WASHINGTON — The U.S. government bumped up against its debt limit Thursday, prompting the Treasury Department to take “extraordinary” accounting steps to avoid default — as friction between President Joe Biden and House Republicans raised concern about whether the U.S. can sidestep an economic crisis.
The Treasury Department said in a letter to congressional leaders it had started taking “extraordinary measures” as the government had run up against its legal borrowing capacity of $31.381 trillion. An artificially imposed cap, the debt ceiling has been increased roughly 80 times since the 1960s.
“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Treasury Secretary Janet Yellen wrote in the letter.
Markets so far remain relatively calm, given that the government can temporarily rely on accounting tweaks to stay open and any threats to the economy would be several months away. Even many worried analysts assume there will be a deal.
But this particular moment seems more fraught than past brushes with the debt limit because of the broad differences between Biden and new House Speaker Kevin McCarthy, who presides over a restive Republican caucus.
Those differences increase the risk that the government could default on its obligations for political reasons. That could rattle financial markets and plunge the world’s largest economy into a preventable recession.
Biden and McCarthy, R-Calif., have several months to reach agreement as the Treasury Department imposes measures to keep the government operating until at least June. But years of intensifying partisan hostility have led to a conflicting set of demands that jeopardize the ability of the lawmakers to work together on a basic duty.
Biden insists on a “clean” increase to the debt limit so that existing financial commitments can be sustained and is refusing to even start talks with Republicans. McCarthy is calling for negotiations that he believes will lead to spending cuts. It’s unclear how much he wants to trim and whether fellow Republicans would support any deal after a testy start to the new Congress that required 15 rounds of voting to elect McCarthy as speaker.
Asked twice on Wednesday if there was evidence that House Republicans can ensure the government will avert a default, White House press secretary Karine Jean-Pierre said it’s their “constitutional responsibility.” She did not say whether the White House saw signs at this stage that a default was out of the question.
“We’re just not going to negotiate that,” Jean-Pierre said. “They should feel the responsibility.”
McCarthy said Biden needs to recognize the political realities that come with a divided government. The speaker equates the debt ceiling to a credit card limit and calls for a level of fiscal restraint that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.
“Why create a crisis over this?” McCarthy said this week. “I mean, we’ve got a Republican House, a Democratic Senate. We’ve got the president there. I think it’s arrogance to say, ‘Oh, we’re not going to negotiate about pretty much anything’ and especially when it comes to funding.”
Senate Republican Leader Mitch McConnell said Thursday in Louisville, Kentucky, that he was unconcerned about the situation because debt ceiling increases are “always a rather contentious effort.”
“America must never default on its debt,” McConnell said. “We’ll end up in some kind of negotiation with the administration over what are the circumstances or conditions under which the debts are going to be raised.”
But any deal would also need to pass the Democratic-run Senate. Many Democratic lawmakers are skeptical about the ability to work with Republicans aligned with the “Make America Great Again” movement started by Trump. The MAGA movement has claimed that the 2020 election lost by Trump was rigged, a falsehood that contributed to the Jan. 6, 2021, insurrection at the U.S. Capitol.
“This is not complicated: If the MAGA GOP stops paying our nation’s bills, Americans will be the ones to pay the price,” said Senate Majority Leader Chuck Schumer, D-N.Y. “Political brinkmanship with the debt limit would be a massive hit to local economies, American families, and would be nothing less than an economic crisis at the hands of the Republicans.”
The debt ceiling was originally a fix made during World War I that enabled bonds to be issued without requiring repeated congressional approvals. But in an era of polarization and rising debt loads, the limit has been transformed into a political bludgeon. It does not reflect the actual capacity of the federal government to borrow, simply how much it is legally able to do so without congressional signoff.
In order to keep the government open, the Treasury Department on Thursday was making a series of accounting maneuvers that would put a hold on contributions and investment redemptions for government workers’ retirement and health care funds, giving the government enough financial space to handle its day-to-day expenses until roughly June.
What happens if these measures are exhausted without a debt limit deal is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporated in a cornerstone of the global economy, the U.S. Treasury note.
