‘You don’t have another option’: Inside the Biden, McCarthy debt ceiling deal

WASHINGTON - The U.S. government was as few as 10 days away from running out of cash - and President Biden and House Speaker Kevin McCarthy still seemed to be getting nowhere.

It was May 22, and the two men once again found themselves in the Oval Office, confronting the stiffening demands of the House Republican majority. For weeks, GOP lawmakers had refused to allow the United States to borrow more money to pay its bills without sharp spending cuts, raising the odds that the country could breach the debt ceiling - and bumble into its first default.

Biden and McCarthy strained that afternoon to present a positive front. They exchanged platitudes for the cameras, touting their recent progress - before officials closed the door and the tensions began to rise.

Privately, Biden delivered his pitch: A proposal to raise the debt ceiling that didn’t just slash spending but also generated new revenue, particularly through tax increases targeting the wealthy. The offer reflected a dramatic shift for a president who long had refused to haggle at all over the country’s credit, fearing that the risks of miscalculation could plunge the economy into a recession.

“This is nothing we want, just what we can tolerate,” Biden said in response to the GOP demands, according to two people with knowledge of the exchange.

McCarthy listened until the president’s chief of staff, Jeffrey Zients, interjected, criticizing Republicans for threatening to decimate funding for health care, education, science and more. That’s when the House speaker shot back: “You don’t have another option.”

“Are you blowing up the deal?” he pressed Zients, before turning to Biden: “Do you want him to blow up the deal?”

Both sides still left the meeting feeling that they had made progress toward an agreement. But the tense clash at the White House nonetheless came to illustrate the fear and acrimony that engulfed Washington over the past month, as a Republican crusade to slash federal spending nearly plunged the U.S. government into financial chaos. It took a frenetic, last-minute scramble by Biden and McCarthy - fierce political foes with no working relationship - before the nation could resolve a fiscal crisis largely of the GOP’s making.

In the end, the two leaders turned to a coterie of policy aides to broker a deal that neutered the threat of fiscal brinkmanship, at least for the immediate future. But their agreement stopped short of the dramatic, lasting changes to the nation’s souring financial health that some Republicans say are needed.

Their deal, the Fiscal Responsibility Act of 2023, pares back federal spending by at least an estimated $234 billion over the next two years, but it barely dents a debt that is still expected to exceed $50 trillion by the end of the decade. It prevents gridlock from causing a government shutdown this fall, but only at the cost of massive automatic spending cuts that both sides see as too steep. And it quiets the possibility of a crippling default - until January 2025, ensuring a return to the fight after the next election.

This account is based on interviews with 20 people familiar with the deal, from lawmakers and White House officials who participated in talks to their closest allies and advisers. Many requested anonymity to speak candidly about private conversations and deliberations, including the May 22 meeting at the White House.

The negotiations between Biden and McCarthy spanned repeated phone calls over multiple continents and tense, in-person meetings - directly, and through their chief emissaries - in the bowels of the Capitol and at the White House. Over bagels, a basketball celebration and brief conversations during day care drop-offs, a full roster of Democrats and Republicans achieved a deal that averts fiscal calamity.

But Republicans accomplished less than they initially sought, infuriating conservatives, some of whom voted against the deal. Yet many party lawmakers still said the war on which they staked the U.S. economy was worth waging - even if they’re aren’t entirely happy with the result.

“Of course it was worth it. That’s our job, that’s what we signed up to do,” said Rep. Scott Perry (R-Pa.), the leader of the far-right House Freedom Caucus. “We could have had a huge win for the American people, and started turning this fiscal ship in the right direction. And I don’t know if it slipped away, but if it did, we certainly let it slip away.”

[Biden signs debt ceiling bill that pulls US back from brink of unprecedented default]

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‘A dangerous game of chicken’

The nation’s brush with default began nearly three months earlier, roughly 850 miles away at a J.W. Marriott in Orlando.

At their annual “issues conference” - where party leaders convened presentations on everything from election polls to a simulated Chinese invasion of Taiwan - Republicans gathered for a “fiscal plenary session” that would set the tone in Washington for the fight to come.

For the estimated 180 or so Republicans in attendance, the meeting hinged on a single question: What, exactly, did they want in exchange for their votes to raise the debt ceiling? Members turned their attention to lawmakers like Rep. Jodey Arrington (Tex.), the leader of the chamber’s budget panel, and Rep. Garret Graves (La.), a top McCarthy ally who eventually would be tapped to lead his party in debt ceiling talks, who discussed the party’s options onstage.

