Tuesday, Jun 25, 2024

Biden-McCarthy Debt Ceiling Deal Defuses The Threat Of A Federal Default

 

Despite harsh criticisms from the progressive and conservative wings of their respective parties, President Joe Biden and House Speaker Kevin McCarthy appear likely to gain enough bipartisan support in the House and Senate to pass their compromise bill that would suspend the federal debt limit in time to avoid a potentially ruinous federal government default as soon as June 5, and also implement certain spending cuts and policy changes that have been demanded by a majority of House Republicans.

The debt-ceiling agreement would suspend the borrowing limit for almost two years, until January 2025, two months after the 2024 presidential election. It would impose modest cuts on domestic spending programs favored by Democrats while satisfying Republicans by boosting military spending by about 3%. It also would extend limits on food stamp assistance and other federal social safety net programs to some beneficiaries, while forcing others to find jobs. The deal will also reduce previously authorized IRS spending for hiring new agents, and cut some of the red tape holding up energy-related construction projects across the country, including a long-delayed natural gas pipeline in West Virginia. Also, in accordance with an earlier promise by Speaker McCarthy, the debt ceiling bill would make no changes to current Social Security and Medicare benefits. It would also fully finance medical care for veterans.

The federal government had reached the current $31.4 trillion debt ceiling set by law in January, but the Treasury Department has been using various accounting tricks since then to avoid breaching it.

BOTH PARTIES UNHAPPY WITH THE COMPROMISES

Some Republican conservatives in the House and the Senate have said they would oppose the deal because it doesn’t go far enough to limit federal spending, while some progressive Democrats complain that the spending curbs the deal would impose on domestic programs are too harsh.

In response to the conservative criticism, McCarthy reminded reporters on Capitol Hill that even though the deal “doesn’t get everything everybody wanted, in divided government, that’s where we end up,” and then added, proudly, “I think it’s a very positive bill.”

Earlier, McCarthy had tweeted, “I just got off the phone with the president a bit ago. After he wasted time and refused to negotiate for months, we’ve come to an agreement in principle that is worthy of the American people.”

President Biden also told reporters who asked him about the progressive Democrat critics of the deal, “I think we’re in good shape.”

Similarly, in a written statement the White House issued late Saturday night, as the deal was being publicly announced, Biden said, “The agreement represents a compromise, which means not everyone gets what they want. That’s the responsibility of governing.”

BIDEN’S TALKING POINT BOASTS

Talking points on the deal distributed by the White House that same night also said, “Negotiations require give and take. No one gets everything they want. That’s how divided government works. But the president successfully protected his and Democrats’ core priorities and the historic economic progress we’ve made over the past two years.”

Biden will also be able to boast that the debt ceiling bill leaves untouched the substantial funding increases that his administration has achieved over the past two years for Title I education funding for low-income students, Child Care and Development Block Grants, and cancer research.

One of the Democrat critics of the deal was Congresswoman Pramilla Jayapal of Washington State, who is one of the original members of the liberal “squad” of New York Congresswoman Alexandria Ocasio-Cortez (AOC). Jayapal is also the chairwoman of the progressive caucus in the House. In a CNN interview, the morning after Biden and McCarthy announced their deal, Jayapal at first said that she wanted to read the final text of the debt ceiling bill before deciding whether to endorse it, but then added that the expanded work requirement in return for welfare payments that the Republicans were asking for, was, “absolutely terrible policy,” and would send a signal “to poor people and people who are in need that we don’t trust them.”

GOP CONSERVATIVE COMPLAINTS

On the conservative side, Congressman Bob Good of Virginia and a member of the House Freedom Caucus, wrote on Twitter. “No one claiming to be a conservative could justify a YES vote,” on the debt ceiling deal which has finally emerged.

GOP Congressman Ralph Norman of South Carolina said in a tweet, that the deal McCarthy had struck with Biden on behalf of his fellow Republicans was “insanity.”

Similarly, Republican Congressman Ken Buck of Colorado also wrote on Twitter that he was “appalled by the debt ceiling surrender.”

Republican Congressman Dan Bishop of North Carolina complained that McCarthy hadn’t clawed back enough of the $80 billion that Congress approved last year to modernize the Internal Revenue Service and hire more investigators to harass American taxpayers.

