As soon as June 1st, the United States could default on its debt, an event that would irreparably harm the country’s economic standing. The Department of the Treasury can use “extraordinary measures” to maintain the US’s finances, so the exact date of a potential default remains unknown; however, Secretary of the Treasury Janet Yellen warned in a letter to Kevin McCarthy that waiting too long to suspend or increase the debt limit would be dangerous for “business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States”.
After hitting the debt ceiling in January of 2023, Congress and the White House have been locked in a series of unsuccessful negotiations. The plans with the most traction seem to be proposals from Biden and McCarthy, but the far right “Freedom Caucus” has called for a refusal to negotiate the debt ceiling until the Senate passes the Limit, Save, Grow Act. There’s also a fourth option for Biden—he could invoke the Fourteenth Amendment and use the Constitution to continue debt payments. Here’s a breakdown of the four major plans, their supporters, and their potential effects on the American economy.
Limit, Save, Grow Act (McCarthy and mainstream GOP): House Republicans passed the Limit, Save, Grow Act on April 23rd in an attempt to both deal with the debt ceiling and rein in government spending. According to USA Today, the Republicans’ plan to cut spending is projected to reduce the deficit by about $4.8 trillion over the next decade, slowly eating away at the United States’ $31 trillion dollar debt. To do so, they propose to cut Biden’s student debt forgiveness plan, cap budget increases, impose stricter work requirements for federal aid (most notably, food stamps), rescind IRS funding, and repeal provisions of the Inflation Reduction Act. In their plan, they also aim to raise the debt limit by $1.5 trillion. This plan, as it stands, is highly unlikely to pass the Democratic controlled Senate. McCarthy has shown a willingness to prioritize the debt ceiling and impending economic collapse over his proposal and is expected to meet with President Biden on Monday, May 22nd.
Limit, Save, Grow Act (Freedom Caucus): While members of the far right Freedom Caucus endorse the same legislation as McCarthy does, they are against any negotiation on the debt ceiling until the Limit, Save, Grow Act is passed. They have repeatedly urged McCarthy to shut down negotiations until the Senate passes this legislation, essentially using the looming threat of default as leverage. GOP leaders have ignored these calls, but if the Freedom Caucus refuses to cooperate with debt ceiling negotiations, more members of Congress will have to work across the aisle to avoid default.
President Biden’s Budget: Biden proposed his budget plan this past March, and it is expected to cut the deficit by about $3 trillion dollars over the next decade. He advocates for spending increases in some areas, but makes up for them with tax increases and savings. Much of this new tax revenue would come from raising the corporate tax rate from 21% to 28% and changing international tax rules. It would also increase taxes on the wealthiest Americans with a 25% minimum tax rate and impose a tax on the “holdings of billionaires.” Like McCarthy, Biden has been willing to compromise on his budget proposal in hopes of avoiding a deficit; however, Biden is expected to veto the Limit, Save, Grow Act in the unlikely event that it passes both houses of Congress.
14th Amendment Plan: Claiming that Section Four of the Fourteenth Amendment “allows the Treasury Department to keep borrowing money past the debt limit” (Politico), some lawmakers have argued that it is unconstitutional for the United States to miss a debt payment, calling for Biden to invoke the Fourteenth Amendment to avoid a default. The exact text of the section reads “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” The section was originally intended to free the US from assuming Confederate debts and illegalize any insurance claim for the emancipation of an enslaved person, but some lawmakers—including Reps. Pramila Jaypal, Jamie Raskin, Alexandria Ocasio-Cortez, Ilhan Omar, and 11 Senate Democrats—are urging Biden to use Section Four to bypass Congress and raise the debt ceiling by himself. Even though Congress has failed to help the US avoid default, White House officials have reportedly said that “they do not see the 14th Amendment as a viable way to get around debt negotiations” (Politico). Bypassing Congress would be a very dangerous precedent to set, effectively consolidating some of Congress’ power into the Executive Branch. However, if Congress fails to reach a compromise, Biden may have few other options.
As the June 1st deadline looms, members of Congress remain divided over the debt ceiling. A potential US default threatens Americans from all over the economic spectrum, and while the financial effects of this impasse have not been felt yet, Congress must act quickly to avoid economic disaster—no matter what plan they pursue.