The Daily - The Ticking Clock of a U.S. Debt Default

Episode Date: May 26, 2023

Top White House officials and Republican lawmakers are racing to reach an agreement as the date when the United States is projected to default on its debt approaches.Jim Tankersley, who covers the White House for The New York Times, looks at the state of the negotiations and explains what it will take to win over enough votes in Congress to avoid an economic disaster.Guest: Jim Tankersley, a White House correspondent for The New York Times.Background reading: The details have not been finalized, but the deal taking shape would allow Republicans to point to spending reductions and Democrats to say they had prevented large cuts.The longer it takes to reach an agreement, the more turmoil there could be for the United States and the global economy. Here’s what to know.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

Hey, it's Michael. If you listen to podcasts, which we know you do because you're here, you know that the biggest challenge is finding great stuff to listen to. The Times wants to make that a lot easier. We're launching an audio app, NYT Audio, a single place where you can find the shows you already know and love, like The Daily, This American Life, Serial, The Run-Up, and discover a bunch of new shows that you can't get anywhere else.

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The Daily, on the audio app. So how do you get this app? If you're a Times, News, or All Access subscriber, you can get it for free by going to nytimes.com slash audio app or by searching NYT audio in the App Store. If you're not a subscriber, the app is the perfect reason to become one. And now, on to the show. From the New York Times, I'm Michael Barbaro. This is The Daily Watch. I'm Michael Barbaro. This is The Daily. Today, with a week to go before the U.S. is expected to default on its debt,

we look at the state of the negotiations to lift the debt ceiling, the prospects for a compromise, and what it will take to win over enough votes in both chambers of Congress to avoid an economic disaster. We turn once again to White House correspondent Jim Tankersley. It's Friday, May 26th. Friday, May 26th. So Jim, let's just establish the state of play at the moment, because this is a very live, fast-moving story.

We're talking to you on Thursday afternoon, with just a few days now left before the U.S. government hits the debt limit. And we as a country run out of money to pay our bills, and we enter this never-before-seen territory in which the entire financial system is, in theory, at risk. So given that context, where exactly are we here at nearly 2 p.m. on May 25th? So it's a little bit scary where we are. We can see the cliff from here, not very many days to go until the Treasury Department says the government will be out of ability to pay all of its bills on time. And Congress and the president need to agree on a way to raise the borrowing limit so that we don't go over that cliff. And remember, President Biden

has been saying for months that he would not negotiate over the debt limit. Congress needed to do a clean debt limit, just raise it without condition, full stop. He wasn't going to bargain over this. House Republicans said, we're not going to raise the debt limit unless you also agree to some spending cuts

because Republicans believe the government spends too much money and is on path to spend too much more. Basically, all those pretenses have been dropped. The big developments of the last week are that negotiators from the White House and from congressional Republicans have been meeting almost constantly now to try to figure out a solution, an agreement, and they have zeroed in on a series of compromises that, provided they can actually reach final agreement on them, would be the bill that Congress could vote on that would end up raising the debt limit. So now we can see the contours of what the deal

might look like that puts the brakes on, stops the car, and prevents the country from defaulting. Okay, it's worth noting that that was not at all an inevitable place for this process to have arrived at. Biden being willing to negotiate with Republicans. When we think back, Jim, to the last time you were on the show, the question was what route would President Biden take here in this standoff, given that Republicans are causing it? Would Biden refuse to negotiate on principle, as he had been, and let the country go over the cliff? Would he invoke some arcane legislative or constitutional provision to get around the debt ceiling? Again, not negotiating. Or would he enter talks with these Republicans? So he has

clearly decided the first two options don't make sense. I'm curious why you think he has arrived at that conclusion. First off, I do think some of those options are still on the table. The president has said he definitively believes he has the power under the 14th Amendment to declare the debt limit unconstitutional, but he just doesn't think he has time to do it to avoid the big problems of default. So that's still possible, but Biden thinks it would be damaging. I think that the president has made an economic first and then maybe political second calculation here. He did not want to be staring down Republicans all the way until the date of possible default by saying, I'm not going to talk, I'm not going to talk, I'm not going to talk, and allow the

