McCarthy’s Debt Default Gamble: It’s The Economy, Stupid

This weekend, the rubber meets the road for debt ceiling negotiations. All eyes are on House Speaker Kevin McCarthy (R-Calif.) as he continues to play a political game of chicken with the White House over federal spending cuts while fiscal default by the United States looms just over the horizon. How he navigates the debt ceiling standoff now could make or break GOP prospects for next year’s elections. The early returns indicate that the Republican Party is heading in the wrong direction.

McCarthy must come to grips with a fiscal crisis coming up fast in the rearview mirror. Treasury Secretary Janet Yellen indicated the U.S. could go into default as early as June 1. That doesn’t leave much time for a possible agreement between the Speaker and President Joe Biden to build support for tough votes in the House and especially in the Democratic-controlled Senate necessary to defuse the ticking time bomb.

McCarthy plays hardball to appease the hardcore far-right wing of the party — now resembling anarchists — who seem willing to let American and international economies crash and burn to get their own way.

The Speaker wants to keep his conservative caucus content. He wants the president to restrict domestic spending without being willing to erase the 2017 Trump tax cuts that expanded the already flush wallets of wealthy Americans and big businesses and that contributed mightily to the federal deficit, which fiscal conservatives gripe about all the time.

The limits on discretionary spending that McCarthy and his caucus desire could have disastrous consequences besides an international economic meltdown. If the GOP’s proposed cuts were enacted, there would be less spending for the care of veterans who served their nation in the Vietnam, Iraq and Afghanistan wars. In the face of an ominous climate crisis, McCarthy is asking the president to shave funding meant to stave off weather disasters driven by fossil fuels. Republicans complain all the time about immigration, but their proposed cuts would undermine border security.

McCarthy’s bargaining chip for these cuts has massive implications. A debt default is uncharted territory for the U.S., as political leaders have always been able to come to their senses when the risk of default was near. As time slips away ahead of the default deadline, JPMorgan Chase CEO Jamie Dimon has warned that “markets will be gripped by panic” by just the fear of default.

Already, one of the three top credit-rating firms, Fitch, has said it may downgrade the U.S.'s AAA credit rating because of "debt ceiling brinkmanship" and "political partisanship" over the issue. A leading European rating agency, Scope, said it is studying a possible downgrade of U.S. AA long-term issuer and senior unsecured debt ratings due to the debt-ceiling debacle. Similarly, the last time House Republicans risked a federal debt default in 2011, several credit rating agencies, including S&P, downgraded the U.S. credit rating.

But an actual default would “send shockwaves through the system,” according to International Monetary Fund economists, and have “immense consequences for global growth.”

Under the current economic conditions, without a default, some economists predict a mild recession next year, which would hurt Democrats. A government default driven by McCarthy’s extreme demands could turn a recession into a depression and create financial chaos. So, the Biden recession could morph into the McCarthy depression and turn the tables against the GOP before next year’s election.

At the moment, the Speaker shares the national spotlight with Florida’s Republican Gov. Ron DeSantis, who just threw his hat into the presidential ring of fire by announcing his candidacy on Wednesday; with former President Donald Trump, who seems committed to recycling his campaign strategy for a third time; and with ethics concerns among the Supreme Court’s conservative majority ahead of major rulings expected this summer.

Unfortunately, none of them seem to be paying attention to the issues most Americans care about and vote on. The economy remains voters' top concern, well ahead of the culture wars that so easily drive Republicans at all levels of government to seek radical policy. The economy is followed in importance by preserving democracy, health care, immigration and climate change. But even if the GOP somehow reverses course and crafts a compelling message or campaign slogan for 2024 on all of these issues, no rhetoric will bring them back from the brink if McCarthy tanks the economy — and his legacy —with a federal debt default.

The clock is ticking, and McCarthy has a global economy in his hands.

Brad Bannon is a Democratic pollster and CEO of Bannon Communications Research. He also hosts the “aggressively progressive” political podcast, “Deadline D.C. with Brad Bannon.”