Should they try to rethink massive programs like Social Security or Medicare, with millions of beneficiaries? Should they trim budgets at government agencies that handle education and housing? Or slash programs at the heart of the Democratic agenda, like those that aim to fight climate change?

Many of the questions reflected demands articulated weeks earlier by Perry and the House Freedom Caucus, a powerful collection of roughly three dozen far-right members who had never before voted for a debt ceiling increase. And the entire gambit bore a striking resemblance to a similar Republican crusade in 2011, when ascendant conservatives - under the banner of the tea party - embarked on a standoff that rattled the stock market, spooked investors and precipitated a costly downgrade in U.S. credit.

In early April, McCarthy put forward a sweeping plan, unveiling legislation that would raise the debt ceiling into next year while slashing more than $3 trillion in spending over the next decade. It aimed to wipe out Biden’s program to cancel student debts, claw back money meant to help the government pursue tax cheats and revoke planned investments in climate change. And it sought to impose new work requirements for poor Americans who receive health insurance and nutrition assistance from the government.

The House adopted the bill before the end of the month, defying Biden’s threat of a veto and surprising some White House aides, who confided to each other that they didn’t think the divided GOP majority could find common ground on legislation. Congressional Democrats were enraged, since McCarthy and his GOP allies never made similar demands of President Donald Trump, even as the party repeatedly raised the debt ceiling to carry out his policies, including a costly 2017 tax cut.

The emerging stalemate raised the odds of a government default, which threatened to inflict widespread economic hardship, from higher borrowing costs for average Americans to disruptions in seniors’ Social Security checks. But the prospect grew real just five days after the House vote, when the Treasury Department warned Congress in newly urgent terms that it was running out of time to act.

In a May 1 letter to Congress, Treasury Secretary Janet L. Yellen did not mince words: “We will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit.” The missive alarmed both ends of Pennsylvania Avenue, and prompted Biden to invite McCarthy and other leaders to the White House for negotiations the president had long resisted.

The May 9 gathering marked the first time the two had spoken in any extended, meaningful way in 97 days, after they huddled in early February. The tensions quickly surfaced: At one point, Senate Majority Leader Charles E. Schumer (D-N.Y.) piped up - and pressed everyone in the room to declare, once and for all, whether they would allow the nation to default.

No, said Biden, who believed lawmakers should raise the debt ceiling without condition or delay.

No, said Hakeem Jeffries, the House minority leader, who agreed the costs of inaction were too high.

Then it was McCarthy’s turn. The irascible leader of a restive majority, McCarthy previously said he didn’t want to court disaster, either. But he also didn’t explicitly rule out default, according to those in the room, and he angrily unfurled a full list of demands - promising he wouldn’t budge unless he achieved them. (The House speaker declined to comment for this story.)

McConnell, for his part, largely stayed out of it: Unlike 2011, he told Biden he simply was not going to intervene in a war between the president and a fellow Republican leader.

During the meeting, Biden accused House Republicans of cutting spending for veterans, since their bill never explicitly exempted them - infuriating McCarthy, who said the president was airing a lie. Repeatedly, the speaker blamed the president for waiting too long to talk, all the while sparring with Schumer, who later confided to colleagues that McCarthy had been disrespectful.

The bickering shook Wall Street, where credit-rating agencies including Moodys Investor Service, S&P and Fitch Ratings had started to warn that they could take action if the U.S. came too close to a default. Even some lawmakers grew apprehensive: Asked about the stalemate, Rep. Steve Womack (R-Ark.), a longtime Republican appropriator, later admitted it amounted to a “dangerous game of chicken.”

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‘Two Irish guys that don’t drink’

But the fierce clash obscured the intricate negotiations that were just beginning, as White House advisers, lawmakers and their aides huddled secretly at their leaders’ direction.

On one side was Zients, the chief of staff; Steve Ricchetti, counselor to the president; Louisa Terrell, the top White House liaison to Congress; and Shalanda Young, the director of the Office of Management and Budget, among other Biden advisers. Opposite them was a rotating cast of GOP aides, eventually led by two handpicked McCarthy surrogates: Graves and Rep. Patrick T. McHenry (R-N.C.), his longtime allies.

After weeks of unproductive public recriminations, Biden and McCarthy had agreed in mid-May to cede talks to their trusted staff, hoping that the policy-minded advisers could reach the sort of deal that had eluded their bosses. (McConnell had phoned Biden right after their initial, fraught meeting to encourage him to deal directly with McCarthy. The speaker later did the same: Frustrated with Schumer, he asked Biden to remove the Senate leader from the negotiations entirely.)