country to go over the cliff. And he's had a lot of pressure from the outside to come to the table. Business groups, fiscal hawks groups, a lot of people that maybe the White House expected at one point would support the president in this idea that, hey, we don't negotiate over the debt limit, have not done that. They basically said, you need to be reasonable, you need to sit down with Republicans. And the polling suggests that the public is divided on who would be blamed if we defaulted. And so I think the president reads that and reads the very strong possibility that a recession would tank his presidency and has made the calculation that this is his best hope of avoiding that. So even though we know from history that Republicans know how to raise the debt limit in a quote-unquote clean bill, because they've done it many times under Republicans, and they're just refusing to do it now under a Democratic president, despite that, Biden has concluded that standing firm on the principle that you just need to raise the debt limit because that's what we do in Washington, that that is too risky because it might lead to a default and he would get seemingly as much blame as the Republicans for the fallout. So in a sense, he has decided to reward these Republican tactics because he feels he doesn't really have a choice.

Yeah, I think that's basically right. I think that the president has decided that the only way he can deal with these Republican tactics is by engaging right now, and that that's the best way to be responsible and avoid a default that, again, would be terrible for the economy, but also would be very, very bad for him politically. Okay, so with all that in mind, how in these negotiations have the president and the Republicans led by House Speaker McCarthy, how have they gotten to what you're describing as, you know, kind of close to a deal? Let's get into some of the details of that. Well, so the first thing they did was get rid of a bunch of things that each side was asking for. So Biden comes in, for example, and says, okay, Republicans,

you care about the debt. Let's raise some taxes. I've got a bunch of tax increases that I want to deal with. And Republicans said, absolutely not. And Republicans came in saying, hey, you know, your entire climate agenda, we'd like to get rid of it and roll it back. And Biden said, absolutely not. And so they started by just taking things off the table. Things that neither side can remotely ever live with. Those are the first things to be negotiated. It's a little bit of theater. They just fly away immediately. Right, exactly. And while in public they keep calling for it, I mean, privately in negotiations, like it's never really been a possibility that they would increase tax rates or that Republicans would repeal the Inflation Reduction Act and all of its climate benefits. So now, once they take

things off the table, they start looking at the things that are on the table. And first off, there's a thing that the president said almost right away he'd be willing to do with Republicans, which is claw back some money spent in COVID relief bills that he signed into law that hasn't been spent yet. Republicans really wanted that, and he said, okay, it's not very much money in the context of the federal budget, $30 billion or something like that. But it's something we can agree on. Let's start with that in a good faith effort. That feels smart because it's already been budgeted. It doesn't seem that controversial. Easy money. Yes. In the terms of a budget negotiation, pretty easy money. And the second thing here is placing limits or caps on federal spending.

In deciding where to cut, the parties have agreed that some of the biggest things, the biggest drivers of federal spending that the government has are off limits. That's like Social Security and Medicare, big programs for retirement, for health care. They're too popular with voters. And President Biden in particular was hammering on Republicans to take them off the table, and they did. So what they're focusing on instead is a category of money known as discretionary spending. That's money for the military, domestic programs like environmental protection, education, aid for the poor. And the White House has agreed to put some sort of limits on that money going forward. Going forward, meaning not to be cut at this very moment,

but to be somehow limited or capped in the future. Well, that's the debate, right? So the current fiscal year runs through the end of September, and the money for that has already been laid out. So we're going to keep spending that money for this year. So the debate is about what happens starting next year. What Republicans want to do is spend less money next year on discretionary spending and then limit the growth for 10 years at 1% for those programs going forward, which would amount to a fairly large

budget cut, a little under $4 trillion over the course of 10 years. Can you explain why that would be a cut? Because a 1% increase doesn't seem like a cut. Ah, this is a Washington cut, Michael. This is not like what you and I would think of as a cut. A spending cut, when you are dealing with Washington Budget Convention, is any time you spend less money

than you were projected to spend under official forecasts. Ah, an imaginary cut. Sort of. But I mean, think of it this way. Prices are going up faster than 1%, as we know. Inflation's been very high. So the cost of running any particular program gets higher every year. So if the cost of, you know, running the education department is 5% higher next year, but I only give them 1% more money, they're going to have to cut some things in order to make their budget. So it really is a cut. Yeah, it just kind of makes

