The turmoil stalling the start of the new Republican House majority offers a warning that disarray in Washington risks igniting a US debt crisis capable of roiling financial markets later this year.
(Bloomberg) — The turmoil stalling the start of the new Republican House majority offers a warning that disarray in Washington risks igniting a US debt crisis capable of roiling financial markets later this year.
The deadlock between establishment Republicans and dissident conservatives over choosing a House speaker laid bare the depth of division within the party, and the powerlessness of GOP leaders to force compromise on recalcitrant members.
After six rounds, House Republican leader Kevin McCarthy on Wednesday again failed to win the majority needed to become speaker, a required but simple step that is usually dispatched in one quick vote.
McCarthy and his allies met with his dissenters Wednesday evening and he emerged optimistic, but the impasse signals how difficult it will be to wrangle votes on perennially challenging issues like increasing US borrowing authority.
There’s also the risk that concessions McCarthy makes in the effort to become speaker end up circumscribing his ability to push through legislation — escalating the danger of a meltdown over US debt. Economists estimate the federal government will run out of ways to avoid a payments default sometime in the third quarter.
Meantime, the House cannot conduct any other business, like naming committees or even paying themselves, until a speaker is elected.
Once one is in place, fiscal policy looms as a fresh battleground. With GOP leadership hobbled, hard-line conservatives would have greater scope to trigger a US default later this year by blocking an increase in the legal debt limit. Even taking the country to the brink of default is risky for investors. And the prospect of a government shutdown also looms more likely.
EXPLAINER: What’s the Debt Ceiling, and Will the US Raise It?
“The dysfunction is a clear signal,” Brian Gardner, Stifel Nicolaus & Co.’s chief Washington strategist, warned clients in a note Wednesday. Investors “should be on guard as the summer approaches” because “brinkmanship over the debt ceiling could lead to market volatility,” he added.
Any financial storm would strike a vulnerable economy, with the Federal Reserve’s campaign of interest-rate increases already a drag on growth and the central bank’s capacity to respond restrained by stubborn inflation. As it is, private forecasters on average predict a 70% chance the US will tip into recession by the end of the year.
2011 Episode
The US could exhaust its legal borrowing authority by late summer or early fall without Congressional action. A standoff between congressional Republicans and President Barack Obama in 2011 took the US to the precipice of default, prompting a downgrade in the government’s credit rating and a slide in US stocks.
With any potential crisis still months away, the stalemate at the Capitol wasn’t a catalyst for any swings in US rates during trading Wednesday.
Many of the same holdouts blocking McCarthy are spoiling for a fight over the debt limit, demanding party leaders use the threat of default as leverage to force deep spending cuts. President Joe Biden and other Democratic leaders adamantly rejected giving in to what they disparage as “hostage taking” with the US economy.
Representative Ralph Norman of South Carolina, one of the Republican dissidents, said Wednesday suspicion that McCarthy wouldn’t stand firm in such a showdown was one reason the group is fighting him.
‘Insane Spending’
“The insane spending cannot keep up. The American people buy into that,” Norman told reporters.
Even if McCarthy prevails or the party settles on a compromise candidate, the new speaker will be weakened and dissidents emboldened, said Doug Heye, a former senior Republican leadership aide.
“Whoever is going to be the next speaker has a very tough job and part of that is the incentive structure that rewards bad behavior: You get to raise money, you go on television, you get to go to Mar-a-Lago,” Heye said, referring to former President Donald Trump’s Florida residence.
McCarthy already agreed to demands from hard-line conservatives for a change in House rules allowing just five members to force a vote on ousting the speaker at any time, a concession they will be loath to relinquish.
Pelosi Contrast
Under that rule, a few dissatisfied Republicans could overthrow the speaker any time they made a tough compromise with the Democrats who control both the Senate and White House.
Outgoing Speaker Nancy Pelosi was able to maintain control of a Democratic majority the last two years that was in many ways a mirror-image of the current Republican House. She also faced impatient newly elected progressives on her left and the same margin of control, unable to lose more than four of her members on a party-line vote.
Pelosi, though a pragmatic-minded daughter of a former Baltimore mayor, had credibility with hard-line members that McCarthy lacks — the product of her history as an insurgent progressive within Congress and a record of achievement on defining liberal causes.
She broke with the Democratic establishment to fight Congress’s 2002 authorization of George W. Bush’s Iraq War, lining up against then-House Democratic Leader Dick Gephardt as well as Hillary Clinton and Biden. And she played a pivotal role in securing passage of Obama’s Affordable Care Act, perhaps the most significant progressive legislative achievement since Lyndon Johnson’s Great Society programs.
That earned her a measure of trust even as progressives differed with her on legislative tactics and pressed for generational change in party leadership, said John Lawrence, a former Pelosi chief of staff and author of “Arc of Power: Inside Nancy Pelosi’s Speakership, 2005-2010.”
“She was able to go to her members and say, ‘Look, you know me, I have fought as hard as I can fight and this is the best we can do,” Lawrence said.
–With assistance from Liz Capo McCormick, Zach C. Cohen and Magan Crane.
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