Analysts at Bank of America cautioned in a report last week that “there is a high degree of uncertainty about the speed and magnitude of the damage the U.S. economy would incur.”
The underlying challenge is that the government would have to balance its books on a daily basis if it lacks the ability to issue debt. If the government cannot issue debt, it would have to impose cuts equal in size on an annual basis to 5% of the total U.S. economy. Analysts say their baseline case is that the U.S. avoids default.
Still, if past debt ceiling showdowns such as the one that occurred in 2011 are any guide, Washington may be in a nervous state of suspended animation with little progress until the “X-date,” the deadline when the Treasury’s “extraordinary measures” are depleted.
Unlike the 2011 showdown, the Federal Reserve is actively raising interest rates to lower inflation and is rolling off its own holdings of U.S. debt, meaning that recession fears are already elevated among consumers, businesses and investors.
Biden administration officials have said they will not prioritize payments to bondholders if the country passes the “X-date” without an agreement. Over the years, officials have studied this emergency option, which Treasury officials across administration have said is unworkable because of the government’s payments system.
“To some extent, the ‘extraordinary measures’ are the backup plan, and once those are exhausted the next step is a major question mark,” economists at Wells Fargo wrote in a Thursday analysis.
Celebrities wept in court. Coaches lost their jobs. Elite universities saw their reputations stained. And nearly four years later, the mastermind of the Varsity Blues scheme was sentenced this month to more than three years in prison.
But there’s little belief the college bribery scandal has stirred significant change in the admissions landscape. Some schools tweaked rules to prevent the most flagrant types of misconduct, but the outsize roles of wealth, class and race — which were thrust into public view in shocking plainness — loom as large as ever.
College admissions leaders say the case is an anomaly. Corrupt athletics officials abused holes in the system, they argue, but no college admissions officers were accused. Still, critics say the case revealed deeper, more troubling imbalances.
“Privilege is just really baked into the system in many ways,” said Julie Park, who studies college admissions and racial equity at the University of Maryland. “At the end of the day, there’s disproportionate representation of the 1% at any private college.”
The scheme itself was brazen, with rich parents paying to get their children accepted to selective universities as fake athletes. It drew attention to the advantages those families already had, including tutors and private consultants. It also highlighted other ways money can sway admission decisions, with edges given to the relatives of donors and alumni.
In court, some of the accused parents argued their alleged bribes were no different from donations colleges routinely accept from relatives of prospective students. Records revealed from the University of Southern California showed lists detailing scores of “VIP” applicants, with notes such as “potential donor” or “1 mil pledge.”
Among the parents sent to prison for participating in the scheme were “Full House” actor Lori Loughlin, her fashion designer husband Mossimo Giannulli and “Desperate Housewives” star Felicity Huffman.
When authorities announced the first charges in 2019, it left colleges across the U.S. scrambling to review their own admissions systems, especially where there was overlap with athletics programs. Schools added layers of scrutiny around recruiting, with a sharp eye on lower-profile sports targeted in the scheme, such as water polo and rowing.
Asked what has changed since then, the universities at the center of the scheme point to a flurry of policies that were adopted within a few months of the arrests.
An internal review at USC found an average of 12 students a year had been recruited for sports they didn’t end up playing. Some, but not all, were tied to the bribery scheme. The university blamed it on “one or a small number” of sports officials who violated school policy and hid it from the admissions office.
Officials at USC said they started reviewing athletic recruits at multiple levels of administration, including by an office of athletics compliance, which also started verifying that recruits actually end up competing.
Yale University made similar changes after a women’s soccer coach accepted $860,000 in bribes to get students admitted as part of the scheme. Yale’s athletic director started reviewing all proposed recruits, the school announced in 2019, and recruits that don’t end up on teams now face “close scrutiny.”
But in the big picture of Yale’s admissions, “very little has changed,” said Logan Roberts, a senior at the Ivy League school who came from a low-income family in upstate New York. The school denounced the scandal, he said, but ignored deeper problems that give wealthy students advantages in admissions.
On campus, he said, students from modest means still are far outnumbered by those who went to private schools with access to expensive tutors. Roberts and others have pressed the university to abandon policies that favor wealth, including preferences for the children of alumni, but so far Yale has resisted change.