For all their divisions, the unlikely cast of characters quickly found some common ground on a personal level.

Young, a veteran of appropriations battles, grew up in the Louisiana congressional district that Graves now represents. The two traded stories about the best gumbo recipe and the fact her father and the congressman exercised at the same gym. She and McHenry, a senior Republican with a strong grasp of the financial system, eventually found themselves discussing the debt ceiling each morning by phone as they dropped their children off at day care.

Speaking later with reporters, McHenry acknowledged the significance of their intervention, since Biden and McCarthy came to the fight with no personal connection after years of political warfare.

“You’ve got two Irish guys that don’t drink, right,” McHenry joked. “So the bonding opportunity is not the same for an Irish guy like me.”

But negotiators still faced a tough task, which they inherited roughly two weeks away from an expected default, according to Yellen. As Biden jetted to Japan to meet with world leaders, the faintest hints of compromise rankled the two parties’ most faithful.

Behind the scenes, conservatives erupted in intensifying fury over the prospect McCarthy might cave. Foreshadowing its revolt, the Freedom Caucus demanded on May 19 that there should be “no further discussion” between Biden and McCarthy until the Senate could pass its own bill, an unlikely outcome.

“If the president has argued the agreement should be less than the House passed bill, then there have to be additions on the other side to gain the House’s consent,” warned Rep. Ben Cline (R-Va.), a caucus member.

Democrats, meanwhile, found themselves sparring with their own president. As talks progressed, liberal lawmakers grew increasingly vocal that Biden should sidestep Congress. A wide array of party leaders - including Sen. Bernie Sanders (I-Vt.) and Rep. Pramila Jayapal (D-Wash.), the chair of the Congressional Progressive Caucus - all urged Biden to invoke the 14th Amendment and declare the debt ceiling unconstitutional.

In fact, Stuart Delery, the White House counsel, had been examining potential unilateral options, an effort that continued at least up until the weekend before McCarthy and Biden reached a deal. Internally, though, Yellen was seen as strongly opposed to such a maneuver, believing it could imperil the bond auctions run by her department. Her repeated comments downplaying the feasibility of the 14th Amendment irked some Biden allies, who had their concerns yet saw the threat as a useful negotiating tactic.

The mounting pressures repeatedly overwhelmed negotiators - even forcing the talks to collapse briefly.

For weeks, Biden had hammered Republicans for targeting their spending cuts predominantly at federal programs that combat poverty, arguing that their calls for austerity threatened to harm the neediest families. Rather, president said the GOP should be open to finding savings through new revenue, including tax increases, which Republicans historically and overwhelmingly oppose.

Young and other aides to the White House raised the matter during a May 19 meeting, only to receive an earful from McHenry, Graves and other aides to McCarthy. The conversation turned heated after the president’s advisers needled Republicans for the costly tax cut adopted under Trump five years earlier.

“Bulls---!” a McCarthy aide charged, arguing that revenue had increased since the overhaul, a longtime Republican talking point. With tensions high, Young and McHenry exchanged concerned glances before the group came to the shared realization they needed to take a break. As Republicans left the room, Young offered her GOP counterparts a note of caution: “The stock market is listening to everything.”

But Graves and his fellow Republicans took their complaints immediately to a throng of reporters gathered outside, telling them the negotiations were on a “pause” - and raising fears about a major breakdown at a pivotal moment. Recalling the exchange later, Graves said the two sides “took about two steps backwards,” as he accused the White House of “trying to retreat from previously agreed upon positions.”

To satisfy Democrats, Ricchetti and Young put on the table a plan to freeze federal spending while reducing the deficit through tax hikes, which Republicans opposed. To assuage conservatives, Graves and McHenry pitched six years of caps on a reduced federal budget along with some new demands, including legislation toughening enforcement on the U.S.-Mexican border - an approach the White House rejected.

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‘We know the deadline’

The talks weren’t dead. Hours after the blowup, McCarthy ordered negotiators back to the table, telling them they had to be in the room - then he and Biden spoke by phone as the president returned from Japan on Air Force One over the weekend. Republicans agreed that the conversations helped spark a reset, even if Biden and McCarthy would tussle again in the Oval Office days later.

“We know the deadline,” McCarthy told reporters after his May 22 clash with Biden and his chief of staff. “I think the president and I are going to talk every day.”

