Will it take market crash for Congress to raise debt limit?

WASHINGTON >> There’s one way to force President Joe Biden and Congress to solve the looming crisis over the debt limit: a financial market crash.

That’s a view held by several economists and a former White House official, mindful that Congress rarely acts unless an emergency forces lawmakers to.

“For that drama not ending in tragedy, key actors have to play their roles,” said Daleep Singh, who was Biden’s national security adviser for international economics and deputy director of the National Economic Council. “Market participants have a lead role of playing the victim. They have to produce pain. They have to produce a sea of red on their Bloomberg screens because politicians need to look at those screens.”

Republicans and Democrats have been dancing around each other about the need to raise the government’s legal borrowing authority. Biden tried to edge closer on Thursday by releasing his budget plan that cuts deficits by $2.9 trillion over 10 years, an offer that House Speaker Kevin McCarthy, R-Calif, quickly dismissed as woefully insufficient. Republicans in the House Freedom Caucus on Friday proposed their own demands, which the White House quickly rejected.

This fandango could persist for several more months until the last possible moment, when the federal government would hit a currently unknown “X-date” — possibly as early as June — and be unable to pay its bills, possibly setting off a default that would suddenly wash away millions of jobs.

It is a familiar ritual. But every other time before, Congress has found agreement on the debt limit. The question now, in a period of ever-increasing political polarization, is whether today is different.

“Every single major economic institution, conservative, liberal, says that will cause a massive recession, a massive recession, and put us in the hole for a long, long time,” Biden said of the possible default as he rolled out his budget in Philadelphia.

McCarthy has promised to put together his own budget plan, but he has little urgency for striking any kind of deal so long as the stock market stays relatively calm. He has said he wants an agreement to put the government on a path toward a balanced budget. But he has also ruled out tax increases or cuts to Social Security and Medicare, which would force deep and controversial reductions in federal spending that could divide House Republicans.

Biden, who would reduce deficits largely through higher taxes on the wealthy and corporations, has said he is ready to go through budget agreements “line by line” once McCarthy has his numbers.

But McCarthy’s leverage is greatest as the “X-date” approaches at some point this summer and markets are biding their time. So far this year, the S&P 500 stock index has been positive. It has largely swung based on moves by the Federal Reserve to lower inflation or with the collapse Friday of the Silicon Valley Bank, events that are separate from the debt ceiling.