What is the debt ceiling, and could Biden avoid a financial crisis with the 14th Amendment?

The White House and congressional Democrats continue to look at their options to avoid a looming financial crisis as Republicans so far refuse a clean raising of the debt ceiling.

Treasury Secretary Janet Yellen said Monday that her department would run out of funds by June 1 if the limit isn’t raised or suspended.

“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” Yellen wrote in a letter to House Speaker Kevin McCarthy. “If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”

McCarthy and House Republicans passed a bill last week that would raise the debt ceiling but attached numerous other provisions that would freeze government spending and gut a number of President Biden’s signature programs. The GOP bill put work requirements for recipients of Medicaid and Supplemental Nutrition Assistance Program (SNAP) benefits, slashed tax incentives meant to fight climate change, cut funding to the Internal Revenue Service and blocked Biden’s student debt relief plan.

The House Republican bill has no chance of passing the Democratic-controlled Senate or being signed into law by Biden. Senate Majority Leader Chuck Schumer labeled the legislation “DOA,” or dead on arrival. Discussing the GOP plan last month, Biden said, “It’s not about fiscal discipline, it’s about cutting benefits for folks that they don’t seem to care much about.”

If Congress does not find a way to raise the debt ceiling and allow the federal government to fulfill its spending obligations, the country could default on payments for bondholders as well as payments to service members and retirees. The ripple effects could cause a financial calamity, experts have warned. In March testimony to Congress, Moody’s Analytics chief economist Mark Zandi estimated that a failure to raise the debt ceiling would cost 7 million jobs, raise the unemployment rate to 8% and wipe out a fifth of the stock market value, eliminating about $10 trillion in household wealth.

“That the U.S. government pays what it owes in a timely way is a bedrock of the U.S. economy and global financial system,” Zandi said. “It has paved the way for the U.S. dollar ultimately to become the global economy’s reserve currency. The economic benefits of this over the generations are incalculable. Lawmakers should put an end to the wrangling over the debt limit and increase it with no strings attached so future generations can enjoy the same benefits.”

Why is there a debt ceiling in the first place?

In the early 1900s, Congress instituted the debt ceiling to allow the Department of the Treasury to issue payments without going to the legislature to get approval for borrowing each time it needed to make an expenditure. The U.S. government borrows vast amounts each year to make up for revenue shortfalls and relies on that ability to borrow so it can function.

In the decades that followed, the lifting of the debt ceiling was regularly done on a bipartisan basis (nearly 80 times since 1960) and with little drama. When President Barack Obama was in office, Republicans used the debt ceiling to negotiate other pieces of legislation. During the current standoff, Democrats have circulated a 2019 quote from then-President Donald Trump saying, “I can’t imagine anyone ever using the debt ceiling as a negotiating wedge.” Democrats voted to raise the debt ceiling without conditions three times during Trump’s term in office.

Potential paths forward

House Republicans could relent on their demands and pass a so-called clean bill, but McCarthy has a tenuous hold on his chamber’s narrow GOP majority. It would only take a few hard-right Republican lawmakers to throw his speakership into jeopardy.

Biden could also give in to many of the GOP demands, but he’s not likely to abandon his signature achievements in office.

This week House Democrats took steps in the process of using a “discharge petition,” which would go around McCarthy and force a floor vote on a clean debt ceiling raise. This tactic began quietly back in January with Rep. Mark DeSaulnier, D-Calif., introducing the 45-page Breaking the Gridlock Act. House Minority Leader Hakeem Jeffries pushed the plan forward in a Tuesday letter to his colleagues.

“A dangerous default is not an option,” Jeffries wrote. “Making sure that America pays its bills — and not the extreme ransom note demanded by Republicans — is the only responsible course of action.”

For this Democratic gambit to work, however, they would need five Republican members to break from the party and sign the petition, which would bring a vote to the House floor without the approval of McCarthy and his leadership team. Due to the rules tied to this maneuver, the signature gathering could begin as early as May 16. So far, even Republicans in swing districts, seen as more likely to agree to the plan, are balking at the idea.

“Leader Jeffries refuses to negotiate,” Rep. Don Bacon, R-Neb., told Axios. “That’s not how it works in a divided government. We have to govern, which means we have to find some agreement, which means we must negotiate.”

There are other more esoteric options to avoid the default. On Tuesday, the New York Times reported that the Biden administration is considering a legal challenge stating that the concept of the debt limit is unconstitutional, thereby ignoring it. The theory is based on a clause in the 14th Amendment that 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.”

Gerard Magliocca, a constitutional law professor at Indiana University, concurred with the assessment, writing that the president “must take any lawful measures to prevent such a default” and that “probably nobody has standing to challenge that action in court.”

Another option — that’s been floated for the last decade-plus when Republicans have blocked clean increases of the debt ceiling — is utilizing an obscure law to have the Treasury mint a $1 trillion coin. That coin could then be deposited into the Federal Reserve to pay down the country’s bills, eliminating the need to raise the ceiling by lowering the debt. While Yellen has called the idea a “gimmick,” it’s been supported by some economists, including Nobel Prize winner Paul Krugman.

McCarthy, Senate Minority Leader Mitch McConnell and the Democratic leadership are set to meet with Biden.

Could Congress just get rid of the debt ceiling?

Yes, that is a maneuver that has been proposed by Yellen. Speaking before the House Financial Services Committee in September 2021, she called the existence of the debt ceiling “destructive.”

“I believe when Congress legislates expenditures and puts in place tax policy that determines taxes, those are the crucial decisions Congress is making,” Yellen said. “And if to finance those spending and tax decisions it is necessary to issue additional debt, I believe it is very destructive to put the president and myself, as treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions.”

In 2017, former staffers for Obama and McConnell co-wrote a Wall Street Journal op-ed calling for the debt ceiling’s repeal, saying it “would let the Treasury focus on the most efficient and effective ways to manage the federal government’s cash flow, giving future presidents, both Democratic and Republican, a freer hand. No matter which party holds the White House, all Americans would benefit from taking the threat of a U.S. default off the table.”

Biden has opposed the elimination of the debt ceiling, calling the idea “irresponsible” in October.