I'm currently in Los Angeles for the Milken Institute Global Conference, where I'm moderating a couple of economy-related panel discussions that will be available for you to watch at the links below.
Today, I'll be moderating a panel on the global economic outlook at 5:30pm Eastern. And tomorrow at 2:30pm Eastern, I'll be moderating a panel called "Countdown to Default: How To Stop Worrying About A Debt Crisis and Achieve Fiscal Sustainability.” I think you’ll especially enjoy that session — the panelists are Rep. Brendan Boyle (D); Mick Mulvaney, former White House Chief of Staff and former director of the Office of Management and Budget; Maya MacGuineas, president of the Committee for a Responsible Federal Budget; and Alan Schwartz, executive chairman of Guggenheim Partners. It’s very timely in light of the news that the debt limit deadline is coming sooner than expected, maybe in early June.
The need to avert a debt limit crisis is also the subject of today's newsletter.
Fights over the debt limit are stupid in several ways, but I want to focus on one of them today: The political redundancy of the debt limit.
It’s well covered that the debt limit is redundant as a policy matter: Congress limits the amount of federal spending through laws creating mandatory spending programs and laws appropriating funds, it sets tax policy through laws, and those laws govern how much money the government must borrow.As a political matter, we’re fighting over whether the need to raise the debt limit should be used as leverage to extract policy concessions. My main point today is that leverage exists independent of the debt limit: Republicans control one house of Congress, and bills to fund government operations next year can’t pass without their consent. They are free to tie demands to the passage of those bills — including demands about mandatory spending or other policies not directly addressed in appropriations bills.
So on one hand, the fight over the debt limit is very important: If the debt limit doesn’t get raised in time, we may face an economic crisis associated with a default on government bonds. On the other hand, the fight over the debt limit isn’t important at all: If it’s removed as a lever, Republicans still retain the ability to force Democrats to the table to cut spending. This redundancy is the reason that debt limit increases so often are tied to agreements over spending. As I’ve written repeatedly, it’s not true that “negotiating over the debt limit” was an aberration in 2011. It’s happened repeatedly since 1985; it just doesn’t stick out in memory because we’ve rarely gotten so close to default as we did in 2011, and most of those negotiations are just remembered as budget negotiations.
This is why I’m eager for the fiscal negotiation to start: It has to happen sooner or later, and it can help bring the necessary debt limit increase along.
An ongoing negotiation provides a reason to delay the crisis
I wrote two weeks ago about a debt limit-related proposal from Reps. Josh Gottheimer (D) and Brian Fitzpatrick (R), the co-chairs of the bipartisan Problem Solvers Caucus (here’s the proposal; and here’s my piece about it).
The proposal has four parts, but the first part is the most important one in the short term: A clean, temporary suspension of the debt limit through the end of the calendar year, which would give Congress a few extra months to work out parts two through four, which have to do with reaching spending agreements for next year and for several years to come after that.
The proposal for a temporary suspension reflects a problem with this year’s legislative calendar: The deadlines are in the wrong order. Spending agreements are usually reached after the October 1 start of the fiscal year — this past year’s got done in December — but we’re likely to breach the debt limit well before the start of the next fiscal year. It would be a lot better if the debt limit deadline were a few months later, and so the Problem Solvers’ first idea is simply to move the deadline back, and tie a longer-term debt limit increase to reaching an agreement on spending before the end of the calendar year. This timing issue is all the more urgent now that both the Treasury Department and the Congressional Budget Office say that — due to lower-than-expected April tax payments — we’re likely to hit the debt limit in early June, not sometime in July.
Officially, neither the White House nor congressional Republicans want a short-term extension. The White House is demanding a clean debt limit increase that extends past the next presidential election, and says the budget and appropriations process should proceed “separately” from that. House Republicans want what was in the bill they passed last week — sharp, multi-year spending caps baked into a debt-limit increase bill that doesn’t even go halfway through next year.
But neither of those things is going to happen, and they’re especially not going to happen in the next month. Both sides will need to come together and agree on a shorter-term fix. And to make it palatable to Republicans, it will have to be seen as a bridge to a more substantive budget negotiation — something that is contemplated in the Gottheimer-Fitzpatrick plan.
