Debt Ceiling Deal: From the New York Times: The House could vote on the agreement as soon as tomorrow, though it must first get through the chamber’s powerful Rules Committee.
Here’s what’s in the deal, which economists gave a decent grade:
- Two years of federal spending limits in exchange for pushing future debt-ceiling discussions beyond the 2024 elections.
- An end to the Biden administration’s freeze on student loan payments.
- Stricter work requirements for public assistance programs, including food stamps, though Medicaid won’t be affected. (The requirements drew opposition from both sides of the aisle.)
- A streamlined approval process for energy projects — known as permitting — through the creation of a single agency to oversee the matter. The deal also includes approval for a multibillion-dollar natural gas pipeline through West Virginia, a win for Senator Joe Manchin.
Not included in the bill are any major commitments to reduce the $31.4 trillion national debt. But The Times calculates that nondiscretionary spending cuts could save $860 billion over the next decade, and the reductions aren’t expected to inflict much pain on the economy.
The House could vote on the deal as soon as tomorrow. But some Republican members of the Rules Committee have already come out against the bill. (One, Representative Chip Roy of Texas, has argued that all nine of the committee’s Republicans must sign off on all legislation before the panel.)
There are hurdles in the Senate as well, with Republicans including Lindsey Graham of South Carolina and Mike Lee of Utah objecting to the bill and threatening delays.
The clock is ticking. As of last Thursday, the Treasury Department’s cash balance was at a six-year low of less than $39 billion. Treasury Secretary Janet Yellen now reckons that the government will run out of money on June 5.
By Jim Tankersley for the NY Times: Why Spending Cuts Likely Won’t Shake the Economy-With low unemployment and above-trend inflation, the economy is well positioned to absorb the modest budget cuts that President Biden and Republicans negotiated.
The last time the United States came perilously close to defaulting on its debt, a Democratic president and a Republican speaker of the House cut a deal to raise the nation’s borrowing limit and tightly restrain some federal spending growth for years to come. The deal averted default, but it hindered what was already a slow recovery from the Great Recession.
The debt deal that President Biden and Speaker Kevin McCarthy have agreed to in principle is less restrictive than the one President Barack Obama and Speaker John Boehner cut in 2011, centered on just two years of cuts and caps in spending. The economy that will absorb those cuts is in much better shape. As a result, economists say the agreement is unlikely to inflict the sort of lasting damage to the recovery that was caused by the 2011 debt ceiling deal — and, paradoxically, the newfound spending restraint might even help it.
“For months, I had worried about a major economic fallout from the negotiations, but the macro impact appears to be negligible at best,” said Ben Harris, a former deputy Treasury secretary for economic policy who left his post earlier this year.
“The most important impact is the stability that comes with having a deal,” Mr. Harris said. “Markets can function knowing that we don’t have a cataclysmic debt ceiling crisis looming.”
Mr. Biden expressed confidence earlier this month that any deal would not spark an economic downturn. That was in part because growth persisted over the past two years even as pandemic aid spending expired and total federal spending fell from elevated Covid levels, helping to reduce the annual deficit by $1.7 trillion last year.
Asked at a news conference at the Group of 7 summit in Japan this month if spending cuts in a budget deal would cause a recession, Mr. Biden replied: “I know they won’t. I know they won’t. Matter of fact, the fact that we were able to cut government spending by $1.7 trillion, that didn’t cause a recession. That caused growth.”
The agreement in principle still must pass the House and Senate, where it is facing opposition from the most liberal and conservative members of Congress. It goes well beyond spending limits, also including new work requirements for food stamps and other government aid and an effort to speed permitting for some energy projects.
What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.
The limit has been hit. What now? America hit its technical debt limit on Jan. 19. The Treasury Department has begun using “extraordinary measures” to continue paying the government’s obligations. These measures are essentially fiscal accounting tools that curb certain government investments so that the bills continue to be paid. Those options could be exhausted by June 5.
What is at stake? Once the government exhausts its extraordinary measures and runs out of cash, it will be unable to issue new debt and pay its bills. The government may wind up defaulting on its debt if it cannot make required payments to its bondholders. Such an outcome would be economically devastating and could plunge the world into a financial crisis.
How can the government avert disaster? There is no official playbook for what Washington can do. But options do exist. The Treasury could try to prioritize payments, such as paying bondholders first. If the United States does default on its debt, which would rattle the markets, the Federal Reserve could step in to buy some of those Treasury bonds.
Why is there a limit on U.S. borrowing? Congress must authorize borrowing, according to the Constitution. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.
