The debt ceiling end-game
What should President Biden do if Republicans refuse to raise the debt ceiling? What should he say he will do, in advance, to avoid a catastrophe and gain leverage in negotiations?
The answer to these questions is far from clear.
Krugman and Klein on unorthodox legal strategies
Paul Krugman argues that the administration should do something – anything – to avoid a debt default. He doesn’t care about the details – platinum coin, consul bonds, 14th amendment. He thinks that there is a real possibility that the Republicans will be unwilling to accept any compromise on the debt ceiling, and that this could have such dire consequences that some plan B is essential. (Krugman has also opposed any negotiations over the debt ceiling, a position I have previously discussed.) But Krugman worries that the administration has made the adoption of unorthodox policies more difficult by dismissing the possibility of a legal workaround:
I have no idea what happens next. I think there’s a real possibility that Biden officials will in the end be forced by sheer Republican intransigence to adopt unconventional methods after all — a task that will be made much harder by the fact that those same officials have spent months trash-talking the approaches they may need to follow.
One problem with any effort to ignore the debt ceiling is that it will be subject to litigation. We do not know how this litigation will end. As Ezra Klein rightly points out, the Supreme Court can do whatever it wants. In the meantime, while litigation works its way through the courts, it is far from clear that financial markets will function properly. Furthermore, consistent with my previous posts, Klein believes the politics of repudiating the debt ceiling are bad for Biden:
If testing the question wouldn’t cost anything, there would be no harm in trying. But I don’t think it would have no cost. The strength of the Biden administration’s political position is that it stands for normalcy. The debt ceiling has always been raised before, and it must be raised now. But if the administration declares the debt ceiling unconstitutional, only to have the Supreme Court declare the maneuver unconstitutional, then Biden owns the market chaos that would follow. Who will voters blame in that scenario? Republicans, who say they just wanted to negotiate over the budget, as is tradition? Or Biden, who did something no other president had done and failed?
Right now, at last, the positions are clear. The White House is open to budget negotiations but opposed to debt ceiling brinkmanship. Republicans are the ones threatening default if their demands are not met. They are pulling the pin on this grenade, in full view of the American people. Biden should think carefully before taking the risk of snatching it out of their hands and holding it himself.
Biden should certainly try to negotiate a reasonable resolution of the stand off. (“Reasonable” to me means a balance of spending cuts and tax increases, cuts that are not harshly targeted at the poor or Biden’s key policy priorities, a substantial increase in the debt limit so that we are not doing this again this year or next, and no sequester.) But as Krugman argues there is no guarantee negotiating will work, so the administration still needs a plan B.
There are two debt limit strategies other than the platinum coin, consul bonds, and the 14th Amendment that should be on the table in this discussion.
First, the President can try to avert a financial crisis by prioritizing interest payments and reissuing maturing debt (which keeps the total outstanding debt within the debt ceiling limit). Other spending obligations would be met to the extent that cash is available, consistent with the Treasury’s ability to target and prioritize. (For example, perhaps the Treasury can send out Social Security checks, but withhold payments to health care providers.) Here is a short description of how this might play out by Edelberg and Sheiner at Brookings.
If this succeeds in averting a major financial crisis – a big “if”, but certainly possible – hitting the debt ceiling might end up looking something like a government shutdown to the public. There would be considerable short-term pain, but the public would quickly grasp the stakes and Republicans would be forced to raise the debt ceiling. As Edelberg and Sheiner note, there would likely be litigation claiming that the Treasury cannot pick and choose who to pay, and that debt holders need to take a haircut. (For some additional legal, operational, and political problems with this approach see here.) But at least in this case it might be the Supreme Court that would trigger a financial crisis.
This may be the administration’s plan B. It would explain why the administration has dismissed some of the extraordinary legal theories that have been bouncing around – the Treasury doesn’t need to mint a platinum coin or issue consul bonds to execute this strategy. On the other hand, it’s far from a perfect or foolproof option. Like any failure to raise the debt ceiling, it could lead to a worldwide economic cataclysm, especially if prioritization fails operationally or legally.