There will be spending cuts
The inevitability of that negotiation — and of the spending cuts it will produce — is an area where I think a lot of Democrats have been in denial. Democrats are focused on the idea of “no negotiating over the debt ceiling,” and it’s possible the eventual set of agreements will be structured in such a way that they can deny they ever did that, but there will, in any case, be a very consequential negotiation over future spending that’s likely to produce significant cuts from last year’s spending level, especially in real terms.
With House Republicans at the negotiating table (unlike last year, where the spending negotiations were bipartisan but only included Senate Republicans) there won’t be political agreement on a deal without spending cuts. The macroeconomic environment, with inflation persistently high and interest rates having risen sharply, calls for deficit reduction — something that likely wasn’t actually provided by the Inflation Reduction Act, because that law’s green tax credits are looking much more expensive than forecast. And, as proposed by Gottheimer and Fitzpatrick, some sort of caps on spending beyond Fiscal Year 2024 are likely to both help gain political agreement for a debt-limit increase and send the right economic signals about the path of future budget deficits, since it won’t be practical to set the budget on a more sustainable path in just one year.
Of course, not all Democrats are in denial about this. As The New York Times notes, this is understood inside the Biden administration, at least by some officials:
White House officials concede that Mr. Biden will have to convene negotiations with congressional leaders over taxes, spending and debt before the government runs out of money to pay its bills. In recent days, the president has suggested an openness to talk fiscal issues with Republicans, with the wink-nod stipulation that they have nothing to do with the borrowing limit…
Some administration officials privately suggest that a more modest version of spending caps, lasting for a few years at most, could plausibly form the centerpiece of an agreement to continue funding the government and raise the borrowing limit.
So, that’s good. But I’m not sure Democrats have prepared themselves or their voters for what is sure to feel like a substantial climb-down. If the end result ends up looking anything like what moderate Democrat Rep. Jared Golden (D) has proposed — splitting the difference between Biden’s budget and the Republican plan to get a material-but-not-drastic cut in real discretionary spending both next year and the following year — I think that’s going to feel like a loss compared to what Democrats are energized for.
Meanwhile, the question for Republicans is: What they can bring themselves to call a victory? On some level, I think the passage of last week’s bill was a hopeful sign — it shows the party is very motivated to get to the negotiating table. I don’t buy the idea that market turmoil will cause Republicans to capitulate and pass a clean debt limit increase that runs for nearly two years. I think it’s likelier that the threat of imminent non-payment could make it possible for both houses of Congress to pass one or more short-term debt limit increases or suspensions — the model during the 1995-6 crisis — in order to create space for a negotiation. But ultimately, to get a longer agreement, you’d need something that helps Republicans feel they’ve gotten something out of their majority.
To be clear, the debt limit aspect of this is all quite stupid. It would be better if we did not have a debt limit law, because it creates the risk of a crisis due to non-payment on debt — and it would be good, when Democrats next have unified control, if they repeal it. Indeed, the argument that the debt limit should be raised routinely and without conditions is the same as an argument that the law serves no purpose and should be repealed.
What I’m more skeptical of is the idea that the debt limit is the reason we got sharp spending cuts in 2011 or that we’re likely to get substantial ones this year. In both cases, those cuts will be the result of Republicans winning control of the House and having the power to block spending plans they oppose. They’d do that even if there were no debt limit law. And at least this time, unlike in 2011, the economy is likely to benefit from some fiscal austerity.
Very Serious is a reader-supported publication. Become a free or paying subscriber to receive updates from me and support my work.
Well, except when the executive branch invents a student loan forgiveness program out of whole cloth.
This is an odd framing. It puts budget negotiations *only* in terms of spending cuts, which will be the major concession Democrats have to make.
Where are the tax increases which would be the Republican concession in a budget negotiation? Apparently, already off the table. And why? Because the clear Republican concession in this "budget negotiation" is to agree to raise the debt ceiling and avert a calamity. (Thanks, Republicans!)
In other words, it's still a hostage situation with the Republicans holding the economy hostage.
Regarding the footnote: personally, I find it much more appealing that when Biden/Democratic policies are bad, they're usually bad for a good intention. I know that also sucks, but "let's do policy X so doing what we all thought was the key to success turned out to be stupidly expensive" is at least nice. Ideally, there would also be some kind of policy to address the reasons higher ed is stupidly expensive.