I guess the story most worthy of comment today is the debt ceiling. The House has passed a bill raising that debt ceiling that also reduces spending to 2022 levels and caps spending growth at 1% per year, repealing some renewable energy tax incentives and stiffening work requirements for antipoverty programs. The bill isn’t expected to pass the Senate.
As you might expect there are differences of opinion about the bill. By and large Democrats want a “no strings attached” increase of the debt limit. The editors of the Washington Post largely concur:
In an ideal world, House Republicans would do their duty and lift the debt limit without exacting a ransom. This is about paying the money that Congress — in a largely bipartisan fashion — already committed to spend. This is also about reassuring a fragile world that the U.S. government can still do something as basic as pay its bills. A potential debt-limit catastrophe is lining up to hit just as the U.S. economy flatlines. The latest report on gross domestic product on Thursday showed a slowing economy in which businesses have already cut back sharply on spending in the face of high uncertainty. On top of that, China and Russia are making a push to get other nations to sign on to alternatives to the U.S. dollar. A U.S. default would enhance their cause.
It’s true that President Biden and Congress need to discuss spending. The nation is on a fiscally unsustainable course. Social Security and Medicare costs are rapidly escalating, along with interest expenses as the debt grows. But holding the debt limit hostage to impose blunt spending cuts would only backfire. A default — or even a near-default — would lead to higher borrowing costs. That’s exactly what happened in the 2011 debt-limit standoff.
It would be best if Republicans agreed to raise the debt limit and Mr. Biden and Congress launched a separate, parallel process to negotiate how to stabilize the budget. Mr. McCarthy likes to tout that his bill would save nearly $5 trillion over the next decade. But here’s the catch: House Republicans do not specify where $3 trillion of those cuts in discretionary spending would come from. It’s far easier to talk about general budget cuts than to spell out how much less funding they want for roads, schools and the military.
Mr. Biden’s insistence that House Republicans pass a clean debt-limit increase without any strings attached is the morally and economically correct course of action. But reality has to sink in. It would be wise for Mr. Biden to start talking seriously with Mr. McCarthy. Budget talks can remain on a separate path, but they need to commence.
while the editors of the Wall Street Journal are more sympathetic with the House Republicans:
Mr. Biden doesn’t seem to have figured out that the House vote changes the balance of negotiating power. Senate Majority Leader Chuck Schumer needs at least nine GOP votes to pass any debt limit increase, and that means he needs help from GOP leader Mitch McConnell. With the House vote in his back pocket, Mr. McConnell isn’t going to provide those votes for free, even if he had the power to do so on his own.
What part of divided government and bicameral legislature doesn’t the President understand? Perhaps he’s still under the illusion that he can refuse to negotiate and cause Republicans to panic as the debt deadline looms. No doubt the press corps will try to give him cover.
But Wall Street will grow increasingly anxious, and even some Democrats have noticed that Nancy Pelosi is now a backbencher. “While I do not agree with everything proposed,†Sen. Joe Manchin said of the House plan, “it remains the only bill moving through Congress that would prevent default and that cannot be ignored.â€
Mr. Biden’s refusal even to meet is weird given his long record as a politician willing to talk to the opposition. In 2012 as Vice President, he negotiated a deal to avoid the “fiscal cliff,†after President Obama’s haughty approach stalled. Mr. Biden reminisces occasionally about his younger years in the Senate, sparring with segregationists like Mississippi Democrat James Eastland. “We’d debate like hell on the floor of the Senate,†Mr. Biden said last year, “and go and have lunch together.â€
Yet Mr. Biden won’t meet with Mr. McCarthy to hash out a debt deal? Ms. Jean-Pierre said Thursday that Mr. McCarthy’s plan is “an extreme MAGA wish list,†and Republicans are “saying to the Senate, they’re saying to the President, that we have to go with this agenda in its full form.â€
No, they’re simply saying that the House has passed a bill to lift the debt limit, and Mr. McCarthy would like to negotiate a final deal with Mr. Biden that can get through both chambers and signed into law. If Mr. Biden won’t work with Republicans in the House and Senate on a compromise, then he’ll be responsible for the financial calamity he’s been warning about.