your head hurt. I mean, this is welcome to my world, Michael. So again, this feels like a pretty practical, rational route. Well, there's a reason why discretionary spending caps are the centerpiece of these discussions. A couple of reasons, actually. One of them is history. Discretionary spending caps were the centerpiece of the budget deal in 2011 that ended the debt ceiling standoff between House Republicans and President Obama. But also, just sort of for practical budget terms, discretionary spending is kind of where both parties go when they're looking for fiscal responsibility claims. And there's also, sneakily, I think, a little bit for the White House, a calculation here, which is Republicans control the House of Representatives. That means they get to

originate spending bills. And there was almost no chance in the mind of the White House that Republicans were going to spend more on most of these programs next year than they were spending this year. So part of this negotiation over spending caps is how much can the White House just lock Republicans into what they think was going to happen anyway? Got it. So in other words, the Biden White House anticipates Republicans were going to put the whole system on a little bit of a diet and makes them feel through this process like they're winning that diet, even though they always plan to be on the diet. Right, exactly. And so the debate over the spending caps is really how restrictive is that diet? And they disagree about how to spread the budget cuts, even the Washington cuts, if you will, across the government. So they're still debating just how

much to cut spending and exactly which programs to cut. But the overall idea of putting discretionary spending on a diet is like a centerpiece of these talks. And the debate over it is what's going to get them to an agreement if they do. Got it. So what else is in this emerging deal? So there are some other things that are kind of floating around on the edges of the deal that are likely to be in it, but are a bit more contentious. For example, Republicans really want to put additional work requirements on some types of federal aid to low-income Americans. So whether that's needy families with children or people who receive Medicaid, health care coverage, there's already work requirements to some degree for these programs,

but they want to make it harder to get the benefits if you aren't working full-time. And what does that have to do with the debt ceiling or spending cuts, or does it not have anything to do with them? Well, the most direct way that it affects it is that it will probably kick some people off these programs, meaning it will end up spending less. Got it. But Republicans also are claiming that by putting these requirements on, people will

work more and that'll lead to more economic growth. Not great empirical evidence to support that, but that is an argument that they are making. Got it. And on the face of it, these do not seem to be policies that Democrats or the Biden White House would ordinarily embrace. So what has the Biden administration said about these? Are they as open to them as they are clawing back COVID money or imposing spending caps on future spending? The president has been very adamant in public that he's not going to cut a debt ceiling deal on the backs of low-income Americans and people with children and Medicaid recipients. In private, his negotiators are entertaining the idea of what you might think of as light work requirements.

One idea that's been floated to me is maybe some sort of small change to who can receive what's called TANF, kind of the modern welfare. But what his team is trying to negotiate is a very sort of modest addition to work requirements on the programs, whereas Republicans really would like something much more meaningful. And that's a big point of contention in the negotiations. So one way to think about these negotiations so far and where they've brought us is that they're largely being conducted on Republicans' terms. I mean, the fact that these negotiations are even happening means they're happening on Republicans' terms.

But they've been largely, from what you're saying, painless for Biden. Because while he is giving in on some of these fronts, he's giving in on a relatively small scale, right? The work requirements seem more like gestures than fundamental changes. The cuts don't seem enormous, maybe more symbolic. And therefore, the victories for Republicans are not enormous, but maybe they're big enough because their policy triumphs for their side that let Speaker McCarthy say, I got Democrats to do things they don't like to do. So two things can be true here. It can be true that this is, if not painless for the president, way less pain than he might have expected. Sure, some domestic

discretionary programs might get cut in ways that the president really opposes, but, you know, it's not going to be in the grand scheme of the federal budget, a ton of money. And that would be a win for the president. But it's also true that Republicans will have cut spending. It's something that they promised that they would do, and that would be a win for Republicans. All of that said, just because it's not terrible for either side doesn't mean it will be easy for them to sell. Both sides have a real risk here of their party and their supporters feeling like they got fleeced. And I think that is the sort of danger in crafting this deal that both sides are having to be aware of. How do you get something that you can sell as a win to your own party without making it look

