The Two Political Dynamics Currently Exasperating Democrats

Why the debt ceiling showdown is more politically complicated than it seems.

Photo by Icons8 Team on Unsplash

Speaker of the House Kevin McCarthy is scheduled to meet with President Joe Biden today to talk about the debt ceiling, among other things. As previously noted in this space, House Republicans have a variety of motivations for playing this game of brinksmanship. At the time I questioned whether this kind of showdown would really benefit Republicans.

In just a few weeks, however, I can kinda sorta see what the GOP is thinking on this issue. There are two planks to this kind of hardline gambit. The first is to force everyone to think about the heretofore unthinkable as a means of destigmatizing it. In the case of the debt ceiling, the constant (and previously bipartisan) refrain has been that it would be self-sabotaging to threaten the full faith and credit of the United States. But over the next six months, expect to see a lot of media coverage of “actually, maybe it’s doable?” scenarios.

For example, in the past few days both the New York Times and Politico have stories about the possibility of the Treasury Department and the Federal Reserve prioritizing bondholders in the case of a default. Here’s the Times’ lede:

Washington’s debt limit drama has Wall Street betting that the United States will employ a fallback option to ensure it can make good on payments to its lenders even if Congress doesn’t raise the nation’s borrowing limit before America runs out of cash.

But that untested idea has significant flaws and has been ruled out by the Biden administration, which could make it less of a bulwark against disaster than many investors and politicians are counting on.

Many on Wall Street believe that the Treasury Department, in order to avoid defaulting on U.S. debt, would “prioritize” payments on its bonds if it could no longer borrow funds to cover all its expenses. They expect that America’s lenders — the bondholders who own U.S. Treasury debt — would be first in line to receive interest and other payments, even if it meant delaying other obligations like government salaries or retirement benefits.

And here’s Politico:

The Biden administration warns of catastrophe if Congress fails to raise the government’s borrowing limit in the coming months. But some Wall Street executives and analysts are starting to break from that script.

A number of prominent financial experts at Bank of America, Barclays and other major firms are confident that the U.S. will avert a global market meltdown by continuing to pay its bondholders if the Treasury Department crosses the threshold where it can’t cover all its other bills. They think the U.S. can do so by withholding funds for things like benefits owed to individual Americans or payments to firms doing business with the government.

It’s a view that aligns with those of conservative lawmakers, who argue that payment prioritization on Treasury securities — the bedrock of the international financial system — is a viable contingency plan as they push for budget cuts opposed by President Joe Biden.

The White House and Treasury are already putting up resistance to the idea, which Treasury says would amount to a default. But disclosures over the past several years — driven in part by investigations by House Republicans — have revealed that officials believe the government has the technical capacity to implement payment prioritization, though it would be experimental and risky.

The key in both stories is that some on Wall Street are open to the idea of a default not being a financial catastrophe. A thorough read of both articles suggests that there are long odds on that. But note that just having this reportage out there reframes the conversation from “a default will be catastrophic!’ to “if a default happens, how would we muddle through?” The moment the framing shifts, suddenly the inconceivable becomes a little more conceivable. At that point, to paraphrase Winston Churchill, now we are just haggling over the price rather than sticking to principle.

This kind of two-step can be exasperating to those who know something about the debt ceiling. But here we lead to the second dynamic that favors Republicans right now over Democrats. On Tuesday the Pew Research Center released results from a late January survey about how members of both parties feel about working with the other side. I suspect the results will cause some Democratic analysts to tear their hair out:

As partisan battles over the debt ceiling and other key issues loom and the GOP takes back control of the House of Representatives following last fall’s midterm elections, most Republicans say they want their party’s leaders to take a hard line in their dealings with President Joe Biden and the Democrats.

More than six-in-ten Republicans and independents who lean toward the Republican Party (64%) say that Republican congressional leaders should “stand up” to Biden on matters that are important to GOP voters, even if this makes it harder to address critical problems facing the country. About half as many Republicans – 34% – would prefer to see the party’s congressional leaders work with Biden, even if doing so requires them to make concessions that disappoint some GOP voters, a new Pew Research Center survey has found.

Democrats are more likely to say they would support efforts by their leaders to find common ground with the other party. A majority of Democrats and Democratic-leaning independents (58%) say that Biden should try as best he can to work with GOP leaders to accomplish things, even at the cost of disappointing some of Biden’s voters. Roughly four-in-ten Democrats (41%) prefer that Biden stand up to Republicans, even if that makes it harder to address the nation’s important problems.

That kind of polling dynamic requires Democrats — particularly moderates — to at least attempt to negotiate with a party with a base that does not want to negotiate, not really — not unless Biden proves to be as supine as Kevin McCarthy. That it’s a negotiation at all advantages Republicans who want to use the debt ceiling to secure policy concessions.

So do I think that the Biden administration will make concessions to get an increase in the debt ceiling? It’s still unlikely. Democrats would have a political field day with any GOP plan that prioritizes paying bondholders over Medicaid and Medicare recipients. As the debt ceiling moves closer into political view, it would not surprise me to see those polling numbers shift as more voters become more aware of the stakes.

Until then, however, these twin dynamics will exasperate Democrats for the first half of this year.