Ignoring the debt ceiling
Finally, rather than citing the 14th Amendment, the President could argue that when the debt limit is reached, he needs to disobey a duly enacted law of Congress – tax law, spending law, and the debt limit are inconsistent – and that ignoring the debt limit is the least unconstitutional option. This position has been argued persuasively by Dorf and Buchanan (see here for a brief summary and citations). The 14th Amendment would be helpful here, but it is not the central issue (the conflict between duly enacted laws would exist even without the language in the 14th Amendment). This is important, because the language of the 14th Amendment is far from clear, which means that the Court can do whatever it wants.
Litigating ex ante
If we hit the debt limit, some degree of financial disruption is inevitable because of uncertainty about the legality of whatever strategy the administration pursues. (The strategy least subject to legal uncertainty may be paying off all creditors on a first-come, first-served basis, but first-come, first-served will stiff bond holders and will clearly disrupt financial markets.) Perhaps this uncertainty should have been cleared up through litigation ex ante, although this would empower the Supreme Court to issue an opinion designed to advantage the Republicans. In any event, although there is a lawsuit in process, it is far from clear that the legal uncertainty will be resolved before the limit is reached.
So where are we?
Where does this leave us? I’m not sure.
In the long run the only solution to our debt accumulation problems is to develop a bipartisan national consensus on fiscal policy. Obviously, this is impossible in the present moment. I will discuss this in future posts.
Given the current situation, I tend to agree with Ezra Klein that announcing an intention to resort to unconventional methods is politically risky. So is refusing to negotiate, at least without a compelling explanation that most voters can understand. Biden and the Democrats are supposed to be our non-crazy political party. As I have previously suggested, I do not think that arguments about hostage taking etc. are compelling to voters, and voters may well blame Biden if he refuses to negotiate and a debt default triggers a severe recession. It may not be fair, but politics ain’t beanbag.
As I have previously argued, the best way to refuse to negotiate on the terms House Republicans have proposed is to offer to negotiate over the future of Social Security, Medicare, and Medicaid. But this train has probably left the station. Given where we are today, the best bet is to agree to negotiate and compromise, but insist that spending cuts must be matched with tax increases on the wealthy dollar-for-dollar and to fight for cuts that reflect democratic priorities. Negotiations on these terms might well fail, but the Democrats would have a solid case that any breakdown was due to Republican intransigence. This might force Republicans to pass a clean increase or allow Biden to blame Republicans for his unconventional measures (if he takes them) and for any economic harm that results from their intransigence.
Finally, suppose that Biden believes the best response – the least unconstitutional option, and the least economically damaging – to a failure to raise the debt ceiling is to simply ignore the debt ceiling. This is the Dorf/Buchanan position. In this case the President could announce that if the debt limit is reached he will keep issuing debt to fulfill his obligations under Congressional tax and spending statutes, because in his judgment this is the constitutionally required solution. However, to be gentlemanly and bipartisan about it, he could say that he would consider defaulting on the debt if Republican leaders of the House and Senate ask him to do so in writing.
Some history from the last debt ceiling crisis: 2011 United States debt-ceiling crisis – Wikipedia The issue would be for unfunded programs. Medicare and Social Security are funded for many years to come
The ongoing political debate in the United States Congress about the appropriate level of government spending and its effect on the national debt and deficit reached a crisis in 2011 that was centered on raising the debt ceiling, which is normally raised without debate. The crisis led to the passage of the Budget Control Act of 2011.
The Republican Party, which gained control of the House of Representatives in January of 2011, demanded that President Obama negotiate over deficit reduction in exchange for an increase in the debt ceiling, the statutory maximum of money the Treasury is allowed to borrow. The debt ceiling had routinely been raised in the past without partisan debate or additional terms or conditions. This reflects the fact that the debt ceiling does not prescribe the amount of spending, but only ensures that the government can pay for the spending to which it has already committed itself. Some use the analogy of an individual “paying their bills.”
If the United States breached its debt ceiling and were unable to resort to other “extraordinary measures”, the Treasury would have to either default on payments to bondholders or immediately curtail payment of funds owed to various companies and individuals that had been mandated but not fully funded by Congress. Both situations would likely have led to a significant international financial crisis.
On July 31, two days prior to when the Treasury estimated the borrowing authority of the United States would be exhausted, Republicans agreed to raise the debt ceiling in exchange for a complex deal of significant future spending cuts. The crisis did not permanently resolve the potential of future use of the debt ceiling in budgetary disputes, as shown by the subsequent crisis in 2013.
