Normal Politics Resolved the Debt Ceiling Crisis

It was stupid but it worked.

Dear readers,

Back in January, I wrote that “normal fiscal politics can resolve the debt ceiling crisis,” and that has proved true. But we didn’t get to this resolution in quite the way I expected.

Contrary to President Biden’s pledge not to negotiate on the issue, I said that he would in fact negotiate, and the way we’d ultimately raise the debt ceiling was by tying the increase to a broader deal with Republicans on government spending levels. That turned out to be the case.

But all year, I’ve fixated on the timing mismatch — we were going to hit the debt ceiling in the summer, and without the pressure of the September 30 end-of-the-fiscal-year deadline, I didn’t think it was likely the parties could reach a spending deal before then. So I thought it was very important to either get a short-term debt limit extension or develop some extra-extraordinary measures to stretch the government’s borrowing authority out toward the end of the year. Instead, the outcome was much more simple — once President Biden agreed to start a one-on-one negotiation between his top staff and Speaker Kevin McCarthy’s designated lieutenants, the two sides hammered out an agreement pretty quickly, which then passed with an overwhelming bipartisan majority.

Which is to say, Joe Biden continues to be very good at working with both parties in Congress. I think Matt Yglesias, as he addresses here in point 16, has the correct broad diagnosis of why: while Barack Obama was too interested in winning arguments — showing Republicans why they shouldn’t hold the positions they do — Biden simply takes Republicans’ priorities as they are and figures out what those priorities mean for how they can reach mutually agreeable compromise. It’s not as emotionally satisfying as the Obama approach, but it’s a lot more productive.

In this specific case, it also seems clear that OMB Director Shalanda Young was instrumental in sealing the deal. Young was a top staffer for House Democrats on the Appropriations Committee before she joined the White House, and she’s one of the few Biden officials who I’m constantly seeing praised in the press by Republican members of the House. Biden has deep personal relationships in the Senate that were very important when Senate Republicans were his primary legislative obstacle, but he had no real pre-existing relationship with McCarthy, and House Republicans are a more partisan bunch than Senate Republicans, so I thought the prospects for effective dealmaking with Republican House leadership looked pretty grim. Instead, House Republicans were more reasonable and more interested in compromise than I expected, and the White House was more effective than I expected in working with them, apparently in large part due to Young.

I remain a little surprised that Republicans were willing to take a deal on these terms, with an overwhelming majority of the House conference voting yes. There is a funny interpersonal dynamic here — until about a month ago, Democrats and the press alike were entirely dismissive of Kevin McCarthy. It seemed like a lot of Democrats had not come to terms with the fact that Republicans now run the House, and that there would therefore have to be a significant spending cut deal this year — if not attached to the debt limit hike, then later in the year when the fiscal year ends and new spending bills must be passed. I knew the spending cuts were coming, but I was still dismissive of McCarthy’s skills and did not believe he could corral 218 of his members to pass any debt limit proposal.

Of course, he did so in late April — an impressive legislative feat before his later impressive legislative feat of aligning his conference behind the final bipartisan agreement. I am now significantly more impressed with McCarthy than I used to be. And I think it’s not a coincidence that, once House Republicans started to feel more respected, they became more willing to deal — they had their seat at the table now, and this was a way to use it and pocket a win in the form of a material (but not crazy!) amount of real-terms spending reductions for the next two years.

Dall-e image generation for “normal but stupid”

As for the substance of the deal itself, it broadly seems fine to me. Fiscal austerity is economically appropriate — cutting spending will tend to push inflation downward and take pressure off the Federal Reserve to raise rates. Resumption of paused student loan payments, which the deal requires later this year, will also tend to push downward on inflation. This is not like 2011, when spending cuts just tended to depress output and employment; Biden will not pay an economic-political price for this deal.

The structure of the fiscal austerity is not ideal. Instead of focusing just on discretionary spending restraint, I would rather have seen a modest broad-based tax increase, some long-term adjustments to entitlement programs, and more efforts to control health care costs. The amount of austerity is also insufficient. We’re going to have to come back for more deficit reduction later in order to achieve better results on interest rates and inflation.

The law also leaves two big open questions for this year. While it sets overall spending targets, it does not set the details of that spending, so Congress will ultimately have to pass appropriations bills fleshing out where the total amount of allowable spending actually goes. If they don’t do that, we’ll instead get the “meat-ax”: an across-the-board, 1% cut to all discretionary spending, including the military and veterans’ programs. This policy is supposed to be undesirable to both parties and thus create pressure to pass a more thoughtful spending agreement later. Of course, that was the theory with the Budget Control Act of 2011 — that law created a “supercommittee” charged with producing a deficit reduction package in order to avoid sharp “sequestration” spending cuts to defense and non-defense programs alike. Intended to be unthinkable, sequestration proved to be quite thinkable and was actually implemented (for a couple of years) after the supercommittee deadlocked.

The White House has been pointing out to allies and the press that the “meat-ax” would actually produce more spending on domestic programs (and less on the military) than is contemplated in the framework agreement just enacted, and that’s why they are confident they’ll be able to work out a detailed spending deal later this year that protects Democratic priorities. Republican defense hawks will be even more afraid of the meat-ax than Democrats are. That sounds plausible, but we’ll see soon enough.

The other major open question for this year is permitting reform. There were some modest changes included in the law the president signed this weekend — plus a specific provision expediting the Mountain Valley Pipeline, a priority for Sen. Joe Manchin — but both Republicans and Democrats still have major unmet objectives on permitting. This is an area where there is significant bipartisan agreement because both parties are interested in adding new energy infrastructure, and where there is an obvious path toward a deal because Republicans’ and Democrats’ priorities are generally not mutually exclusive — you can construct a deal by making it simultaneously easier to build fossil fuel projects and renewable and electrical transmission projects. Given the success in putting this agreement together, I’m more hopeful than I was that we’ll get a fuller permitting reform later this year too.

And then one last open question I want to highlight won't be answered until 2025. That is when many of the provisions of the 2017 Trump tax cuts will expire. Assuming there is divided government in 2025, it will be necessary to reach a bipartisan agreement on which of those provisions to extend, amend, or sunset. As was the case with the expiration of the Bush tax cuts in 2012, this will provide an opportunity for Democrats to reshape the tax code in a more progressive direction — that time around, they generally canceled Bush’s tax cuts for the very highest earners while keeping the rest of the cuts in place. Assuming we remain in a similar macroeconomic environment in 2025 — with a robust job market and elevated inflation — this will provide a good opportunity to further reduce the deficit. That austerity should include tax increases, to be achieved by renewing the 2017 tax cuts only in part. It could also include entitlement reforms, especially if entitlement reforms help Republicans get on board with a package with significant new revenues.

And as always, I agree with the commentators who say we should abolish the debt ceiling. Even though raising it worked out okay this time (and the previous 103 times) this is not a good way to conduct fiscal negotiations, and the debt limit serves no real policy purpose since federal borrowings are already controlled by the statutes that set tax and spending policy. But I do not think it is likely we will abolish the debt ceiling before 2025, when it will next need to be raised, so I would encourage the Treasury Department to lay some of the groundwork it would need if it has to deploy debt limit management strategies like premium bonds in the future.

Very seriously,

Josh