President Joe Biden met with congressional leadership from both parties Tuesday to negotiate an end to the federal debt ceiling dispute.
Both Biden and House Speaker Kevin McCarthy delivered comments and took questions following the closed-session meeting.
Biden called the meeting productive. The meeting was called to discuss a path beyond the current debt ceiling problems.
“America is not going to default on this debt for the first time in history. Never has, never well,” Biden said. “We agree to continue our discussions, and we’re gonna meet again on Friday.”
In the meantime, the Biden’s and the leaders’ staffs are expected to meet each day this week to prepare for Friday’s meeting.
“Everyone in the meeting understood the risk of default, our economy would fall into a significant recession. It would devastate retirement accounts, increased borrowing cost,” Biden said. “According to Moody’s, nearly 8 million Americans would lose their jobs.”
Biden added that the U.S.’s reputation on the world economic stage would be “damaged in the extreme” in the event of a default.
One possibility for ending the debt ceiling impasse is if Biden invoked the 14th Amendment’s fourth section which involves the validity of the public debt.
Biden said that he had been considering it and that a legal advisor told him that it would be a “legitimate” route to consider, however, should the 14th Amendments be invoked, it would have to be litigated, Biden said.
“Meantime, without an extension, (the debt ceiling situation) would still end up in the same place,” Biden said. “I’ll be very blunt with you. When we get by this, I’m thinking about taking a look at- months down the road- to see whether what the court would say about whether or not the (14th Amendment) does work (in this case).”
The possibility that Biden will invoke the 14th Amendment to raise the debt ceiling is slim, according to University of New Mexico Law Professor Maryam Ahranjani.
“Admittedly, I am not an expert on the use of the 14th Amendment to raise the debt ceiling. However, based on what I do know, it seems unlikely to happen and furthermore I doubt this Supreme Court would uphold the current President’s right to do so (despite recent rulings to expand executive power). But it’s not impossible, and there is certainly textual support if Biden decided to try it,” Ahranjani said.
From the financial perspective, although Biden may be able to invoke the 14th Amendment, it could be a risky move, UNM Associate Professor of Finance Reilly White said.
“On the finance side, it’s likely the financial markets will interpret legal ambiguity as a risk,” White said. “That’s the additional challenge of alternative measures to manage a potential default – if it’s fraught with complications, it may do little to assuage markets and investor expectations.”
U.S. Senator Martin Heinrich, a New Mexico Democrat, warns that the federal government defaulting on its debt could have rippling consequences for everyday people living in New Mexico.
The Democrats on the congressional Joint Economic Committee released a report Monday detailing the effects of a Republican-led economic default.
Heinrich serves as chairman of that committee.
“Republicans have created a default crisis that will drive up costs for working families in New Mexico — from mortgages, car loans, student loans, and small business loans to the costs of many consumer goods,” he said. “The threatened default would also jeopardize Social Security payments for over 455,000 families in New Mexico and put health benefits at risk for more than one million New Mexico residents who get their health insurance through Medicare, Medicaid, or Veterans Affairs coverage. This new Joint Economic Committee report puts in real terms those devastating impacts and makes clear just how urgent it is for Congress to pass a clean debt limit increase.”
The report comes about a week after the House narrowly passed a bill thatwould raise the debt ceiling with austerity measures in the form of cuts to environmental tax credits and cuts to safety net programs such as Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families and Medicaid.
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“Republicans have now pushed the United States to within one month of a catastrophic and unprecedented default on the nation’s existing obligations,” the report states. “Instead of passing a clean debt limit bill to avert this crisis, their continued threats to cause a default could trigger a massive recession that would cost 8.3 million Americans their jobs.”
The Monday report was an update to the report released March 28 that detailed the possible changes that a debt default could create.
These changes include the monthly mortgage costs potentially going up by $140 per month for New Mexicans based on interest rate hikes that could come following a default, the report states.
Social and economic effects of default
In the event that a conclusion cannot be reached through negotiations, the U.S. may have to face the reality of a budget default.
Moody’s Analytics reports that “global investors thus appear to be attaching non-zero odds that the debt limit drama will end with a default sometime in June or July.”
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“Getting legislation that funds the government in fiscal 2024 and increases the debt limit across the finish line into law will surely be messy and painful to watch, generating significant volatility in financial markets,” the Moody’s Analytics report states. “Indeed, a stock market selloff, much wider credit spreads in the corporate bond market, and a falling value of the U.S. dollar may be what is required to generate the political will necessary for lawmakers to avoid a government shutdown and breach of the debt limit. Lawmakers will not be sufficiently motivated to find a political path forward and act until they recognize the severe economic and political costs of not doing so.”
So far, there has been little movement since the House passed its Limit, Save, Grow Act.
“A recent analysis by the Council of Economic Advisors lays out the steep economic costs of failing to pay our existing obligations. If the GOP pushes the United States into a protracted default, 8.3 million people would lose their jobs this summer as the unemployment rate spikes to 8.6 percent, and real Gross Domestic Product shrinks by 6.1 percentage points,” the updated report states.
That analysis, “The Potential Economic Impacts of Various Debt Ceiling Scenarios” was published on May 3.
If there were a budget default, a new recession would begin which comes with several unknowns such as how long it would last and how devastating it would be, White said.
“I was looking at some estimates on this and thinking about this in detail, if we default, we would have an immediate cost. So first, that would send us into a recession and you would have about a million federal workers, maybe more, maybe less, that would be laid off,” White said. “Unemployment would rise. Right now, it’s a little bit more than three and a half percent, they would probably go up to five percent in that first week.”
Following the rise in unemployment claims, the U.S. credit system would appear to be damaged from the international perspective, White said.
“You’d have higher interest rates, and that would be really nefarious, because that would hurt everybody, from the small businesses to large businesses to people getting loans and mortgages and credit card rates. Because interest rates are tied inherently to risk and when you default, risk goes up exponentially,” White said.
With all of that in mind, should even a short-term default lasting only a few days, the economic impact would be long-lasting.
“If you’re a U.S. money manager or an international money manager or pension manager or another government holding U.S. Treasuries, you need to know how risky your money is,” White said.
When the U.S.’s credit rating was lowered to AA+ from AAA by Standard and Poor’s in 2011, it was a warning because the U.S. was willing to take a risk in the political maneuvering surrounding the debt ceiling, White said.
“That (risk) results in increased borrowing costs because everything falls under risk in return to compensate investors for taking on additional risk,” White said. “So the biggest effect— bottom line— is it will raise interest rates, and the downgrade would be more substantial than what we’ve seen in our lifetimes and it would result in long-term interest rates that would raise the cost of borrowing across the board for everyone.”