The crisis sparked the most volatile week for financial markets since the 2008 crisis, with the stock market trending significantly downward. Prices of government bonds (“Treasuries”) rose as investors, anxious over the dismal prospects of the US economic future and the ongoing European sovereign-debt crisis, fled into the still-perceived relative safety of US government bonds. Later that week, the credit-rating agency Standard & Poor’s downgraded the credit rating of the United States government for the first time in the country’s history, though the other two major credit-rating agencies, Moody’s and Fitch, retained America’s credit rating at AAA. The Government Accountability Office (GAO) estimated that the delay in raising the debt ceiling increased government borrowing costs by $1.3 billion in 2011 and also pointed to unestimated higher costs in later years. The Bipartisan Policy Center extended the GAO’s estimates and found that delays in raising the debt ceiling would raise borrowing costs by $18.9 billion.
If they are after SS and Medicare, they are after the funding in which to pay for the deficit Republicans created.
I did not think this article had this many links. Sorry . . .
It’ll be settled next year, if we are still around.
Just be ready for the Second Coming.
I find myself unable to understand why hitting the debt ceiling should have any impact on Social Security payments. The Treasury already owes Social Security the entire balance of the trust fund. Paying off those Special Treasuries requires new debt of exactly the same amount as is being paid off and therefore has zero impact on debt with respect to the debt ceiling. Sending out the checks is covered by the trust fund.
Are they just saying that we cannot change who owns our debt because of the administrative cost of creating new debt? That would not come under the category of sensible prioritization.
I agree. The money is there. So why threaten the oldsters? Unless it is to scare them so as to react. The treasury could issue new bonds.
1996 Law Could be Debt Limit Escape Hatch for Social Security
A 1996 law provides an escape clause from the debt limit that allows ((requires?) the Treasury Department to pay Social Security benefits, along with Medicare payments, even if there is a delay in raising the debt ceiling.
… A 1996 law provides an escape clause from the debt limit that allows the Treasury Department to pay Social Security benefits, along with Medicare payments, even if there is a delay in raising the debt ceiling. It allows for the Social Security and Medicare trust funds to be drawn down to keep those benefits flowing until the debt limit is raised, while prohibiting those funds from being used to pay for any other government programs.
“There is a legal authority and it arguably should be used to make sure benefits are paid,” said Steve Robinson, chief economist for the bipartisan Concord Coalition, which advocates for fiscal discipline. Robinson, who wrote a paper this week to highlight the issue, said the debt limit must still be raised to enable the Treasury to pay all its bills. …
Is it possible that the Trust Fund is book kept as an asset so that it is not considered a net debt, but redeeming it moves the asset off-balance sheet? Example: Trust Fund owns $100 of US debt but federal government “owns” the Trust Fund, so net $0. Tomorrow, Treasury sell $100 of debt to private creditor A, sends the proceeds to Social Security to buy back their bond, but Social Security sends the money to private beneficiary B. Treasury was a pass through from A to B of $100 cash, but is now has another creditor for $100 and no offsetting asset. Is this possibly the accounting?
It is an asset having a numerical amount of dollars backing the programs the same as a platinum coin. The theory is the same. You print money based upon the asset. To think there are boxes of funds sitting to be drawn upon is fallacy.
Of course, but that is not my point. Does the Treasury consider debt in the hands of a trust fund whose end beneficiaries are private entities part of the public debt or not? I infer you don’t know either and I figure Dale or another here probably would.
Per the latest report the Trust Fund balance at start FY2023 was $2.83 trillion. The report says that non-disability part of this will exhaust in 2034 to 2035. Not sure how much is for disability versus old age or supplements. If we believe what Dale says about this being workers money, then this ought to be viewed as public debt….when SSA goes to Treasury and says that they are not rolling-over the next $2 billion of maturing debt, Treasury must give them the $2 billion, right?
There is no piggy Bank. The treasury electronically transfers a credit to your account and draws down the balance of the TF. It is funds taken from each person and placed is special treasuries which draw interest.
The Treasury web site says that the trust fund is included in the debt ceiling.
Are Social Security Benefits at Risk?
