The debt ceiling deal is fine. May it be the last
There are many subjects that I enjoy writing about. The debt ceiling is not one of them. The fact that it exists is an embarrassment. The only plausible argument that could be made to justify having it is that it keeps spending in check. A century of experience has proven that to be false. At best, its existence requires Congress to put on a charade every few years and needlessly freak people out. At worst, the US risks defaulting on its debt payments and potentially causing a global depression.
Nonetheless, the debt ceiling is in the news for obvious reasons and so I’m writing about it. Everyone else is doing it so if you can’t beat them, join them. Over the weekend, a deal was struck between Biden and Kevin McCarthy. Overall, the deal is very modest in what it does.
It can be framed as a win or a loss for both sides. That’s a good thing because it will need to be passed this week. The most left-wing Democrats and the most right-wing Republicans are against it, which is a good sign. The more the most ideological members are against it, the more likely everyone else is to support it.
The deal entails some small cuts to non-defense discretionary spending. Cumulatively, that is close to 15% of the federal budget. Medicare, Medicaid and Social Security are left untouched and defense spending is increased. One good part of the deal is that it forecloses shutdowns this year and next year. More importantly, it raises the debt ceiling until 2025 so it won’t have to be dealt with until after the election. Between no shutdowns and not having to worry about defaulting again this year and next year, it takes away any significant congressional threats to the economy.
In addition to some modest spending reductions, the deal includes some new work requirements for certain food stamp recipients, namely those who are childless adults. Previously, work requirements only applied to adults who are 49 and younger. Now, it has temporarily been raised to 54. That provision is set to expire in 2030. Ironically, the deal may wind up increasing the total number of food stamp recipients. That is because it exempts from work requirements veterans and the homeless. Both of those groups were previously subject to work requirements.
The deal also imposes additional work requirements on recipients of TANF, but hardly anyone is enrolled in it now and it already has work requirements so the impact is likely small. Republicans wanted to impose work requirements on Medicaid enrollees, but Democrats rightfully refused to give them that. Medicaid work requirements are a terrible, horrible, no good, very bad idea. The notion that there are millions of people out there who would be working but are not because of Medicaid is on its face absurd. Medicaid is an insurer. It will pay some medical bills for patients who are enrolled in it. It won’t pay rent, utilities, transportation or any other costs.
If the goal is to increase labor force participation, Medicaid work requirements don’t do that. However, if the goal is to make people go through an additional barrier to be able to enroll in it in the hope that they will give up and not enroll, then they’re very effective. The experience of Arkansas is proof of that.
The deal includes a small amount of permitting reform. It also approves a pipeline Joe Manchin had been pushing for. McCarthy and Biden have pledged to work together to push for more comprehensive permitting reform this year. Here’s hoping that happens. Without it, clean energy won’t reach its potential.
The part of the deal I dislike the most is the reduction in funding to the IRS that was given to it via the Inflation Reduction Act. The IRS has been underfunded by design for years. By giving it more money, it is going to collect taxes that are legally owed with the focus being on wealthy individuals. For now, the money given to the IRS has been used to hire people to answer calls, which has reduced the average waiting time from close to 30 minutes to less than 5 minutes. Congressional Republicans hate that because they think rich people having to pay more in taxes is bad and they want everyone’s experience with the government to be awful. The reduction in funding will also increase the deficit, but they never cared about that in the first place.
As far as how the deal will affect the economy, it’s likely to be negligible. It may even have a slight positive effect. By reducing spending, it will help a little to reduce demand. That will take some of the burden off of the Fed so it may not have to raise interest rates by as much. Every little bit counts and it’s good to not rely entirely on the Fed to bring down inflation.
The good news about reducing spending now is that the economy is in a very different spot compared to the last time spending reductions were made to raise the debt ceiling. In 2011, the economy needed more stimulus. Demand was far lower than it should have been. Unemployment was high, inflation was low and interest rates were near zero. That is the time to spend. Instead, we got austerity[i], which helped contribute to a slow and lousy recovery.
Today, things are very different. Unemployment is at a record low, inflation is high and interest rates have risen sharply in the last year. The time for austerity is now. Austerity undermined Obama’s chances of getting reelected, but it will probably help Biden’s chances.