I think we need to take a lot of what the editors are saying with a substantial helping of salt. The Congress that committed to the spending (“This is about paying the money that Congress — in a largely bipartisan fashion — already committed to spend”) was a different Congress and Congresses’ ability to bind future Congresses is limited.
I also found the WaPo editors’ “in a perfect world” trope amusing. My version of perfection is obviously different from theirs. My version would include provisions like requiring the Congress to raise revenue when they increased spending beyond some percentage, e.g. the rate at which aggregate supply is growing.
However, the base purpose of the Congress is legislating negotiated deals. That’s what should happen here, too. I don’t know whether the House’s demands are a “MAGA wish list” or not. I’m open to suggestions one way or the other on that although I suspect that’s how the White House would characterize anything that passed a House with a Republican majority.
Like the editors of the Washington Post I think the White House should be open to negotiations with the Congress. If it takes “holding the debt ceiling hostage” to accomplish that, so be it.
Before the House passed this budget, most pundits felt McCarthy would not be able to herd the vote to passage on the first vote. Along with these predictions the Dems tried to muddy the House’s proposals by saying social security and Medicare would be threatened by cuts should the House pass their budget. This was the Dems mantra even though republicans repeatedly said such cuts were “off the table†– something factually proven once it was released. Now, dem talking points will have to be replaced by something else just as disingenuous and politically provocative.
What Dems won’t admit, let alone stress, is how unsustainable the debt has become, primarily through the unrestrained spending Bills falsely named as to where the monies will really be spent. For instance the Inflation Reduction Act, actually raises inflation, just as the infrastructure legislation has only small amounts designated for roads/bridges, the vast majority going to climate change/green energy programs.
In the meantime Dems only seem to exhort how great the economy is under Biden, despite the GDP coming in at an anemic 1.1%, and the latest WSJ poll saying 77% of people think their children will be worse off than themselves – a discouraging number not seen in many decades of polling. Supposedly, commerce is also demonstrating signs of slowing down with companies selling packing boxes citing a drop-off in sales, along with large trucking companies seeing the same trend in their business. Only the stock market appears vigorous, infused by the Fed’s constant printing of money.
I almost always favor clean bills. Congress very, very rarely favors that. The temptation to poison pill, virtue signal, or cram in unrelated stuff is always too great.
The debt limit is a catastrophe waiting to happen. It makes no sense that Congress can pass tax and spending bills and then threaten to renege on the country’s obligations. It’s holding the creditors hostage to an intramural fight.
Consider: A partnership has borrowed money from the bank. The note is due, but the bank says they can just sign to renew the note and increase the limit. When the partners are in the bank, one of the partners starts to complain about something or other about the business, begins to yell at his partner, then threatens to not sign but let the business go into default instead. This, even though the bank is more than willing to extend the note. The effect is to hold the bank hostage (and makes them very nervous).
Think of it as the start of the budget negotiations.
Liam Donovan has been pretty insightful about the public posturing.
The Democratic position was we won’t negotiate, since Republicans don’t even have a negotiation position that can gather a majority of the House. By passing a bill through the House, Republicans shows they have a position that can gather a majority.
The likely result is negotiations that gives both sides “face”. Biden continues to take the position and likely gets a “clean” debt-ceiling raise. But simultaneously, negotiations will take place on the annual budget, where some Republican demands will be met (overall spending levels for next year, cancellation of leftover COVID funds).
I think the most interesting (and very undiscovered) fact is as part of the cost estimates of the Republican debt ceiling bill; the CBO now estimates the Inflation Reduction Act’s tax credits (EV’s, Solar, etc) will cost ~$300 billion more then just a year ago. The Inflation Reduction Act will likely never lower the deficit at any point now.
All of this probably points to the need to reform the budget process; which is 50 years old now. It probably won’t happen unless Washington is forced into it by outside forces.