Kentucky Republican Senator Rand Paul was also disappointed with the outcome, writing on Twitter, “No real cuts to see here. Conservatives have been sold out once again!” Or as Republican Senator Mike Lee from Utah asked, “With Republicans like these, who needs Democrats?”

Republican Senator Lindsey Graham of South Carolina was also highly critical of the debt ceiling deal, but for a much different reason. In an interview on Fox News, he called the deal too stingy in its treatment of the military, and demanded more funding, particularly for the U.S. Navy. “I am not going to do a deal that marginally reduces the number of IRS agents in the future at the expense of sinking the Navy,” which urgently needs to build many more warships, Graham said.

But despite the criticism from his Republican colleagues, Speaker McCarthy remained optimistic about getting the bill passed by the House. “More than 95 percent of all those in the [Republican] conference were very excited,” McCarthy said on Fox News, shortly after he had briefed them on the details of the deal. “Think about this,” McCarthy continued. “We finally were able to cut spending. We’re the first Congress to vote for cutting spending year over year.” He also boasted that “We capped so that the president can’t just spend money wildly,” and called the deal “worthy of the American people.”

WINNING RARE PRAISE FROM FORMER SPEAKER GINGRICH

But even though prominent House conservatives, including Norman of South Carolina, and Chip Roy of Texas, have been highly critical of the compromises McCarthy made to finalize the deal with President Biden, former GOP House Speaker Newt Gingrich is far more supportive of the agreement, calling it, in a Fox News op-ed essay, “A historic first step toward shifting government back toward common sense and conservatism.

“It is a step toward creating a smaller government, lower taxes, less regulation, economic growth, prosperity, and more take-home pay. All of this will also strengthen Social Security and Medicare,” Gingrich declared.

Recalling his own experience during his first year as House Speaker in 1995, Gingrich described how he and his fellow Republicans, “step by step, got budget changes, moved from welfare to work, cut taxes, and reduced bureaucratic regulatory overkill. . . They calmly and methodically took a series of steps that moved the government back toward conservatism.” Eventually they prompted Democrat President Bill Clinton to declare during his 1996 State of the Union address that “the era of big government is over,” infuriating many liberal Democrats.

Gingrich then declared that the current McCarthy-Biden “debt ceiling agreement is precisely in the tradition of how we operated [in 1995] to profoundly change Washington. . . By passing the original debt ceiling bill, House Republicans set the stage for a profound shift in the center of gravity in Washington. Suddenly, for the first time in decades, the House Republicans were negotiating with the Democrat president.”

Gingrich also published his own list of 12 talking points to document the Republican victories in the debt ceiling compromise. They include: limits [on] topline federal spending to 1% annual growth for the next six years; clawing back unspent Covid-19 funds, including $400 million from the U.S. Centers for Disease Control and Prevention’s Global Health Fund that would have sent taxpayer money to China; cutting costs with the first significant reform to environmental policy since 1982; restarting student loan repayments and requiring borrowers to be responsible for paying off their student loan debts, and blocking Democrat demands for new taxes and rejecting all $5 trillion of Biden’s proposed tax increases.

BIDEN EXPECTING RELUCTANT DEMOCRAT SUPPORT

On the Democrat side, there was a great deal of unhappiness as well. Democrat Congressman Jim Himes of Connecticut was particularly unhappy with how the Republicans forced Biden into the negotiating process, by effectively taking hostage the full faith and credit of the United States government. Himes also complained that “none of the things in the bill are Democratic priorities, [that are] going to make any Democrats happy.”

But he then added that “it’s a small enough bill that in the service of actually not destroying the economy [it] may get [some] Democratic votes.”

Similarly, House Democrat Minority Leader Hakeem Jeffries said in a CBS News interview, said, “We have to, of course, avoid a market crash. We have to avoid tanking the economy. We have to avoid a default. The reason why we’re in this situation from the very beginning is that extreme MAGA Republicans made the determination that they were going to use the possibility of default to hold the economy and everyday Americans hostage.”

In the end, because neither party wants to be blamed for the default that would result from a failure to pass the debt ceiling bill in a timely fashion, it is likely that the bill will pass by a wide margin in both houses, thanks to strong support from both Biden and McCarthy, and then be signed by Biden into law.