“When money and morality clash, money generally tends to win,” said Roberts, 22.
Angel Pérez was the head of admissions at Trinity College in Connecticut when the scandal broke. His school wasn’t implicated, but within minutes, his phone was buzzing with texts from colleagues. Could it happen here, they wondered? Trinity reviewed its policies and concluded they were sound.
Ultimately, it did little to change the industry, said Pérez, who now leads NACAC, a national association of college admissions officials.
“The majority of institutions found that they had a really good process and that there wasn’t unethical behavior taking place,” he said. “This was a case of some bad actors who were framing themselves as college counselors.”
Still, he said, the bribery case — along with the country’s racial reckoning and separate legal battles over affirmative action — stirred debate about the fairness of legacy preferences and entrance exams.
“I think it just woke up the American public,” he said.
After the Jan. 4 sentencing of scheme mastermind Rick Singer, authorities said their work led to reform. The FBI said colleges reached out asking how they could catch wrongdoing.
Massachusetts U.S. Attorney Rachael Rollins said it revealed a “separate college admissions process for the rich, powerful and entitled,” but she also said it led to “meaningful changes.” She suggested it may have contributed to more colleges making the SAT and ACT optional, a trend that started before the case but gained steam during the pandemic.
Others, however, argue that the scheme was only a symptom of a disease.
America’s obsession with elite schools, combined with opaque admissions systems, has led to desperation among families seeking the best for their children, said Mark Sklarow, CEO of the Independent Educational Consultants Association, a nonprofit that represents private counselors who help in the admissions process.
Colleges help fuel the frenzy, he said, by boasting about their ever-narrowing acceptance rates, all while giving advantages to the well-connected.
“Colleges created a system that was designed to reject more and more kids,” he said. “It became less and less clear who got in and who got rejected, and I think that led this generation of parents to say, ‘I’ll do whatever it takes to get my kid in.’”
Closing bribery loopholes, he added, does little to make admissions more fair.
Ultimately, wealth and privilege play the same role in admissions that they did before the case, said Park, of the University of Maryland. So far she sees little real change, she said, with only a small number of schools agreeing to drop legacy preferences, for example.
“Things have the potential to change,” she said. “But is it just going to be shifting chairs around on the Titanic? I don’t know.”
GREENSBORO — The owners of Cone Denim Entertainment Center are again suing the city of Greensboro over an easement to provide access to the back of the club.
The lawsuit, filed earlier this month, claims the city breached an agreement to provide an alley wide enough to allow tour buses and trucks access to the venue.
“We need 19 feet,” said Drew Brown, the attorney representing the company that owns the club. “That’s what they agreed to give us.”
And in this alley, size matters.
“They knew every inch was going to be important,” said Rocco “Rocky” Scarfone, part owner of the venue at 117 S. Elm St., adding that the alley is about 12 feet wide in some areas.
“The extent of the breach includes building the parking garage literally and directly in the easement, even after being told of the breach multiple times since December 2020,” the lawsuit says.
City Attorney Chuck Watts declined to comment on the lawsuit.
The 2018 settlement agreement stems from a lawsuit filed against the city that fought the use of eminent domain to gain control of the easement.
The most recent lawsuit also claims the city has not secured parking for the venue on Market and Elm streets before and during concerts as called for in the settlement agreement.
“We didn’t want it to get to this point,” Scarfone said. “Everything that we have done has fallen on deaf ears.”
The $36.1 million, five-story parking garage has a history of controversies relating to its cost, need and impact on surrounding businesses. The public-private project was approved in 2017 and is being built in conjunction with a new Westin Hotel. The city will lease parking space to the 180-room hotel that will be built atop the south part of the deck.
There will be roughly 720 parking spaces, including room for bicycles and five electric vehicle charging stations.
The city said last year that the parking deck will open this summer, though that timing could not be confirmed Thursday.
As construction continued this week, Scarfone said “obviously the city is not going to knock down the deck.”
However, he does want compensation. “They’ve basically ruined my business,” Scarfone said.
Contact Kenwyn Caranna at 336-373-7082.