401KSpecialist – May 2
… plenty of uncertainty surrounding whether or not Social Security payments could be delayed…
Some say Social Security payments will not be impacted because of a debt limit impasse due to an “escape clause” in the form of a 1996 law that allows the Treasury Department to pay Social Security and Medicare benefits even if there is a delay in raising the debt ceiling.
The clause allows for the Social Security and Medicare trust funds to be drawn down to keep benefits flowing until the debt limit is raised, while prohibiting them from being used to pay for other government programs.
Steve Robinson, chief economist for the bipartisan Concord Coalition, which advocates for fiscal discipline, wrote an issue brief in February on the issue. Robinson served as a senior policy advisor in the Social Security Administration from 2018 to 2021.
“The government’s cash-flow is simply too variable and uncertain from day-to-day to adopt any rational payment policy other than delay payments until sufficient funds become available. As a result, some observers have concluded that monthly Social Security benefits are also at risk of being delayed,” Robinson wrote. “But this conclusion overlooks a provision of current law that permits the disinvestment of the Social Security trust funds when necessary to pay benefits.”
As long as there is a positive balance in the Social Security trust funds, Robinson wrote that the Treasury Secretary has both the authority and the obligation to pay Social Security benefits. …
McCarthy, Bracing for Defections, Eyes a Fraught Path to a Debt Limit Deal
NY Times – May 23
Speaker Kevin McCarthy is attempting a difficult balancing act as he tries to extract spending concessions from President Biden in exchange for raising the debt ceiling: cobbling together a deal that can win the votes of a majority of Republicans without alienating the critical mass of Democrats he would need to push it through the House.
Hard-right Republicans have fueled the debt-limit standoff by demanding deep spending cuts as the price of averting a default, and they are all but certain to oppose any compromise. That means that Mr. McCarthy, a California Republican, would need the support of a solid bloc of Democrats in the closely divided chamber.
The political reality is weighing on both Republicans and Democrats in the debt-limit talks, which continued Tuesday on Capitol Hill with no sign of imminent resolution. Mr. McCarthy and Mr. Biden are weighing compromises that would likely result in losing the votes of both the hard left and right flanks in Congress, meaning they would need to assemble a coalition of Republicans and centrist Democrats to back any final deal to avert a default.
The strategy carries steep political risks for Mr. McCarthy, who won his post earlier this year after a bruising 15 rounds of votes in part by promising to elevate the voices of his most conservative lawmakers — and agreeing to a snap vote to oust him at any time. He can afford to lose conservatives’ votes on the debt ceiling, but if he strikes a deal that angers them too much, he could be out of his job. …
“My conservative colleagues for the most part support Limit, Save, Grow, and they don’t feel like we should negotiate with our hostage,” said Representative Matt Gaetz, Republican of Florida, who was one of Mr. McCarthy’s chief detractors during his fight for the speakership. Mr. Gaetz was referring to the bill the House passed last month that would cut government programs by an average of 18 percent over a decade in exchange for raising the debt limit.
The dynamic has complicated the task of finding a palatable agreement, placing negotiators on a precarious legislative seesaw. If they impose tighter work requirements for public benefit programs to win over Republicans, for instance, they risk losing too many Democrats. If they tip the compromise toward Democrats by dialing back the spending cuts, they risk alienating Republicans. …
… Mr. Gaetz said the knowledge that (McCarthy) could lose his post at any moment has kept pressure on the California Republican to do the right thing.
“The one-person motion to vacate has given us the best version of Speaker McCarthy,” Mr. Gaetz said.
There are risks for Democrats, too.
In both the House and the Senate, liberals have balked at the White House’s openness to negotiating with Republicans on imposing stricter work requirements on programs like Temporary Assistance for Needy Families and food stamps, as well as the idea of cutting federal spending. Some progressives have urged Mr. Biden to stop negotiating with Republicans and avoid default by invoking the 14th Amendment.
Representative Hakeem Jeffries of New York, the Democratic leader, complained on Monday night after Mr. Biden and Mr. McCarthy met at the White House that House Republicans were attempting to foist “extreme proposals” on lawmakers and the public.
“They keep going back to work requirements, which are extreme. They keep going back to 10-year or multiyear spending caps,” Mr. Jeffries said. “These are all extraneous things that are moving in the wrong direction.”