But its centerpiece is limits on spending. Negotiators agreed to slight cuts to discretionary spending — outside of defense and veterans’ care — from this year to next, after factoring in some accounting adjustments. Military and veterans’ spending would increase this year to the amount requested in Mr. Biden’s budget for the 2024 fiscal year. All those programs would grow by 1 percent in the 2025 fiscal year — which is less than they were projected to.
The first back-of-the-envelope analysis of the deal’s economic impacts came from Mark Zandi, a Moody’s Analytics economist. He had previously estimated that a prolonged default could kill seven million jobs in the U.S. economy — and that a deep round of proposed Republican spending cuts would kill 2.6 million jobs.
Mr. Zandi wrote on Twitter on Friday that it was “Not the greatest timing for fiscal restraint as the economy is fragile and recession risks are high.” But, he said, “it is manageable.”
Other economists say the economy could actually use a mild dose of fiscal austerity right now. That is because the biggest economic problem is persistent inflation, which is being driven in part by strong consumer spending. Removing some federal spending from the economy could aid the Federal Reserve, which has been trying to get price growth under control by raising interest rates.
“From a macroeconomic perspective, this deal is a small help,” said Jason Furman, a Harvard economist who was a deputy director of Mr. Obama’s National Economic Council in 2011. “The economy still needs cooling off, and this takes pressure off interest rates in accomplishing that cooling off.”
“I think the Fed will welcome the help,” he said.
Economists generally consider increased government spending — if it is not offset by increased tax revenues — to be a short-term boost for the economy. That’s because the government is borrowing money to pay salaries, buy equipment, cover health care and provide other services that ultimately support consumer spending and economic growth. That can particularly help lift the economy at times when consumer demand is low, such as the immediate aftermath of a recession.
That was the case in 2011, when Republicans took control of the House and forced a showdown with Mr. Obama on raising the borrowing limit. The nation was slowly climbing out of the hole created by the 2008 financial crisis. The unemployment rate was 9 percent. The Federal Reserve had cut interest rates to near zero to try to stimulate growth, but many liberal economists were calling for the federal government to spend more to help bolster demand and accelerate job growth.
The Fight Over the Debt Limit
A First Test: The plan to raise the debt ceiling and set federal spending limits that President Biden and Speaker Kevin McCarthy agreed to on May 27 has begun its obstacle-laden route through Congress. Consideration by the House Rules Committee is the first crucial step.
In Pursuit of Consensus: The debt ceiling deal bolsters Biden’s commitment to bipartisanship — but it also comes at the cost of rankling many in his own party.
Food Stamps: The debt limit bill includes new work requirements for older Americans who receive food assistance but will remove some barriers for veterans and homeless adults.
Effect on the Economy: With low unemployment and above-trend inflation, the U.S. economy is well positioned to absorb the modest budget cuts the deal proposes.
The budget deal between Republicans and Mr. Obama — which was hammered out by Mr. Biden, who was then the vice president — did the opposite. It reduced federal discretionary spending by 4 percent in the first year after the deal compared with baseline projections. In the second year, it reduced spending by 5.5 percent compared with forecasts.
Many economists have since blamed those cuts, along with too little stimulus spending at the recession’s outset, for prolonging the pain.
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The deal announced on Saturday contains smaller cuts. But the even bigger difference today is economic conditions. The unemployment rate is 3.4 percent. Prices are growing by more than 4 percent a year, well above the Fed’s target rate of 2 percent. Fed officials are trying to cool economic activity by making it more expensive to borrow money.
Michael Feroli, a JPMorgan Chase analyst, wrote this week that the right way to assess the emerging deal was in terms of “how much less work the Fed needs to do in restraining aggregate demand because fiscal belt-tightening is now doing that job.” Mr. Feroli estimated the agreement could function as the equivalent of a quarter-point increase in interest rates, in terms of helping to restrain inflation.
While the deal will only modestly affect the nation’s future deficit levels, Republicans have argued that it will help the economy by reducing the accumulation of debt. “We’re trying to bend the cost curve of the government for the American people,” Representative Patrick T. McHenry of North Carolina, one of the Republican negotiators, said this week.
Still, the spending reductions from the deal will affect nondefense discretionary programs, like Head Start preschool, and the people they serve. New work requirements could choke off food and other assistance to vulnerable Americans.
Many progressive Democrats warned this week that those effects will amount to their own sort of economic damage.
“After inflation eats its share, flat funding will result in fewer households accessing rental assistance, fewer kids in Head Start and fewer services for seniors,” said Lindsay Owens, the executive director of the liberal Groundwork Collaborative in Washington.