like too much of a loss to the other guys and putting the whole thing in jeopardy. We'll be right back. Jim, given the tensions that you just outlined, let's say that in the coming days, maybe over this long holiday weekend, maybe just in a few hours, there's a deal along the lines that you have just described. Walk us through what happens and where it might get tripped up. Sure. Well, the sides will announce it. And then the first thing that has to happen is it has to pass the House. So, assuming that he has brokered the deal, Speaker McCarthy will bring it to a vote in the House. That could be trickier than you might imagine. McCarthy has a very slim majority in the House. Like four seats, about as slim as it gets. Yeah. He's trying to negotiate a bill that will make the bulk of his caucus happy and that he can sell to almost everybody as a positive deal for Republicans.

But he has a very conservative caucus, the Freedom Caucus, which has more than 30 members, who are very unlikely, I would say, to support the kind of deal you and I just talked about. They want much deeper spending cuts than what's on the table right now. So what do you do without 30-some Republican votes in a four-seat majority? It means you need Democrats. So if McCarthy loses, you know, the Freedom Caucus and a bunch more,

I mean, he could lose 50 Republicans is the number that keeps getting battered around in my conversations with people. But then that means they need, you know, 45 or 50 or more Democrats, depending on how many Republicans they lose, to join in and help pass this, which puts the kind of ball in Joe Biden's court.

He and the House Minority Leader, Hakeem Jeffries, have to lean on their caucus to get Democratic votes to help pass this thing through. Let's just pause. I mean, that's fascinating. Even though this is not a bill that, on paper, to get Democratic votes to help pass this thing through. Let's just pause. I mean, that's fascinating. Even though this is not a bill that on paper you can imagine many Democrats ever wanting to support, they start off from the position of Biden, I imagine, which is why aren't we just raising the debt limit,

period, end of story? Why do we have to concede both fiscal and policy points to Republicans to get this? They now need to give their votes to make this happen and avoid a giant debt crisis. Yes. And every Democrat in the House has signed a petition calling for a clean debt limit increase. They really don't want to pair this with spending cuts. But the argument that I think will prove persuasive in the event of a deal with House Democrats and a lot of them is, hey guys,

this is our chance to avoid default. We've cut this deal. The president cut this deal. We're the ones who've been talking all along about how dangerous it is to default. We need to be responsible, suck it up, vote for a bill we don't like, and prevent default. So the argument is going to be a very simple argument to Democrats, which is we have a kind of responsibility to the American people to do this distasteful thing on Republican terms, because otherwise we will have a calamity on our hands. Yes, exactly. That will be the argument. And also, to the degree that the deal reflects this, we'll see. But I think the White House will be making the argument to Democrats in the House

that this deal isn't as bad as you might think. You know, it's maybe not any worse than we would have gotten in the normal appropriations process or whatever. They're going to try to make the deal look as good as they can while acknowledging that it's not a clean debt limit increase. And again, really just appealing to Democrats' sense of patriotism and not tanking the economy. So Biden and McCarthy, very interestingly, will be making almost entirely opposite pitches to their members in the House. McCarthy will be trying to sell Republicans on the idea that this agreement is a big win,

that they get work requirements, they get spending cuts, whereas Biden will be saying almost the exact opposite, that the spending cuts aren't that big, the work requirements aren't that meaningful. Yes. I mean, Biden and McCarthy seem to have been crafting this deal with this very much in mind. You try to give your opponents something they can sell in the same way that you have something to sell, so that together you can get enough votes to actually pass the bill and raise the debt ceiling and avoid default, which everyone says is their goal here. So in order to do that, Democrats have to be mindful of both getting enough votes for this

to pass, but also making sure that Kevin McCarthy puts this deal on the floor. Here's what I mean by that. He could be very worried if enough conservatives revolt against him that they would vote to depose him as Speaker of the House, get rid of him entirely. So if the deal seems bad enough to a huge number of conservatives, McCarthy could fear for his job, and then he could decide not to put his own deal up for a vote in the House. And Democrats absolutely don't want that because they want this deal to be voted on. So Democrats might actually have a stake, an unexpected stake, in trying to make sure that McCarthy can sell this debt deal to as many Republicans in the House as possible. That's right.

