Biden and McCarthy reach a final deal to avoid US default and now must sell it to Congress
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“Public debt since 2020 has grown by $3 trillion. According to the latest Monthly Treasury Statement, government spending in March of 2023 alone was twice the revenue collected. The deficit in the first six months of FY 2023 is about 80 percent as large as the deficit for the entire FY 2022. Our mid-year deficit is $1.1 trillion, compared to $667 billion at the same point last year. Falling revenue collection is responsible for only 17 percent of this difference. The other 83 percent is overwhelmingly due to excessive and increased spending.
In simpler terms, the decline in the debt-to-GDP ratio cannot be attributed to spending cuts, even as we move away from what’s now widely regarded as an excessive fiscal response to the pandemic.”
“Government debt as a share of the U.S. economy is falling.”
“The main driver behind the reduction is inflation”
“Republicans, Biden asserted Wednesday, “say they’re going to default unless I agree to all these wacko notions they have. Default. It would be worse than totally irresponsible.”
He reminded McCarthy of the GOP’s hypocrisy — they had no problem raising the debt ceiling three times during the Trump presidency — and of Ronald Reagan and Donald Trump’s own comments decrying debt limit brinkmanship as reckless. Biden also urged the speaker to “take default off the table, and let’s have a real, serious, detailed conversation about how to grow the economy, lower costs and reduce the deficit.”
According to two people familiar with the administration’s strategy, it’s not clear to anyone inside the White House if McCarthy has the votes from his own caucus to pass his bill, and it may not yet be clear to the speaker himself, who has what one person familiar with the White House’s thinking termed a “principal-agent problem.”
The bill would be dead on arrival in a Democrat-controlled Senate. But the White House is signaling clearly to GOP moderates in the House: Vote to cut popular programs, including Social Security and Medicare, at your own risk.
“If they pass this, we are going to hang it around their moderates’ necks,” said one person familiar with the administration’s thinking.”
“Biden, his aides say, learned from the Obama administration’s 2011 standoff with Republicans that it’s imperative not to allow the debt ceiling to become part of negotiations. But with McCarthy’s tenuous speakership constantly hanging by a thread, and dependent in large part on his ability to placate his most extreme members, the White House knows that talking him off the ledge on risking default — giving up what he sees as his main point of leverage — won’t be easy.
And as much as White House officials like the politics of the negotiations’ current phase, they know they, too, will face pressure to negotiate the closer they get to D-Day.”
““China right now describes us in their open speeches, etc., as a declining power,” Milley said. “Defaulting on the debt would only reinforce that thought and embolden China and increase risk to the United States.”
Austin added that a default would mean a “substantial risk to our reputation” that China could exploit.”
“The reason Congress continues to land in the same place is that raising or suspending the debt ceiling, much like funding the government, is something it must address on a regular basis. Every few years or so, Congress has to either increase or suspend the country’s debt ceiling as it accrues more debt. This debt comes from covering government expenses including paying for the military, health care programs, and Social Security.
If it fails to address the debt ceiling, Congress would ruin the US credit rating and put its ability to pay its bills in doubt. That would likely trigger a domestic economic crisis, if not an international one. Were the US to default, interest rates would probably go up and unemployment would increase, potentially putting thousands or even millions of people out of work.
Because it’s must-pass legislation and requires the backing of both chambers, the party that’s out of power in the White House or in the minority in Congress has often used this measure as leverage to extract policy concessions or send a political message. That has erased any incentive to reform the process, even though Congress could do away with the debt ceiling if it wanted to.”
“In recent years, Republicans have been more aggressive in demanding concessions from Democratic administrations in exchange for their support for a debt ceiling increase, though both parties have utilized such votes in the past to make a point. That’s left the US in a dangerous cycle in which the minority party tries to squeeze every concession it can out of the process, debt ceiling negotiations go down to the wire, and any miscalculation on the part of lawmakers could inadvertently cause a default.”
“the United States is unique in having a debt limit that lawmakers need to suspend or raise every few years.
A debt limit was first established in 1917 in order to “make it easier to finance mobilization efforts in World War I,” per the Brookings Institution. That enabled the US government to take on debt without Congress approving each individual expenditure, which meant it could more quickly and efficiently finance the military. Since the 1960s, Congress has raised the debt limit more than 70 times; 20 of those times have been in the last 23 years. The debt limit effectively caps how much the US is able to borrow from federal agencies, foreign countries, and banks, so if the country defaults, it isn’t able to pay its bills.”
“The US government doesn’t have to work this way.
Congress could pass legislation doing away with the debt ceiling, and the president has options to ignore it as well, though they’d likely prompt legal challenges. As Vox’s Dylan Matthews has reported, the president could invoke the 14th Amendment and ignore the debt limit, or Congress could approve an increase to the debt cap that’s so high it basically nullifies the ceiling.
Abolishing the debt limit altogether would prevent either party from using this process as political leverage. Doing so would greatly reduce the uncertainty that comes around every time there’s a deadline like this and prevent significant market volatility that results.
“There are zero downsides to getting rid of the debt ceiling. It is utterly meaningless as a policy guide or institution; it is good only for gridlocking government. And, in the modern age, gridlock is an enormous problem, given the huge pressing needs policymakers should be addressing,” said the EPI’s Bivens.
Other economic experts note that eliminating the debt ceiling could take away an opportunity for Congress to debate fiscal policy. But many feel like that’s a moot point, given debt ceiling standoffs are rarely about any specific spending anymore, but rather about weakening the party in power.”