“In an ideal world, House Republicans would do their duty and lift the debt limit without exacting a ransom. This is about paying the money that Congress — in a largely bipartisan fashion — already committed to spend.
In an ideal world, the family would do their duty and provide two gallons of vodka to their alcoholic father without exacting a ransom.
This is about delivering the sauce that Dad — in a largely drunken fashion — already committed to drink.
The debt limit shouldn’t exist. Since it does it should have a clean bill. While the Congress that committed to the spending is different than the one now it is a small difference and shouldn’t make a difference. Its a different POTUS, SCOTUS and the rest of the nation is different, its always changing, but to function the nation needs to honor commitments. The current Congress has the ability to alter future spending so it should do that by passing a budget. (I wonder if my corporation can avoid paying debt since we have different employees now?)
Of course this wont happen. The GOP is always careful to avoid getting pinned down on exactly how to cut spending and what it wants to cut. Other than Big Bird that is, they need to commit to some real spending issues.
Steve
Drew: In an ideal world, the family would do their duty and provide two gallons of vodka to their alcoholic father without exacting a ransom.
Not a coherent analogy.
If the alcoholic father is the U.S. and its spending problem, then the ransom being sought is sobriety or murder. However, given that you care about father and don’t just want to avoid the trouble, you should sustain life before addressing other issues, especially when other options are available. Indeed, the U.S. had cash surpluses at the end of the Clinton administration, so we know it can be done.
“While the Congress that committed to the spending is different than the one now it is a small difference and shouldn’t make a difference”
It makes all the difference. In case you haven’t noticed, Congress and the US government reneges on commitments all the time. Every time the law changes its revoking of a commitment of some sort, and Congress is in the business of making laws. It used to be the Government committed seniors getting social security at 65, now its 67. You could get a $7500 tax credit for buying a Nissan Leaf until a month ago, now you can’t. At one point the Government was committed that $29 = 1oz gold, that became $43 = 1oz gold; and now its devalued to $2000 = 1oz gold.
The only thing about the debt ceiling is reneging in theory would cause more negative consequences then most other government actions.
But I consider the debt ceiling exists because both sides like it. Republicans somewhat like it because its a rare vehicle where they can get something, if they are willing to pay the costs of taking hostages. Democrats like to demagogue about it; I mean they all moan how terrible it is but they controlled Congress for 2 years, reconciliation meant Democrats alone could have raised the limit to such an amount it would never be an issue again, or raised it beyond Biden’s presidency. The debt ceiling was so terrible they didn’t even put it in the reconciliation bill that was BBB or IRA.
CuriousOnlooker: It makes all the difference.
Not to creditors. The United States is an institution. It’s obligations, whether debt or treaty, continue on past any particular congress. It’s even in the U.S. Constitution.
CuriousOnlooker: Every time the law changes its revoking of a commitment of some sort
The federal government could balance the budget tomorrow by ending Social Security while still collecting the taxes. However, whatever debt the U.S. has incurred until that point would still be due and payable.
CuriousOnlooker: The only thing about the debt ceiling is reneging in theory would cause more negative consequences then most other government actions.
It would be a credit default, making creditors hold the bag for political dysfunction in the U.S.
CuriousOnlooker: But I consider the debt ceiling exists because both sides like it.
The debt ceiling exists for the same reason the QWERTY keyboard exists–historical circumstance. Political dysfunction and structural conservatism make eliminating the debt ceiling very difficult.
“It’s obligations, whether debt or treaty, continue on past any particular congress”
The debt ceiling doesn’t call into question any past debt obligation at all. As you rightly point out later, the government could just stop any spending (like social security), and it would have the cash to pay any obligations coming due.
The government has the choice to either renege on previous commitments of debt or future commitments on spending..
CuriousOnlooker: The debt ceiling doesn’t call into question any past debt obligation at all. As you rightly point out later, the government could just stop any spending (like social security), and it would have the cash to pay any obligations coming due.
By law, the government can’t just stop spending. That requires an act of Congress. If the Congress doesn’t act, then the debt limit will be exceeded and the U.S. will be in default.