And then you get into, like, wild possibilities there. Like, what if Democrats have told McCarthy as a condition of reaching this deal with him that, hey, they'll supply votes to keep him as speaker, at least for this one time. Oh, geez. Yeah, no, it could get wild. Now, a lot of people I talk to think that it won't come to this, that McCarthy's not going to cut a deal that would provoke that large of a revolt, which is a consideration in these talks. But it's out there and it's possible. And so I think, theoretically, all McCarthy has to do is bring a handful of Republicans to the table. And if he can get all the Democrats, well, then that raises

the debt limit. Got it. So a lot of political perils exist here in the House vote, the first vote in this process, if we get a debt ceiling deal. But what's your sense of how likely it is that this would eventually get through the House and make its way to the Senate? So I don't think anything is a given in Washington right now, particularly in this political environment. You know, Kevin McCarthy needed 16 rounds of votes, I believe, to become speaker. So it could be trickier than we're imagining. But I think most people I talk to believe that if McCarthy and Biden really can come to a deal, then it is very likely it makes it through the House just because they each have the ability to command, you know, enough votes that you can get to even a slim majority to raise the debt limit. So let's assume that's right.

And then this process moves into the Senate. Should we assume that because the Senate is controlled by Democrats and Biden is a Democratic president, that this will be a relatively light lift. Well, the first thing to remember about the lift here is that you need 60 votes in the Senate to get this through. It's not a simple majority like the House. You have to get past a filibuster. So you need a combination of Democrats and Republicans because neither side has 60. Right. So that makes it trickier.

Another thing that makes it trickier is that there are a lot of very fiscally conservative Republicans in the Senate who might not ever want to vote for a debt limit deal and would be at least encouraged to try to tank this by the Republicans in the House who didn't like it. So you would lose a decent chunk of them, maybe even more than half of the Republican conference if you look at previous debt ceiling deals and how they went through. Got it. So, that means you would need a lot of Democratic votes, maybe all of the Democratic votes to get it through.

And in that case, you have some problems. I mean, particularly when it comes back to the work requirements. Senator John Fetterman, for example, of Pennsylvania, a freshman senator, has been really vocal about the fact that he did not come to the Senate to take out the problems of the budget on poor people. And if you had pretty stringent work requirements as part of this deal, you'd very likely lose him. I think you'd be very likely to lose Bernie Sanders and Elizabeth Warren and a bunch of the sort of more progressive senators if they think this deal is too much of a giveaway to Republicans. And so that's, you know, it's not a guarantee then either. I will say, I think if it passes the House, the odds are very high that it gets through the Senate one way or the other. But you could have a lot of sound and fury before it does. So if we assume that a deal emerges, gets announced, and then needs to go through the legislative process, it will be a rough and dramatic week ahead of us with absolutely no guarantees other than drama.

Yeah. No guarantees other than drama is sort of like Washington's slogan right now. But it's true. And I think in particular, you know, you'll have the backdrop of financial markets because we don't know exactly when default would hit. And I think that's the biggest wild card behind all of this is, even if they make a deal, can they get it done in time? Because, well, Treasury thinks it's around June 1st

that it will run out of money. Which is next Thursday. Which is next Thursday. But they can't say for sure. And so there's all these questions about, like, when would the drop dead date be? And you could see a of late-night votes. You could see a lot of, you know, real consternation to pass this. Right. What you're getting is that even if Congress clears these hurdles, which it sounds like they might, the complexity of the process, the delays built

into it, that carries its own risks. I think we should talk about what the fallout would look like if these deadlines get missed, if Thursday comes and goes and the U.S. hits the debt ceiling and technically defaults. Just give us a really brief picture of what that starts to look like on day one. So there's truly a couple of things that could happen. One is that we could hit that default date, but it looks like a bill is about to get passed and sent to the president. And so nobody freaks out that much. Maybe there's like a little bit of a reaction in the bond market and stock market. But really what it is, is that, you know, everybody thinks it's going to happen. And so they don't freak out. They kind of give us permission to miss the date.

Yeah, but like, it's like, okay, I know you didn't make it to class just before the tardy bell, but I saw you running across the field and so I'm going to count it. Right. Whereas there's also a possibility that everybody freaks out.