“It’s unlikely there’s enough political will to make any of these changes happen. Instead, it seems as though lawmakers are comfortable getting right up to the brink — and running the risk of a default again and again.”
“The legislation, known as the Budget Control Act of 2011, initially increased the debt ceiling by $900 billion and guaranteed a similar amount in long-term savings across defense and non-defense expenditures. It also set up a super committee of lawmakers who were tasked with finding a set amount of additional spending cuts by late November, or automatic spending cuts would be triggered across the board.
By the time the bill passed, however, some of the economic damage was already done. Because the US was so close to default, the stock market had already dipped and the cost of borrowing had increased for the government as well. Higher borrowing costs effectively mean the government has to pay more for loans and has fewer resources to spend on public investments like infrastructure. Additionally, in part due to the brinksmanship involved, the credit rating agency S&P downgraded the country’s credit rating for the first time in US history, signaling to potential buyers that taking on US debt wasn’t as safe as it once was, and undercutting global trust in the country’s economy.
The outcome in 2011 revealed that even getting close to a default was dangerous and had a problematic impact on the economy, experts say. “This is an entirely human-made crisis that adds extra cost to the taxpayer, that can lead to market volatility, and that’s totally avoidable,” said David Vandivier, a former Treasury Department official.
“Repeating it doesn’t make sense,” emphasized Furman.
That warning may go unheeded, however. While Democrats have argued that the debt ceiling — which covers debts the US government has already incurred — should be separate from negotiations on the budget and spending, Republicans have indicated that they’re eager to use this opportunity to secure possible savings, even if it incurs risks that became apparent in 2011.”
“The bipartisan Problem Solvers Caucus—made up of 31 Republicans and 32 Democrats—has reportedly crafted a debt limit proposal that calls for Congress to return to so-called regular order for the passage of annual budget bills. That means the dozen appropriation bills that make up the federal budget would go through the full congressional process, including committee hearings and individual votes for each, rather than being rolled together in the massive omnibus packages that Congress has relied upon in recent years.
According to a draft proposal from the caucus published Wednesday by Axios, a return to regular order would be one of several changes the lawmakers in the group would demand as part of a debt ceiling deal. They’re also asking for the creation of a new fiscal commission to make recommendations on stabilizing the federal government’s dangerously high levels of debt, and the adoption of budget controls (similar to those that were in place between 2011 and 2018) to limit future spending increases.
If those terms are agreed to, the group’s framework would raise the debt ceiling to a level that won’t be reached until after 2025—in other words, until after the next election.
On their own, those proposals won’t solve America’s serious fiscal challenges. But they would be a series of good first steps toward taking the mess seriously and would avert the potentially catastrophic debt default that looms over everything in Washington right now.”
“If nothing changes, Social Security benefits will be subject to a 23 percent cut in a decade.”
“Since any changes to shore up Social Security’s bottom line will likely require huge tax increases or changes to how benefits are paid, policy makers are also running out of time to implement those changes in ways that don’t cause major disruptions to the economy and Americans’ retirement plans.”
“The most straightforward solution to Social Security’s problem is to raise the payroll taxes that fund the program to make up for the shortfall on the benefit side of the ledger. But that would only exacerbate the problem by placing a bigger burden on younger, generally poorer workers.
According to the report, Social Security could be kept afloat for the next 75 years by hiking the payroll tax by 4.15 percentage points in 2034 (or implementing a smaller increase sooner). The payroll tax is currently charged at a 16.5 percent rate, with employers and employees each covering half. That works out to a nearly 25 percent tax hike. Alternatively, the report says, benefits could be cut by about 25 percent.”
LC: We could also fund it by higher taxes on the wealthy.
“To pretend that Social Security and Medicare shouldn’t be touched is nothing short of political malpractice. Over the next 30 years, the two programs will run a $116 trillion shortfall. This number accounts for the significant amount of interest payments on the debt the government will ring up in the process. While we might be able to stumble along indefinitely, all that borrowing will slow—perhaps even halt—our economic growth, making funding the programs that much more difficult.”
“The Biden administration has framed its new, tighter “Buy American” regulations as a way to bolster domestic manufacturing and benefit parts of the country that have been left behind by technological innovation.
To many of those same communities, the White House has promised better connectivity and higher internet speeds. The bipartisan infrastructure plan signed by President Joe Biden in 2021 dedicated $42 billion to expanding broadband access, with much of the funding aimed at laying fiber optic lines in parts of the country where they don’t exist.
There’s one small problem with all this: Finding enough fiber optic cables that comply with the Buy American rules.”
“Under Biden’s Buy American rules, 55 percent of the component parts of any product used in a federal construction project must be sourced in the United States. That disqualifies any imports of finished cable, but it also wipes out most of the available American-made supply since many of the component parts are sourced overseas.”
“Another problem, according to a Bloomberg report earlier this week, is that building a fiber optic network requires more than just fiber optic cable. You also need switches, terminals, routers, and other pieces of tech that are mostly imported or manufactured with imported components. In both cases, the Buy American requirements mean broadband companies can’t use those parts for projects funded with federal funding from the infrastructure bill.
That means less infrastructure gets built, and lots of perfectly good American-made fiber optic cable doesn’t get purchased, simply because less than 55 percent of its components happened to come from somewhere else.”