To negotiate or not to negotiate
I wrote in January that Biden was right to refuse to negotiate over raising the debt ceiling. At the time, my assumption (and likely Biden’s, too) was that either (a) House Republicans wouldn’t be able to pass anything because of their narrow majority or (b) if they did pass something it would be full of unpopular spending cuts that they could never get absent holding the debt ceiling hostage. Had the second scenario happened, Biden would have been right to not negotiate, but neither scenario happened, which changed things.
What did happen was House Republicans passed a bill that was bad, but didn’t include entitlement cuts. What they passed was an opening bid that was not toxically unpopular. What Biden and McCarthy agreed on wound up being something House Republicans could have gotten in an ordinary appropriations bill. Odds are they would have gotten something like it later this year.
Had the debate been about entitlement cuts, it would have been easy for Biden to call Republicans extremists holding the country hostage. Since they didn’t pass a bill doing that, the debate became about spending in the abstract, which is much better terrain for Republicans. Between the framing of the debate being on better terms for Republicans and few people outside of DC paying attention to what was going on, Biden no longer had the stronger hand.
That might sound like a loss for him, but it wasn’t. In 2011, House Republicans passed Paul Ryan’s budget that decimated the safety net, including Medicare. What House Republicans passed this year was much less ambitious. They lost the battle over the size of government. Politically, that is much better for Republicans, but on policy it means they surrendered.
Biden did eventually negotiate after months of saying he wouldn’t, which was a good thing. Haggling over modest demands is a far cry from where things were 12 years ago. Contrary to what some seem to think, negotiating over the debt ceiling has happened before. What was different about 2011 was how much it was being negotiated over, i.e., entitlement cuts paired with substantial tax reform. Obama was trying to negotiate a comprehensive deficit reduction passage that included entitlement cuts and tax increases. That was a big mistake, which he learned from and so did Biden.
Reagan and Clinton both negotiated over raising the debt ceiling. In 1985, a default nearly happened. Then Treasury Secretary Jim Baker took some unilateral actions that delayed things long enough for a default to be avoided, but it was close.
Trump never had to negotiate over the debt ceiling because he doesn’t care about anything. Democrats were able to get a good amount of spending increases when they had the House during his term. It was easy to do since Trump would sign whatever came to him. Clinton, Reagan and Obama all had things they believed in and so they had something to lose. One upside to not caring about anything is you have nothing at stake so technically you can never lose a policy battle.
The biggest mistake Democrats made under Trump was not eliminating the debt ceiling then. They could have tried to get a provision into the bill that was ultimately passed that got rid of it. It probably would have been an easy lift given that Trump didn’t care and wouldn’t have fought it.
For those wondering why Democrats didn’t eliminate it last year when they were in full control, the most important answer is they didn’t have the votes. Joe Manchin didn’t want to do it and others probably felt the same way. There were also other priorities towards the end of the session such as passing the omnibus (omni) spending bill.
Many Democrats even welcomed a fight over the debt ceiling. They believed, as Republicans were indicating last year, that the fight would be over cuts to entitlement programs and Republicans would be hurt politically by it. The overarching assumption among Democrats and others was that the debt ceiling would be raised in the end because it always is and so there was no need to raise it months in advance.
Looking back, some might say Democrats’ calculations were wrong, but that wasn’t obvious at the time. The omni bill was critical and included many important items. Putting it together took a lot of work and it wasn’t guaranteed to pass. Had Democrats tried to raise the debt ceiling, the omni bill may not have had enough time to pass and probably would have lost a lot of Republican support. It could’ve been the worst of both worlds where Democrats lacked the votes to raise the debt ceiling and the omni bill didn’t pass either. Considering that, the fact that there was no default and the deal struck is very modest, I think Democrats made the right decision.
As far as how well Biden handled the debt ceiling this year, I think the deal that was struck was as good as could be expected under the circumstances.[ii] The things Republicans got were things they could have gotten in negotiations over the budget that needed to be resolved by September 30 to avoid a shutdown. Because Republicans control the House, they have a seat at the table and will get something for it. In other words, spending cuts of some sort were going to happen no matter what.
The biggest mistake I think Biden made was ruling out unilateral options from the beginning. He was right to be uneasy about relying on options like invoking the 14th Amendment and minting the coin. The arguments about the validity of those options are very esoteric and which side is right is way beyond my expertise. There are people I respect who believe those were viable options and there are people I respect who believe they were not.