If it doesn't necessarily look like it's about to be signed, sealed, and delivered, there's just a meltdown in financial markets. Stocks plunge, bond yields spike. You know, it's about to be signed, sealed, and delivered, there's just a meltdown in financial markets. Stocks plunge, bond yields spike. It's the first days of a global financial crisis. It would be brutal. And that could happen right away. Now, obviously, the damage would be much worse if the default continues for weeks or months. But even just a couple of days of a default could be really damaging. And we don't know which of those scenarios it would be. default could be really damaging. And we don't know which of those scenarios it would be. It's kind of like you have a third beer and you decide to get into the car and drive home. Like maybe,

possibly, you get there safely. But it's a terrible idea and really dangerous. And no safety-minded person would advise you to do that. And so I think that's sort of where we would be if Congress makes it past this default date without having sent a bill to the president that he can sign right away. Right. Three beers in, a fourth on the way, just not a good idea. Exactly. Call someone else to drive you home at that point. Let's be very clear. This podcast supports designated drivers.

Right. Designated drivers and fiscally responsible approaches to the debt ceiling, which it looks like both sides are currently on a path toward achieving, right? I mean, if we're just being really honest with what your reporting tells us, there is a good faith effort underway here to avoid the things that you have just described. Yeah, a lot could go wrong still. When you leave anything to the last minute like this, something can go wrong. But certainly the tenor over the last couple of days has really pointed toward both sides are trying to get something done in time to avoid the worst consequences. to get something done in time to avoid the worst consequences.

And, you know, that has left everyone, I think, around these talks more optimistic that they will avoid the bad consequences than maybe they were a week ago. Well, Jim, thank you very much. Thank you. On Thursday, after the latest round of negotiations with President Biden, Republican House Speaker Kevin McCarthy said that a potential deal was close at hand. But speaking to reporters, McCarthy emphasized that the deal would likely leave some members of both parties unsatisfied, saying, quote, I don't think everybody is going to be happy at the end of the day.

Adding, that's not how this system works. We'll be right back. Here's what else you need to know today. On Thursday, a judge sentenced the leader of the Oath Keepers militia, Stuart Rhodes, to 18 years in prison for his role in the January 6th riot at the U.S. Capitol, the most severe penalty so far to stem from the assault. to stem from the assault. The sentence was the result of Rhodes' conviction late last year on charges of seditious conspiracy for plotting to keep former President Trump in power after the 2020 election.

Rhodes has expressed no remorse for that plot and at his sentencing called himself, quote, a political prisoner. And in the latest evidence that corporations are worried about artificial intelligence, Microsoft has proposed a series of government regulations to limit potential risks from the technology. Those regulations include a requirement that AI can be turned off when used in critical infrastructure,

and for creating a system of labels to make clear when either an image or video is generated by AI. The proposals are notable because Microsoft is building AI into many of its products, including its search engine, known as Bing. Today's episode was produced by Rob Zipko, Nina Feldman, and Stella Tan. It was edited by Liz O'Balin and Rachel Quester, contains original music by Diane Wong, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landvork of Wonderly.

by Jim Brunberg and Ben Landfork of Wonderly. The Daily is made by Rachel Quester, Lindsay Garrison, Claire Tennesketter, Paige Cowett, Michael Simon-Johnson, Brad Fisher, Chris Wood, Jessica Chung, Stella Tan, Alexandra Lee Young, Lisa Chow, Eric Krupke, Mark George, Luke Vanderploeg, MJ Davis-Lynn,

Dan Powell, Sydney Harper, Michael Benoit, Liz O'Balin, Thank you. Special thanks to Sam Dolnick, Paula Schumann, Lisa Tobin, Larissa Anderson, Julia Simon, Sophia Milan, Mahima Chablani, Des Ibequa, Elizabeth Davis-Moore, Jeffrey Miranda, Renan Borelli, Maddy Maciello, Elizabeth Anderson, and Nina Lassam. Just a reminder, you're going to see our new show, The Headlines, right here on The Daily Feed. We made it for you, and we hope you like it. To find it, go to nytimes.com slash audio app. That's it for The Daily. I'm Michael Bilbaro. See you on Tuesday after the holiday.