U.S. House Speaker Kevin McCarthy speaks to reporters in the U.S. Capitol following passage of the GOP debt ceiling and spending cut legislation on April 26, 2023. (Capital-Star photo by Ashley Murray).
Now that America has once again dodged a disastrous default, it is worth reflecting on six lessons from the negotiations and the deal.
First, we have to get rid of the debt limit. It is, after all, just another statute that can be repealed without having to face a filibuster.
Readers of this column know how I feel about this, but it is worth remembering just how crazy the debt limit is.
Almost all federal government spending, and all taxes, are mandated by law. That means the government is currently legally required to run a deficit. The debt limit does not change that. It merely forbids the government from borrowing money that others are willing to lend in order to pay for the required spending.
What sense does this make?
And since everyone agrees that default is never a good policy, why risk it?
The good news is that Democrats seem finally to have gotten the message and might repeal the debt limit the next time they have the White House and a majority in Congress.
Second, don’t underestimate President Joe Biden or U.S. House Speaker Kevin McCarthy, R-Calif.
Biden comes out of the negotiations looking great. For all the talk about his age and whether he is firmly in control, the debt deal has his fingerprints all over it.
Biden started out in an impossibly weak position. Donald Trump was right that the Democrats had to “cave” in their refusal to negotiate over raising the debt limit. After all, a substantial number of Republicans were willing to consider default—even though no one wanted it—and virtually no Democrats were. Republicans were going to “win” this fight in some sense.
Nevertheless, Biden gave away very little—not that raising food stamp work requirements on older Americans is not cruel—and got what he needed: no debt limit until after the next presidential election.
Pretty good job for an old man.
Could any other Democrat have pulled it off?
But the real winner was GOP leader McCarthy. Who could have seen this coming? McCarthy looked pitiful in his struggle to become House speaker. He looked like a puppet of the Freedom Caucus.
Well, he sure defanged them. McCarthy knew exactly what he needed to do to get a majority of Republicans in the House to sign on. And he got exactly what he needed.
In fact, McCarthy’s desire for a deal at the expense of the Freedom Caucus was probably Biden’s secret weapon in the negotiations.
Third, Democrats who voted against the bill, including two from Pennsylvania, are show-offs who put their precious consciences ahead of the common good of the country. At least, U.S. Sen. John Fetterman, D-Pa., told the leadership that he would vote for the deal if they needed his vote. I hope U.S. Rep.Summer Lee, D-12th District, who also voted no, did the same.
Fourth, the Republican Party deserves some credit. Every Republican who voted for the debt deal knows that a primary could be the result. You could win a lot of those primaries just by linking the incumbent to the “Biden deal.”
Nevertheless, Republicans in the House voted for the deal 149-71.
Fifth, and conversely, the whole debt threat demonstrated that Republicans only care about deficits when a Democrat is in the White House. This is the party that not only raised the debt limit without a whimper under Trump, but cut taxes in 2017, when we were already running a deficit and were in the midst of an economic boom. That was one of the most fiscally irresponsible acts in American history.
The result was $1 trillion annual deficits even before the pandemic.
Which leads to the sixth and final lesson from the debt deal. America is still on an unsustainable fiscal path. For years, observers urged massive borrowing on the theory that borrowing costs were low.
Well, they aren’t low anymore. According to the Pew Research Center, in fiscal 2021, the average interest rate on the federal debt was a record-low 1.605%. But with the Federal Reserve raising interest rates to fight inflation, the average interest rate on federal debt last year ticked up to 2.07%.
And that interest rate will only go up.
Payments on the debt this fiscal year will cost almost $400 billion, 6.8% of all federal spending.
And that cost will only go up.
Worst of all, massive recent federal borrowing, both right before and during the pandemic, undoubtedly contributed to the increase in inflation that has led the Fed to increase interest rates.
It is very clear that we cannot go on this way. But an overall budget deal seems completely out of reach. The deficit is driven by spending on Social Security, Medicare, Medicaid and the military. All are important programs and there is a great deal of political opposition to any cuts.
Yet taxes are not low by traditional standards. Federal tax revenue is currently running at about 18.7% of GDP, versus the long-term average from 1968-2022 of 17.1%.
So, it is hard to say that the answer is simply to raise taxes—on the rich or otherwise.
A compromise of spending cuts and tax increases is needed. But the system today seems incapable of reaching such a difficult decision.
The debt deal demonstrated that the political center can still get things done, despite America’s hyper-partisanship. But the debt deal was actually small potatoes despite the enormous threat of default.
A real debt deal that puts America on a sane fiscal path does not appear likely no matter who is in charge in Washington.
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