Representative Pramila Jayapal of Washington, the chairwoman of the Progressive Caucus, urged Mr. Biden to hold the line against Republican pressure or face significant backlash both from Democrats in Congress and from millions of voters.
“The president needs to continue to stay strong because otherwise there will be a backlash from people just losing faith that government cares about them,” she said.
How a speaker of the House can be ousted with a ‘motion to vacate’
NBC News – Jan 10
In his bid to become speaker of the House, Rep. Kevin McCarthy agreed to a number of concessions to secure the support of Republicans who originally opposed him. One was a rule change to allow just a single member to try to force him from office.
Under the new House rules passed Monday, only one member of Congress — Democrat or Republican — is needed to bring a “motion to vacate,” which forces a vote on removing the speaker. That would need only a simple majority of the House to pass to oust McCarthy. …
(Of course, it would seem that if one GOP member ousts McCarthy, a gang of Dem centrists could convene to put him back in office again. It could happen!)
Maybe one Dem member could just throw the House into utter chaos by ousting McCarthy. Not that I am suggesting anyone consider doing so, if he doesn’t become more receptive to Dem requisites.
Bloomberg – just in
McCarthy, Graves Signal Impasse in White House Debt Talks
House lawmakers preparing to leave Washington on Thursday
Votes on any deal likely pushed until just before deadline
House GOP Negotiator Signals Impasse in Debt Talks
Republican Representative Garret Graves, one of House speaker Kevin McCarthy’s chief negotiators, suggested that the two sides were at a standoff in the debt talks.
Speaker Kevin McCarthy left the US Capitol late Tuesday afternoon saying the two parties had yet to reach a deal to avert a first-ever US default, and a top lieutenant said there are no more meetings planned.
Republican Representative Garret Graves, one of McCarthy’s chief negotiators, suggested just hours after a two-hour meeting in the Capitol with his White House counterparts that the two sides were at a standoff.
Speaker Kevin McCarthy left the US Capitol late Tuesday afternoon saying the two parties had yet to reach a deal to avert a first-ever US default, and a top lieutenant said there are no more meetings planned. …
For a Way Out of the Debt Crisis, Look to the Civil War
NY Times – May 24
The looming American debt crisis is politically contrived. The Treasury could borrow all it needed if the Republican majority in the House acted responsibly and raised the debt ceiling.
But the notion that if the House fails to come to agreement the United States faces a default on its debt has been accepted far too casually, partly because Janet Yellen, the Treasury secretary, has been vague about whether interest payments would be maintained.
In fact, were the government to run short of cash, the Treasury should manage the shortfall by prioritizing interest payments and reducing funding on ordinary budget items such as national parks, the military and education. This would be painful, and possibly extralegal, but it would be the best of bad options. Responsible nations honor their debts.
There is a historical precedent: The Civil War Congress faced a similar choice. President Abraham Lincoln and Republicans in Congress recognized that preserving America’s credit was the key to financing the Civil War, and therefore to the government’s continued health and existence. President Biden and Secretary Yellen should heed their example. …
Of course, much has changed since the Lincoln era. Importantly, in early 1862, the United States faced an actual financial crisis. As it became clear that the war would be longer (and bloodier) than expected, its cost quickly surged to $1 million and then $2 million a day, a level that would exhaust the government’s annual revenue base in only a month.
The only seeming solution was to borrow, but America’s credit was not held in high regard. The U.S. had recently agreed to 12 percent interest (a high rate that was an expression of investor mistrust) — and even at that rate, offers of loans were scarce. In 1861, Lincoln’s Treasury secretary, Salmon P. Chase, dispatched an emissary to England and continental Europe to scope out interest in loans; the response was poor. The Economist smugly reported, “It is utterly out of the question, in our judgment, that the Americans can obtain, either at home or in Europe, any thing like the extravagant sums they are asking, for Europe won’t lend them; America cannot.” Unlike today, when the dollar is treated as a reserve currency, the United States could not simply print paper and expect the world to accept it.
