In Debt Ceiling Fight, Kevin McCarthy Can Either Crash the Economy or Blink

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As kids, most of us learned how to play an on-the-fly version of chicken: two players are on a collision course that can be avoided only if one of the parties swerves. The responsible party is branded a “chicken” for demonstrating an aversion to risk, a deficit of courage, a desire to choose compromise over mutually assured destruction. The winner proves the boldest, if most likely to allow hubris to overtake rationality.

As we grow up, the idea of chicken evolves into a game of conflicting goals rather than literal bodies hurtling toward one another, with the loser more often described as the first to “blink.” And these days, the so-called grown-ups may have overdone their exposure to partisan Botox—and now they can’t even flinch. It’s a common affliction in Washington, where the pursuit of the ideal renders nerves numb if not fried, and the cost is a staring contest that has few signs of abating.

On Thursday, according to the Treasury Department, Washington is set to hit its limit on borrowing, meaning money already spent whose bills come due. Now, Treasury can take so-called extraordinary measures to kick the can down the road for a few months, but the $31.4 trillion limit on the national credit card isn’t going away. The United States is the only industrialized nation to have such an arbitrary institution as a debt ceiling, but the players who keep ending up in the same standoff aren’t exactly looking to kill it.

House Republicans, led by newly elevated Speaker Kevin McCarthy, say they won’t move the debt ceiling without corresponding cuts in spending, something President Joe Biden and fellow Democrats insist is not on the table as part of these talks. House Republicans have just five votes to spare at the moment, while Democrats control the Senate and the White House. It’s a moment that seems to demand compromise, but that’s not in the offing, thanks in large part to McCarthy’s nakedly political concession to his hard-right flank that the House would leverage the debt ceiling to shrink the federal government. Democrats, who to this point have proved unified, say Republicans are trying to take the economy hostage to placate their performative right.

But, as has been said plenty of times before, the debt ceiling has nothing to do with future spending. The Treasury Department needs to borrow money to pay for things already shoved out the door. This is simply a draw to cover money spent months ago. Congress in December considered boosting the borrowing limit to delay the fight until well into the new session, hoping calmer heads might then prevail. They failed, setting up an early test for how well the new Republican-led House can plug into the existing political-economic ecosystem.

Put simply, the debt ceiling has to be raised, one way or another. Failing to do so puts the entire U.S. economy at risk. The credit rating for the United States would face an immediate downgrade. Hedge funds and retirement accounts alike would be hit hard. Money for new houses, schools, and bridges would get more expensive to borrow, a trend already going in the wrong direction as the Fed tightens access to cheap capital. One estimate suggested GDP would drop 4%, families would lose $15 trillion in wealth, and unemployment would climb back to 9%.

The politicians who trigger this crisis would rightly get the brunt of the blame, and no one in the general public cares much about caucus promises when they see their 401(k) plummet in value. Carve-outs that cover automatic spending like Social Security could insulate some individuals, but critics on all sides could find a winning message in highlighting what gets cut off, such as social safety programs or national defense efforts.

Which brings us back to that potentially fatal game of chicken, or Who Will Blink First? The House Republicans’ right flank demanded that McCarthy start down this collision course. In turn, they made him Speaker. But, as has been the case far too often, the GOP doesn’t exactly have a matrix in hand for when their leader should stand down or when to upshift. Defining a win is something they forgot to do before reaching in the henhouse. Some of the demands on the table are frankly unworkable, and Democrats aren’t exactly in the mood to cede their path, either. After all, cutting Social Security and Medicare may play well in some deep-red corners of the country, but would almost certainly be calamitous for either party looking to win in the swing districts that determine majorities.

All of which is to say this: thank goodness Treasury can sidestep the limits and use some—ahem—creative ways to cover the costs already incurred for a beat. Still, it’s not a long term solution. Everyone has known this needed hike to the national credit card was coming, is still coming, and will come again after that. No level of tinkering with spending is going to change the fact that publicly held debt in this country is equal to its entire GDP, a huge spike from the roughly 40% ratio in 2008 and a ratio unseen since World War II. The Covid-19 pandemic and subsequent investments helped pull down the United States into the debt-laden fraternity of Japan, Italy, and Greece, for sure, but those dollars are already spent. Now, it’s time to pay for popular programs that drew support from both parties.

Which leaves McCarthy in the position of possibly working with Democrats over the outraged shouting of members of his own caucus. It may be the only way for lawmakers to end this unnecessary staring contest without crashing the economy, or into each other.

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