ETA: The government can’t just stop sending out Social Security checks while still collecting the taxes. That requires an act of Congress.
On an actual credit default — I would never advise doing it or risking it — but just a thought exercise.
It could be less apocalyptic event then feared, maybe a lot less.
Usually the problem with a “default” is no one wants to lend you additional money, and the interest rate goes sky high if it is available. But with a US government default, think on the other side. The lenders to the US government, where would they put their money — into state/municipal bonds, corporate bonds, stocks — those are far risker assets then treasuries and likely to go down in value more in the ensuing panic. Treasuries may actually go up in value in that scenario, lowering rates.
And the US government probably wouldn’t have problems borrowing money at “AAA” rates whenever it did resolve the “default” (as the default wasn’t a traditional inability to pay).
CuriousOnlooker: The lenders to the US government, where would they put their money
Somewhere where they pay their bills. US bonds would crash in value. There would be turmoil in the global banking system.
CuriousOnlooker: And the US government probably wouldn’t have problems borrowing money at “AAA†rates whenever it did resolve the “default†(as the default wasn’t a traditional inability to pay).
S&P already downgraded the U.S. to AA+ since the last debt ceiling debacle due to political dysfunction. And that’s without an actual default. Bankers get very nervous when people owing them money talk about maybe default won’t be so bad.
By law, the government can’t just stop spending.
Certainly, the contingency plans since 2011 do just that; stop spending (https://www.brookings.edu/2023/04/24/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/)
Maybe you are confusing the obligation to spend with the impoundment power. Since 1974, the executive branch is obligated to spend funds that Congress has appropriated. It is not discretionary as prior to 1974.
The key proviso is the executive branch is obligated to spend the funds if it has them. If treasury isn’t transferring funds to the State department because it has none, the State department won’t break any laws for not spending up to its appropriated amounts since it didn’t make any discretionary choices.
Again, I don’t advocate for any of this. Congress would be foolish to push the President to claim there’s no funds in the treasury and make up rules on who gets paid.
CuriousOnlooker: Certainly, the contingency plans since 2011 do just that; stop spending
Certainly, you can’t spend what you don’t have. As your citation points out, it would cause sustained or significant damage to the US economy. As for not paying vendors, well, not paying for your new fighter jet or that box of paperclips is a default, and as with a business not paying its bills, they will see you in court. And, as you point out, if treasury makes up rules for who gets paid first, that will surely be challenged in court. Sure, investors may still invest, but they will demand a higher return for the higher risk and uncertainty.
Somewhere where they pay their bills. US bonds would crash in value
Why would it? Bonds value that are “defaulted” as the debt comes “due” on is based on the estimated “recovery value”. Lets say the Government chose to prioritize spending over repaying the due debt — the value of the debt will certainly stay around par because Government will pay off the due debt as soon as the debt ceiling issue is resolved.
For debt that is not due, their price is set by the market based on sellers and buyers. To have that price crash, you need a lot more sellers then buyers. The problem for sellers is suppose one sells — where would one put the proceeds. Put it in the bank, its an uninsured liability to the bank, invest it in state bonds — most state revenues come from the Federal Government, put it in stocks — they probably tank in a panic…. Given the lack of alternatives, it is quite reasonable best to stay in treasuries and wait it out. Without sellers, how are treasuries going to crash?
I think the experience in 2011 proved that out. Interest rates (ie the value of treasuries went up) went down hard as negotiations came down to the wire and panic broke out at the end of July.
” It used to be the Government committed seniors getting social security at 65, now its 67. ”
Seniors arent creditors. Zach has pointed out the flaws here. As I noted I cant change the composition of my corporation then declare I dont want to pay for stuff we already received. If I do we go to court and our credit rating tanks. We can change future spending.
Steve
This was already argued back earlier.
The debt ceiling doesn’t call into dispute any previous obligation at all. The Government can stop upcoming spending (which is by definition is future spending) and payoff debt as it comes due — which is actually what the existing contingency plan from 2011 would do.