But in December of that year, when America’s banks ran out of gold to lend to the Treasury (which had been supporting the war over its first months), the 37th Congress proposed to do just that: print paper. With neither private banks nor the government possessing enough gold to finance the war, Congress proposed a revolutionary expedient: “legal tender”— paper money — supported only by the full faith and credit of the U.S. government, not by gold. It would be money by government fiat, standard today but novel in 1862.
The notion of a paper money standard was shocking, including to many Republicans in Congress. As one had put it, paper could not be money any more than a contract to deliver flour was flour itself; it was only a promise to deliver the real thing.
Such philosophical qualms were trumped by the emergency: The Treasury was running out of cash. Congress nonetheless recognized that most of the war’s expenses would have to come from borrowing. Had the country simply printed money to cover the entire budget, it would have risked a ruinous inflation, as would indeed occur in the Confederacy. Therefore, Congress limited the issue of legal tender paper notes to $150 million (later it would authorize two more issues). But it still faced a dilemma: how to print legal tender and preserve the nation’s fragile credit? …
… After the war, the 14th Amendment to the Constitution (stipulating that the validity of the public debt of the United States “shall not be questioned”) implicitly treated the debt as sacrosanct.
Today, when the Treasury market is vastly larger and more central to the world economy, preserving America’s credit is even more important. Hopefully, the debt ceiling will be raised and the crisis fabricated by House Republicans will be averted.
If not, Secretary Yellen could meet the Treasury’s debt service obligations by reducing other funding. In April, for instance, government receipts were $639 billion, compared to $62 billion in interest payments. According to the Bipartisan Policy Center, revenue expected in June will be enough to cover 80 percent of projected spending that month. Clearly, something will have to give, and some government services might be suspended. Even temporary cuts to ordinary budget items would be painful. With a recession potentially in the wings it could be extremely painful.
But as the 37th Congress recognized, the United States has a paramount interest in preserving its long-term ability to borrow. President Biden and Secretary Yellen should be guided by their example.
Roger Lowenstein is the author of “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War.”
Salmon P Chase, Lincoln’s Treasury Secretary, and prior to that a leading abolitionist, was not a financier by any means, but had much to do with Civil War financing. Chase Bank was named for him, but he had nothing to do with its establishment. After serving as Treasury sec, Chase was appointed Chief Justice of the Supreme Court.
Wikipedia: During the Civil War, Chase served as Secretary of the Treasury in President Lincoln’s cabinet from 1861 to 1864. In that period of crisis, there were two great changes in American financial policy: the establishment of a national banking system and the issue of paper currency. The former was Chase’s own particular measure. He suggested the idea, worked out the important principles and many of the details, and induced the Congress to approve them. It secured an immediate market for government bonds and provided a permanent, uniform, and stable national currency. Chase ensured that the Union could sell debt to pay for the war effort. He worked with Jay Cooke & Company to successfully manage the sale of $500 million in government war bonds (known as 5/20s) in 1862. …
Default on US Debt Risks ‘Permanently’ Denting Nation’s Credit Rating
NY Times – May 24
If the U.S. government defaults on its debt even for just a few hours next week, it could have long-lasting consequences for the nation’s future. Three major ratings companies — S&P Global Ratings, Moody’s and Fitch Ratings — play a big role in how damaging those consequences can be.
Because the financial fallout of a default would be severe, the agencies expect lawmakers to come to an agreement before the government runs out of cash to pay its bills, which could happen as early as next month. But if the government ends up missing a debt payment, all three companies have vowed to lower the rating of the United States as a borrower, and they may be reluctant to restore it to its previous level, even if a deal is reached soon after the default.
The United States has never deliberately reneged on its debt in the modern era, but even a brief default would alter the perception of debt-ceiling brinkmanship as political theater and turn it into a real risk to the creditworthiness of the government, Moody’s has warned.
“Our view is that we would need to reflect that permanently in the rating,” said William Foster, the lead analyst for the United States at the rating agency. The agency has said that if the Treasury Department misses one interest payment, its credit rating would be lowered by a notch. For the United States to regain its previous top rating, according to Mr. Foster, lawmakers would have to significantly alter the debt limit or remove it entirely. …
Matt Gaetz Admits Republicans Are Holding America “Hostage” Over Debt Ceiling
New Republic – May 23
On Tuesday, Gaetz told Semafor’s Joseph Zeballos-Roig that his “conservative colleagues for the most part support Limit, Save, Grow, and they don’t feel like we should negotiate with our hostage.” …
According to Gaetz, the Republicans are still steadfast in their position that they will only agree to raise the debt ceiling—something they did three times under twice-impeached … former President Donald Trump—if Democrats agree to cut all these programs that millions of Americans benefit from. …
Potential Debt Ceiling Deal Would Barely Change Federal Spending Path
NY Times – May 24
Negotiators have focused on a relatively small corner of the budget, shunning new revenues or cuts to the fastest-growing programs.