Returning to Capitol Hill, McCarthy riled up his restive conference at a private Tuesday morning meeting, going as far as to tell members who felt vulnerable entering the next election that he would help them fundraise - and urging them not to help Democrats raise the debt ceiling without spending cuts.

In an ominous sign, Graves signaled little willingness to relent to Democrats’ own demands as the deadline neared. “We’re willing to give them an increase in debt ceiling. That’s what they’re getting,” he said.

The comments seemed designed to quell a conservative rebellion, as members of the House Freedom Caucus ratcheted up their attacks on their own party’s leaders. “We’re going to fight,” pledged Rep. Ralph Norman (R-S.C.), a member of the bloc, charging in an interview that week that “McCarthy can only do what our caucus, what our Republicans, say.”

Among Democrats, meanwhile, party lawmakers grew increasingly fearful that Biden might agree to new work requirements for people on welfare. The president had supported such rules during his service in the Senate and voiced an open-mindedness to the idea in an offhand remark to reporters during a bike ride in Rehoboth, Del., earlier in the month.

The prospect led Jayapal and others in the party’s left-leaning bloc to petition Biden directly: When the president called her on May 24 after the group held a fiery news conference, the congresswoman said she gave him an earful about work requirements.

“I told him this is an ideological battle that is absolutely contrary to everything he led in the first two years of the administration,” she later recalled.

Again, though, the partisan warfare obscured progress behind closed doors.

By midweek, the discussions had migrated to the White House campus, where reporters cannot roam freely, preventing Republican negotiators from giving instant readouts on disagreements. Graves and McHenry joined Ricchetti and Young in an OMB conference room, where they swapped ideas over bagels and sandwiches from Call Your Mother, a local shop (where Zients had been an investor, though he no longer has a stake there).

Above them hung portraits of former agency directors, including Russ Vought, who served under Trump before becoming one of the leading voices pushing the GOP to seize on the debt ceiling as political leverage.

That afternoon, the group came to a loose understanding on the early fiscal shape of the deal - a two-year agreement to cap federal spending contingent on a wide array of unfinished business, including GOP demands for work requirements. Another reprieve arrived Friday, when Yellen reported that federal coffers had proved stronger than expected, yielding an extra four days - until June 5 - to strike a deal.

Sensing an end in sight, White House aides and top Republicans labored into Memorial Day weekend, trying to piece together the final contours of the deal. Wasting not a moment, Young and Graves even texted to swap ideas Friday afternoon at the White House, where they both had gathered to celebrate Louisiana State University’s women’s basketball team. They spoke on calls and Zoom meetings - Young had to fly to Louisiana, where she delivered a commencement speech at Xavier University - that stretched into 2:30 a.m. Saturday.

The fruits of their around-the-clock discussions finally arrived Saturday night, exactly one month and a day after the House adopted its legislation. With Biden at Camp David and McCarthy in Washington, the two men spoke by phone, agreeing to unveil an “agreement in principle.” Even though the legislative text wasn’t final, the two leaders immediately set about trying to marshal votes for an arrangement that did not satisfy either party’s hard-line members.

In a statement heralding the “compromise,” Biden took care to note the deal “protects my and Congressional Democrats’ key priorities and legislative accomplishments,” though Jayapal and other top liberals still later opposed it.

McCarthy, meanwhile, charged that Democrats “got nothing,” and blasted his foes for having refused to engage in talks for weeks, which offered no comfort to hard-line conservatives, who also voted no. The House Freedom Caucus went as far as to call the deal “a win for Joe Biden.”

In truth, the legislation marked a radical departure from the roughly $3.5 trillion in cuts Republicans aimed for over the next decade. The resulting agreement is likely to save less than half as much over that 10-year period, but only if lawmakers adhere to spending caps that are essentially voluntary.

The bill largely leaves Biden’s economic agenda untouched, with the exception of a limited rollback of some IRS funds and the end of a payment pause on federal student loans that was expected to expire anyway. The proposal imposes new work requirements for the beneficiaries of some federal aid, including childless adults who receive food stamps. But it actually increases spending in the program - and is expected to cover more people - while sparing Medicaid, in contrast with the original GOP bill.

Undeterred, McCarthy took to the House floor Wednesday night before passage to sound a celebratory note: Describing the sum total of the legislation as a “major victory” - and the start of more spending cuts to come - he defended the fiscal brinkmanship that brought the nation within days of default.

“Over the past four months,” he told lawmakers, “we fought hard to change how Washington works.”