Even though Speaker McCarthy presides over a narrow four-vote Republican majority in the House, with the support of both President Biden and House Minority Leader Jeffries, House Democrats are likely to supply many more votes than needed to compensate for the likely loss of votes from the most conservative members of the House Republican Freedom Caucus.

BIDEN’S EMBARRASSING DEFEAT

The final deal is viewed as something of a political defeat for Biden, because he had initially refused to negotiate on spending levels with McCarthy in return for Republican agreement to support raising the debt ceiling, and then gave in.

Biden’s first mistake was in underestimating McCarthy’s competence to act as an effective House Speaker by maintaining control over the very narrow Republican majority in the House. Now that McCarthy has proved himself by forcing Biden to back down, it sets the stage for the next spending battle this summer over crafting the federal budget on time for fiscal year 2024, which starts in October.

Some progressive Democrats had been urging Biden to call McCarthy’s bluff, by claiming that the 14th Amendment to the U.S. Constitution gives the president the legal power to ignore the debt ceiling and continuing federal borrowing. But Biden had waited far too long to start the debt ceiling negotiations with McCarthy, which made the 14th Amendment strategy too risky, because it could result in the U.S. government going into default while the legal issues over the 14th Amendment strategy was still being litigated in the courts. As a result, the final stage of the bargaining to finalize the debt ceiling deal was negotiated almost entirely on Republican terms.

REPUBLICANS COMPLAIN THAT THE SPENDING CUTS ARE TOO SMALL

On the other hand, the spending cuts in the final deal were much smaller than conservative House Republicans had called for in passing their “Limit, Save and Grow Act,” in late April. It would have raised the debt ceiling for less than one year, instead of two years in the final compromise and it would have imposed hard spending caps on the federal budget for the next 10 years, rather than just two years in the current deal. The final deal also severely limits the expansion of work requirements that Republicans wanted for recipients of food stamps as well as those now benefitting from a federal program called Temporary Assistance for Needy Families.

As a result, the Congressional Budget Office has estimated that while the spending caps and limitations passed by House Republicans in April would have trimmed $3.2 trillion in discretionary federal spending over the next 10 years, according to an initial New York Times estimate, the agreement that was finally reached between Biden and McCarthy would cut just $650 billion during that period instead.

CONGRESS STILL RACING TO MEET A JUNE 5 DEFAULT DEADLINE

The first opportunity for the House to vote on the bill, before sending it to the Senate for its approval, came on Wednesday, because McCarthy had promised to give House Republicans at least 72 hours to review the text of the legislation before casting their votes on the bill. The bill’s timetable in the Senate, however, is much more uncertain, because its opponents from both parties have several parliamentary means at their disposal to delay a final vote, if they choose to do so, beyond the June 5 default deadline now forecast by Treasury Secretary Janet Yellen.

While the Senate can speed up votes if all 100 senators agree to it, conservative Republican Senator Mike Lee had announced, even before the debt ceiling deal was finalized, that he would not agree, and “will use every procedural tool at my disposal to impede a debt-ceiling deal that doesn’t contain substantial spending and budgetary reforms.”

Like most Senate bills, the debt ceiling legislation will be subject to two cloture votes in which the Senate agrees to cut off debate. The first time cloture will come into play is in deciding whether to proceed to an up-or-down vote for the Senate to take up a bill and the second time is to move the bill to a vote on final Senate passage. The process of invoking cloture to end debate and allow a vote to take place, according to current Senate rules, requires a 60-vote supermajority and could add days to the process of passing the debt ceiling legislation.

But even if the final passage of the bill does not quite meet Yellen’s June 5 deadline, the impact on financial markets and the economy is likely to be slight, because the ultimate deal that will solve the debt ceiling problem is already in place.

BIDEN WHITE HOUSE TRYING TO RALLY MODERATE DEMOCRATS

Meanwhile, members of the Biden White House staff have called more than 60 House Democrats to emphasize that the compromise deal largely preserves domestic federal spending at current levels. The Biden-McCarthy deal is also supported by the leadership of the New Democrats, a large group of centrist House Democrats who declared in a statement that “compromise depends on give and take and this bill required concessions from both sides.”

