A Debt-Ceiling Deal That Doesn’t Deal With Debt

A Debt-Ceiling Deal That Doesn’t Deal With Debt
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by Greg Ip, Chief Economics Columnist for the Wall Street Journal

Republicans, Biden on brink of a default hammer out a deal that doesn’t raise taxes or address the biggest sources of spending pressure.

There’s an old saying about academia that nicely describes U.S. budget policy these days: The fights are so vicious because the stakes are so low.

Republicans in Congress used the threat of a catastrophic default on Treasury securities if President Biden didn’t agree to cut spending. In the end, Republican negotiators agreed to raise the debt ceiling, removing the threat of default, in return for cuts that make only the slightest change to the trajectory of deficits and debt.  

There are two key lessons from this episode. First, as politics have become more polarized, both parties, though Republicans more so, have reached for financial tactics once seen as off limits to achieve their goals. Yet even as the tactics become more extreme, the goals have drifted further from controlling deficits and debt.  

Republicans’ beef has never been with debt, otherwise they would not routinely vote for tax cuts, as they did in 2017, that add to it. Their beef is with the size and nature of government spending.

And yet even on spending their ambitions have shrunk. When the government shut down for a then-unprecedented 21 days in 1995-96, a key reason was a demand by Republicans, led by then-House Speaker Newt Gingrich, on changes to Medicare intended to save money. He didn’t get those changes, but he did succeed in normalizing shutdowns as a negotiating tool. 

Shutdowns result when Congress doesn’t authorize money for government programs. By contrast, the debt ceiling limits how much the Treasury can borrow to pay for programs that are already authorized—including interest on existing debt. In 2011, Republicans, then in control of the House, raised the prospect of not raising the debt ceiling, forcing the Treasury to default, to extract spending cuts from President Obama.

For a time, both sides were willing to consider changes to Social Security and Medicare, which provide pensions and healthcare to the elderly and disabled. Both are mandatory programs, i.e., they don’t have to be reauthorized each year. In the end, though, the programs were left largely untouched and cuts were borne almost entirely by discretionary spending—the sort that has to be authorized each year and covers many vital federal functions such as the National Park Service, the U.S. Coast Guard, National Institutes of Health and National Aeronautics and Space Administration. Nonetheless, the Overton window had moved: Threatening default was now an acceptable negotiating tactic.

By 2023, the negotiating field had narrowed considerably. In his State of the Union speech, Biden accused Republicans of wanting to sunset Medicare and Social Security. When they protested, he declared a bipartisan consensus on leaving the two alone.

Sure enough, when House Speaker Kevin McCarthy (R., Calif.) opened negotiations, the two programs were off the table, along with veterans’ benefits, defense, interest on the debt, and, of course, taxes.

That left non-defense discretionary spending, less than 15% of the total, to bear the brunt of any cuts. “If you were really serious about debt and deficits, you wouldn’t be focusing on 15% of the budget,” said Bill Hoagland, senior vice president of the Bipartisan Policy Center.

And in the end, discretionary spending will actually rise slightly next year, after inflation, according to Goldman Sachs. The Congressional Budget Office estimates the deal will reduce deficits by $1.5 trillion over a decade. That sounds like a lot, but it simply means the federal debt, now 97% of gross domestic product, will rise to around 115% in a decade instead of 119%. And that’s assuming former President Donald Trump’s tax cuts expire after 2025 and a future Congress doesn’t jack up discretionary spending.

So what was the point? Asked Tuesday what comes after the deal, McCarthy said that when the new spending caps are translated into specific program cuts during the appropriations process, “you’re able to eliminate the wokeism.” The target, in other words, wasn’t spending per se; but the political values reflected in that spending.

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