Finally, a Debt Limit Deal. Can We Avoid the Crisis Next Time?

Special Guests: Rohit Kumar, Jason Furman

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This week on Facing the Future, we got multiple perspectives on the debt limit deal reached just a few days ago by President Biden and House Speaker McCarthy that averts – once Congress passes it and the President signs it into law – a federal default that most experts agree would have disastrous consequences. In the first segment of the program, Concord Coalition chief economist Steve Robinson and policy director Tori Gorman joined me to take a look at what is actually in the final agreement. Spoiler alert – the budget savings are fairly modest and mostly limited to spending caps over the next couple of years.

Later in the program we aired highlights from a webinar we held last week featuring perspectives from two veterans of the 2011 debt limit showdown between President Obama and a divided Congress: Harvard University economics professor Jason Furman  who served as chair of the White House Council of Economic Advisers under President Obama, and Rohit Kumar, Co-Leader of Washington National Tax Services for PricewaterhouseCoopers, who was head of domestic policy and later deputy chief of staff for Senate Republican Leader Mitch McConnell. Neither of them supports the debt limit as it exists under current law, and both would like to see it either repealed or overhauled.

We at The Concord Coalition feel the same way. The federal government has a major long-term fiscal sustainability challenge, and Congress has ignored that for too long as our debt has piled up. But it is more than reckless to allow politicians to play chicken with the U.S. and global economy (let’s not forget the dollar is the world’s reserve currency) using the threat of defaulting on our obligations as leverage to pursue policy priorities.  Even getting close to default has brought economic consequences, as the federal government was put on a credit watch in the last week by Wall Street rating agencies. 

Overall, the Congressional Budget Office has scored the Biden-McCarthy agreement as reducing the deficit by $1.5 trillion over the next 10 years, most of which is achieved by capping the growth of discretionary spending over the next two years. There are also some recissions of unspent funds appropriated for COVID-19 pandemic relief. The bill reduces some of the increased funding for the Internal Revenue Service enacted last year but CBO estimates that this will result in a slight deficit increase because it would limit IRS enforcement efforts. Similarly, new work requirements for the Supplemental Nutrition Assistance Program (SNAP) would be more than offset by other changes in eligibility according to CBO’s scoring.

In return for all of that and a few more items, the federal debt limit is suspended until January 2025. We turned to Tori Gorman and Steve Robinson for their thoughts.

“My opinion on this deal depends on which hat I am wearing. As a budget wonk and a deficit hawk, I think they really missed an opportunity to move the needle on spending. If I am a Joe Biden staffer, I’m feeling pretty good,” said Gorman. “All along, the President has been pushing for a clean debt limit increase, and I think he definitely had the wind at his sails right up until the House Republicans managed to pass their own bill. I don’t think anyone thought McCarthy could do it, but once he was able to do it, President Biden recognized ‘well I have to negotiate with this guy.’ When you take a look at what they negotiated, there’s not a lot of pain in this legislation. It’s been my experience on Capitol Hill that the appropriators are always smarter than the people who want to cut money. The thumbprints of all the expert appropriators are all over this legislation. It sets statutory spending caps for fiscal years 2024 and 2025 that are enforced via sequestration, but then there are all kinds of loopholes and escape clauses that appropriators have access to that are not exactly enumerated, but little tricks they’ve used in the past they can use to increase spending underneath those caps.”

One of the reasons the amount of spending and deficit reduction was smaller than the grand expectations set forth early on by Republicans, is that the major drivers of spending such as Medicare and Social Security, were ruled off the table before negotiations even began.

“There’s not a huge amount of spending reductions here,” said Robinson. “What we’re fighting over are reductions in annual appropriations bills. That’s something that Congress has to do every single year, that occurs at the end of the fiscal year at the end of September. We’ll see whether Congress is actually able to comply with the caps they have agreed to. That’s always the dilemma. Every single year Congress has to do appropriations bills and things change. You have emergencies, floods, disasters, and wars, so to say today that we’re committing to some level of future spending without knowing what the future holds is always an iffy proposition.  There are certainly good intentions on the part of Republicans to say we want to control and reduce discretionary spending, but whether they’re going to be able to follow through and hold themselves to that- much less the Biden Administration and their Democratic colleagues they have to negotiate with – remains to be seen.”

As to the larger question of whether or not we should even continue to have the debt ceiling as a statutory limit on borrowing, the two experts participating on our recent webinar, Rohit Kumar and Jason Furman, both advocate getting rid of it or else making some serious changes to it.

“The amount of risk that we incur is far in excess of whatever hypothetical value we get in terms of deficit or debt reduction, in part because history has shown us that we don’t use this to make the hard decisions,” said Kumar. “We’re not having a grand bargain conversation. Even in 2011 when Speaker Boehner and President Obama were trying to have a grand bargain conversation, it failed. This has not proven to be an effective tool of fiscal restraint or fiscal sustainability. But it does continue to present an existential threat to both the U.S. and ultimately the global economy. This is not working, and presents outsized risks to the economy. So I think we would be better off investing our energies in thinking about a better way to think about the fiscal trajectory question that doesn’t involve putting a bomb underneath the U.S. and global economy.”  

“This has not been a successful way to get meaningful action on the deficit, so I would scrap it,” said Furman. He suggested that better action forcing events might be market reactions to increased debt and the pending insolvency of the Social Security and Medicare Part A trust funds.

Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.

Debt Limit Webinar 5/25/23

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