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By Peter Coy for the New York Times: Members of the ultraconservative House Freedom Caucus are unhappy that the debt ceiling deal wouldn’t significantly reduce federal budget deficits in coming years. One referred to the deal as a sandwich made of excrement, another called it “insanity,” and a third tweeted a barfing emoji. Classy stuff.
Realistically, though, there are two problems with the right wing’s position on deficits. One is that the rapid reduction in deficits those legislators call for would not be healthy for the economy, especially right now. The other is that while deficit reduction is important in the long term, right-wing Republicans are looking for balance in the wrong places.
On the first point, it’s lucky for the U.S. economy that the deal reached by President Biden, House Speaker Kevin McCarthy and their lieutenants is less aggressive than the House-passed Limit, Save, Grow Act of 2023, which the Congressional Budget Office estimated would reduce federal deficits by $4.8 trillion over 10 years.
Too much fiscal austerity too fast can harm the economy because the federal government takes money out of Americans’ pockets when it spends less (or taxes more). While the economy is running hot now, with unemployment in April matching the lowest since 1969, there are abundant signs that a recession is near. The Conference Board’s index of leading economic indicators declined in April for the 13th consecutive month, “signaling a worsening economic outlook,” the board, a business-supported research group, announced.
Even the cuts in the debt ceiling deal would be a mild retardant for economic growth. As reported by The Times, the deal would hold nondefense spending in 2024 at roughly its 2023 level and would increase it by 1 percent in 2025. An initial estimate by The Times predicts that the limits would reduce federal spending by about $650 billion over 10 years, assuming that spending grows at the anticipated rate of inflation after the caps lift in two years.
Economically speaking, reducing federal budget deficits is important but not urgent. By the International Monetary Fund’s calculations, Japan’s central government debt totaled 221 percent of its G.D.P. in 2021, compared with 115 percent for the United States, and Japan seems to be doing OK. (Those numbers are somewhat exaggerated because they include debt held by other parts of the government, not just debt held by the public.)
Eventually, though, something will have to be done. In February the nonpartisan Congressional Budget Office projected that by current law, U.S. debt held by the public (a narrower measure than the I.M.F.’s) will reach 195 percent of G.D.P. in 2053, double the level of 98 percent in 2023. At that point, an uncomfortably large portion of federal spending has to be devoted to paying interest on the debt. There’s no risk of default, because the government can always print more dollars to cover its debts, but too much money printing would make it hard to keep inflation under control.
That brings up the second thing that’s wrong with the right wing’s condemnation of the debt ceiling deal. Freedom Caucus members, along with other Republicans and a fair number of Democrats, have unwisely ruled out tax increases as a key component of fixing the government’s finances.
The drama around the debt ceiling deal, which is far from over, is intense because negotiators are trying to achieve something that is impossible. They are looking for all of their deficit reduction on the spending side, rather than a more reasonable mixture of spending cuts and tax increases.
Cutting Social Security and Medicare is tough because they are justly popular programs. They are lifelines for a large share of the public. They are growing because society is aging, not because older Americans are getting sweetheart treatment. Cutting defense is tough because the world is a perilous place (although I do think there’s some fat to be pared). And cutting discretionary spending other than defense is tough because it accounts for only about 15 percent of outlays and does many valuable things, from funding scientific research to helping the poor to guaranteeing food safety. It would take devastating reductions in key functions of government to make a significant difference in the outlook for deficits and debts.
That leaves higher taxes as the underexplored option. According to the Congressional Budget Office, by current law, total outlays by the federal government are projected to rise to 30.2 percent of G.D.P. by 2053 from 23.7 percent in 2023. That big increase in outlays is not matched by a corresponding increase in revenue, which the C.B.O. projects will edge up to 19.1 percent in 2053 from 18.3 percent in 2023.
To keep debt from soaring, one of two things needs to happen. Either outlays need to increase more slowly as a share of G.D.P. or revenues need to increase more rapidly. I think the revenue option is going to come to the fore eventually.
From the Financial Times: Germany’s economy is likely to shrink about 0.3 percent this year from 2022, a team of Deutsche Bank economists led by Stefan Schneider, the chief economist, wrote on Friday. Next year doesn’t look great, either, the team said. “With the expected U.S. recession weighing on German economic momentum toward year end and in early 2024, we have cut our annual forecast for G.D.P. growth in 2024 to 0.5 percent from 1 percent.”
And: 48.3 billion- The record amount of gambling revenues racked up by Las Vegas casinos last year. Pricier hotel rooms and concert tickets, and smaller winnings at the blackjack table, are part of the new economics of the Las Vegas Strip.
