underlying health of the U.S. economy.