Whether either of those options would have worked is very uncertain, which is a problem. Either of them would have been challenged immediately in court. Most certainly, the Supreme Court would have had to rule on it. If Biden had used either (or both) of those options and lost in court, the country would have been in default and he could have been blamed for it.
Even if both or one of those options were upheld in court, there was going to be a period of uncertainty. That uncertainty would likely have spooked markets. If the treasury market panicked and interest rates surged, that would have been a major problem. If other markets panicked, such as the bond market, the economy could’ve quickly fallen into a recession or worse. Ultimately what is most important about either of those options is how markets react to their being invoked. The reaction during the period of uncertainty, however brief, was likely to have been negative and damaging to the economy even if the Supreme Court ultimately upheld one or both of those options.
True, invoking either or both of those options could have ended well. Ideally, one or both of those options would be invoked, markets would remain calm and the Supreme Court wouldn’t want to mess with that and so would let the president take unilateral action. If that happened, then the debt ceiling would be gone. The president would have the unilateral authority to raise it and it would never be an issue again. But that depended on many things going right and I understand Biden’s unease about it.
Still, it was a mistake to disavow those options right off the bat. If your position is you won’t negotiate, having potential unilateral options is critical. That is how you gain leverage. If the other side thinks you might take that route, they might back down. By saying he wasn’t going to use either option, Biden took away a point of leverage. It’s possible had he threatened unilateral action, Republicans wouldn’t have believed him and things would’ve wound up just like they are now, but we’ll never know for sure.
Let’s end this insanity
In the end, things look to have worked out. Throughout the drama, markets remained calm. Virtually everyone in the business world was confident a deal would be struck and didn’t panic. Normal people didn’t even know there was a fight and continued with their lives. Still, the process of getting to where we are now was very bad.
The next time Democrats are fully in charge, they need to get rid of the debt ceiling once and for all. How best to do it? Absent getting rid of the filibuster, it will have to be done through reconciliation. The solution is to raise it by ten quadrillion dollars. Yes, I’m being serious.
One ridiculous fear some Democrats have about eliminating the debt ceiling is that Republicans will use it against them in attack ads. Only someone in DC could be worried about that. Outside of DC, nobody even knows what the debt ceiling is. The fighting in Congress over the he said/she said in the lead up to the deal was paid attention to by nobody who isn’t in Congress, a political reporter or a political junkie. I can count on no hands the number of people who have not been reelected because they voted to raise the debt ceiling.
That’s why raising it by ten quadrillion dollars is good because who would even believe that? Just think about the ads run, (scary voice) “John/Jane Doe voted to raise the debt ceiling by ten quadrillion dollars!” How do you think a normal person is more likely to react, “How dare they!” or “What’s the debt ceiling and what’s ten quadrillion dollars?” Even you, dear reader, have probably never heard someone say that number before in your life.
On a final and more serious note, it is now established that the debt ceiling can potentially be weaponized. It was fortunate that a deal was struck in time to avoid a default. It is also fortunate that it’s a modest deal and doesn’t create the precedent of using the debt ceiling to get things that could never happen otherwise. Still, we may have just been lucky again. We may be lucky until the end of time and never have a default, but we may not. The longer the debt ceiling is around, the more likely a default becomes.
That is why the debt ceiling has to be eliminated. It serves no purpose. The benefits of having it are zero while the costs are potentially massive. It is a gun pointed to the head of the global economy. There are many threats to the economy that are unpredictable and beyond our control. The debt ceiling is not one of them. For the sake of the US and world economy, it has to be done away with.
[i] Austerity in this context refers to cutting spending and/or raising taxes.
[ii] Some congressional Democrats were griping about Biden’s messaging during the last few weeks. They thought if only Biden would give a rousing speech then everything would be great. That’s not only self-serving, it’s delusional. The presidential bully pulpit is a myth that needs to die. It’s never been true that the president can just use his platform to bring everyone to his side. It’s especially false today. Still, people in positions of influence cling to it. One quiet theme of Biden’s presidency has been his acknowledgment that the bully pulpit is a myth. Given how low profile he’s been and how much success he's had at getting bipartisan legislation enacted, I’d say he’s on to something.