As their debt limit negotiations with President Biden push the nation perilously close to a devastating default, House Republicans have stuck to a clear message: They must force a change in what they call the nation’s “unsustainable” spending path.
Yet in talks with Mr. Biden, Speaker Kevin McCarthy and his lieutenants have focused almost entirely on cutting a small corner of the budget — known as nondefense discretionary spending — that includes funding for education, environmental protection, national parks, domestic law enforcement and other areas. That budget line accounts for less than 15 percent of the $6.3 trillion the government is expected to spend this year. It is not outsized, by historical standards. It is already projected to shrink, as a share of the economy, over the next decade.
And it has nothing to do with the big drivers of projected spending growth in the coming years: the safety-net programs Social Security and Medicare, which are facing increasingly large payouts as the American population ages.
Those politically popular programs have been deemed off limits in the current talks by Republicans, who came under heavy criticism from Mr. Biden for even entertaining changes that could raise the retirement age for those programs or make other changes to slow their future spending. …
Republicans have also refused to entertain cuts to military spending, which is nearly as large as nondefense discretionary spending. As a result, the negotiations are almost certain not to produce any agreement with Mr. Biden that would dramatically alter the course of federal spending in the next decade.
Instead, they would concentrate budget cuts on education, environmental protection and a host of other government services that fiscal experts say are nowhere close to being primary sources of spending growth in the years to come.
For instance, if Republicans could somehow persuade Mr. Biden to accept the full round of discretionary spending cuts contained in the fiscal bill the House passed last month, it would do little to alter the nation’s overall spending trajectory over the next decade. Those cuts would reduce federal spending by about $470 billion in 2033 and likely save about $100 billion that year in borrowing costs, according to the Congressional Budget Office.
Total government spending would then be just under 24 percent of the economy — or nearly exactly what it is today.
While those cuts might not make much of a dent in the overall budget, they would still be felt by many Americans. Because the cuts would be so contained to one segment, many popular government programs would shrink by as much as 30 percent under that scenario, White House officials and independent analysts have calculated. …
McCarthy says debt ceiling standoff ‘not my fault,’ as White House warns of economic risks
AP – just in
A defiant House Speaker Kevin McCarthy said Wednesday the debt ceiling standoff was “not my fault” as he sent Republican negotiators to the White House to finish out talks, but warned the two sides need more time as they try to reach a budget deal with President Joe Biden.
McCarthy said he remained optimistic they could reach an agreement before a deadline as soon as next week, when the Treasury Department could run out of cash to pay its bills. Financial markets are teetering as Washington edges closer to a debt default crisis that would be unprecedented in modern times, sending shockwaves around the globe. …
“We’re not going to default,” McCarthy, R-Calif., assured. …
The Republican speaker said the negotiators “made some progress” at the White House. “I want to work as hard as we can and not stop.” …
Time is short to strike a deal. Treasury Secretary Janet Yellen said Wednesday that “it seems almost certain” that the United States would not make it past early June without defaulting. That would be catastrophic, as the government risks running out of cash to pay its bills as soon as June 1. …
“We are seeing some stress already in Treasury markets,” Yellen said at a Wall Street Journal event.
Failure to raise the nation’s debt ceiling, now at $31 trillion, would risk a potentially chaotic federal default, almost certain to inflict economic turmoil at home and abroad. Anxious retirees and social service groups are among those making default contingency plans.
While Biden has ruled out, for now, invoking the 14th Amendment to raise the debt limit on his own, Democrats in the House announced they have all signed on to a legislative “discharge” process that would force a debt ceiling vote. But they need five Republicans to break with their party and tip the majority to set the plan forward.
Dragging into a third week, the negotiations over raising the nation’s debt limit were never supposed to arrive at this point. …