Biden May Have to Act Unilaterally to Avoid Default, Khanna Says

(Bloomberg) -- The US will not default on its debt but the Biden administration might be forced to take unilateral action to head off a crisis, Representative Ro Khanna, a California Democrat, offering several possible executive maneuvers.

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“The question is whether it’s going to come to unilateral action by the executive branch,” Khanna said during a meeting with Bloomberg News reporters and editors on Monday.

“I hope it doesn’t,” added Khanna, who emphasized that it was Republicans who were responsible for a large share of the increase in US borrowing over the past several decades. “I think we’re going to have a rocky time, it’s not great for the political system, but at the end of the day I don’t think the United States is going to default.”

Options on the table for President Joe Biden, Khanna said, include making a legal argument that congressional appropriations already approved must be paid regardless of the debt limit; increasing the interest rates on Treasury bonds, an accounting gimmick that would artificially lower the face value of US securities but risk long-term damage to confidence in the market; or minting a $1 trillion coin.

Treasury Secretary Janet Yellen has rejected the coin idea, expressing doubt that the Federal Reserve would accept such a note.

Members of the ultraconservative House Freedom Caucus and other Republicans have demanded sweeping reductions in government spending, with Social Security and Medicare on the table, in exchange for raising the debt ceiling later this year. Former President Donald Trump has cautioned against cutting Medicare and Social Security, but other possible cuts, such as to military spending, would not be palatable to the Republican base.

While Congress has never allowed the US to default, the prospects for a near-term solution seem dim at the moment. Moderate Republicans, at least for the moment, seem to be behind Speaker Kevin McCarthy and are pushing for a negotiated solution, but the House GOP is splintered as what that might look like.

Khanna would like to strategically cut the defense budget and levy taxes on the very rich — including the billionaires of his Silicon Valley district who, he said, continue to send him back to Congress.

“Budget deficits matter,” he said. “They matter because they increase the interest for the federal government. Ultimately, they matter when they’re a cause of inflation or crowding out private investment.”

Yet the last president to leave a budget surplus was Bill Clinton, Khanna said. He referred to tax cuts that mostly benefited the wealthy plus costly wars in Iraq and Afghanistan under President George W. Bush — who ran a $3.3 trillion deficit across his two terms; and the sweeping tax cuts under the Trump administration, which oversaw a deficit of $6.6 trillion after four years, driven in part by significant spending on coronavirus programs.

He did not mention President Barack Obama, who also ran a deficit, to the tune of $6.8 trillion in his eight years in office.

“We’re looking at paying the debt largely accrued by Republicans and Republicans are saying ‘we don’t want to pay up the debt we incurred,’” Khanna said. “I say let’s not negotiate whether we pay our debts. Of course we pay our debts.”

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