US debt ceiling: Playing chicken games again?

THE House of Representatives passed last Wednesday (Apr 26) a bill proposing to raise the US$31.4 trillion borrowing limit, which on one level sounded like good news.

The 217-215 vote – with all the Democrats voting no, and four Republicans opposing – was a victory of sorts for the new House Speaker, Republican Kevin McCarthy from California, whose proposal had faced opposition from some Republicans.

To put it differently, had the vote failed, that would have ignited growing concern in the markets about the ability of the politicians in Washington to avert a US financial default.

Since January when the United States reached the debt limit, the US administration has been employing special accounting manoeuvres to avert a default and could probably continue doing that for another month or two.

So last week’s vote pointed to some political momentum over the issue and could in theory provide an opportunity for the White House and its Democratic allies on Capitol Hill and Republican lawmakers to reach a compromise agreement.

The bad news is that the Republican bill stipulates that in exchange for raising the debt limit, House Speaker McCarthy is demanding deep cuts in federal government spending.

But the White House press secretary has made it clear that President Joe Biden was willing to meet Speaker McCarthy for talks but “not on whether or not the debt limit gets extended”, adding: “That is not negotiable”.

More specifically, the White House and congressional Democrats are opposed to any major cuts on government spending on social-economic programmes that the Republicans demand.

The White House had expected that Speaker McCarthy would fail to pass a bill extending the debt limit, which would have allowed the Democrats to place the blame for potential financial default on the shoulders of the Republicans.

But now that the Republican bill has been approved, Speaker McCarthy is arguing that the White House’s refusal to negotiate spending cuts in exchange for extending the debt limit, meant that President Biden was “putting the American economy in jeopardy by his lack of action” and urged the president to negotiate with him.

Here we go again with yet another game of chicken in Washington, when each side is hoping that the other one would make the necessary concessions or be seen by the American public as being responsible for a catastrophic economic crisis.

In reality, it is clear that both sides would need to make concessions before the administration’s manoeuvre to avoid breaching the debt ceiling is exhausted as early as June, and the US could end up defaulting on debt payments and other obligations.

In practical terms, the Republicans recognise that the bill that was approved in the House would not pass in the Senate where the Democrats continue to hold a slight majority, and the Republicans led by Senate Minority Leader Mitch McConnell from Kentucky are backing Speaker McCarthy’s demands for spending cuts.

All this is happening against the backdrop of growing fears of an economic recession, as US economic growth slipped in the first quarter to 1.1 per cent annual rate, according to US Commerce Department figures issued on Thursday. With the inflation rate remaining high and opinion polls suggesting that the American public disapproves of his administration’s economic policies, the last thing that President Biden needs now, on the eve of a presidential election year, is a costly economic crisis.

Indeed, pressure is now growing on President Biden from his anxious allies on Wall Street and moderate Democrat lawmakers, like Senator Joe Manchin from West Virginia, to negotiate with Speaker McCarthy and Senator McConnell who are demanding capping annual growth in discretionary spending at 1 per cent, and who, like the Democrats, recognise that there would be no winners in this game of chicken. Everyone, and in particular the American people, would lose.