On the surface, while the debt ceiling deal that President Biden and Speaker Kevin McCarthy reached bears certain similarities to the debt ceiling deal that was reached between President Barack Obama and House GOP Speaker John Boehner in 2011, its fiscal impact on the economy will be far less comprehensive than the previous agreement was. Instead of imposing strict federal spending restrictions for the next decade, the spending restrictions in the current deal will last for only two years. That means, according to Ben Harris, a former Biden deputy Treasury secretary for economic policy, that the macro impact of the current deal on the U.S. economy “appears to be negligible, at best,” and is therefore unlikely to trigger a recession.

More specifically, spending on the U.S. military and veterans’ benefits would increase this year to the amount that President Biden’s budget originally requested budget for the 2024 fiscal year while cuts to all other forms of discretionary spending in 2024 would be slight and increase in 2025 by no more than 1 percent, which is significantly less than Biden’s original budget had proposed.

On the other hand, Harris said, “The most important impact [of the debt ceiling deal] is the stability that comes with having a deal. Markets can function knowing that we don’t have a cataclysmic debt ceiling crisis looming.”

A New York Times analysis of the debt ceiling deal projects that it would reduce federal spending by about $55 billion next year, and cut another $81 billion in 2025.

SMALLER THAN THE 2011 DEBT CEILING DEAL

By contrast, the 2011 debt deal between Republicans and President Obama, which was negotiated by then-Vice President Biden, reduced federal discretionary spending for the first year by 4 percent and in the second year by 5.5 percent. But because the country was still trying to recover from the Great Recession of 2008, those spending cuts wound up prolonging the economic pain and slowing the pace of the recovery. By comparison, the current state of the U.S. economy is much stronger and more resilient than it was in 2011, with unemployment at a near-record low of just 3.4 percent.

Mark Zandi, the liberal chief economist for Moody’s Analytics, also agrees that the negative impact of the spending cuts in the debt ceiling deal on the American economy is likely to be minimal, prompting the loss of about 120,000 jobs next year and raising the unemployment rate by just 0.1 percent.

On the other hand, some economists believe that the much more modest federal spending cuts in the current debt ceiling deal could actually be helpful in reducing the persistently high rate of inflation, which is being driven in part by the continued excess in federal spending.

DEBT CEILING DEAL MIGHT HELP TO REDUCE INFLATION

One of those economists is Jason Furman, who served as a deputy director on President Obama’s National Economic Council in 2011. He said that “from a macroeconomic perspective, this deal is a small help. The economy still needs cooling off, and this takes the pressure off interest rates in accomplishing that cooling off.”

Furman also said, “I think the Federal Reserve will welcome the help,” in trying to reduce the rate of inflation.

North Carolina Congressman Patrick McHenry, who is one of House Speaker McCarthy’s Republican negotiators, defended the debt ceiling deal as “the most conservative spending package in my service in Congress, and this is my 10th term.” He also argued that the deal’s federal spending cuts will also help the economy by slowing the rate at which the federal deficit will be increasing. He also said that he and his fellow Republicans are, “trying to bend the cost curve of the government for the American people.”

On the other hand, progressive Democrats, such as Lindsay Owens, the executive director of the Groundwork Collaborative in Washington, warned that even the modest federal spending restraints in the debt ceiling deal will lead to a different sort of economic damage. “After inflation eats its share, flat [federal] funding will result in fewer households accessing rental assistance, fewer kids in Head Start, and fewer services for seniors,” Owens said.

WINNERS AND LOSERS

One of the provisions of the debt ceiling deal that both parties do support is a measure to speed up the environmental permitting process for energy-related projects that is required under the National Environmental Policy Act of 1970, reducing the current process, which takes, on average, 4.5 years, by more than half to two years or less.

On the other hand, Democrats have objected to the Republican-supported measure in the bill which would expand the work requirement for able-bodied adults without children to qualify to receive food stamps and other federal social safety net benefits.

But perhaps the most important outcome of the debt ceiling deal is the new confidence it has created in Speaker Kevin McCarthy’s leadership as Speaker, and the encouragement it will give conservative House Republicans when they realize that they have finally succeeded in forcing President Biden to back away from further pursuing his liberal spending policies, and requiring him to take them more seriously as he tries to govern the country over the next years.

Twitter
WhatsApp
Facebook
Pinterest
LinkedIn

LATEST NEWS

IN A PERFECT WORLD

Walking the Walk Have you ever had the experience of recognizing someone in the distance simply by the way they walk? I have, many times.

Read More »

NEWSLETTER

Subscribe to stay updated