It’s hard to believe we are worrying about a default on the debt of the United States – again. The markets and many pundits are – in my opinion – disturbingly sanguine about what is about to go down. Evidently, they are confident that a deal will be inked before a default occurs. I hope they are right, but I don’t think that outcome is certain.
The existing debt limit of $31.4 trillion was reached in January, which prevented the U.S. Treasury from issuing new debt. Since then, Treasury Sec. Janet Yellen has been employing what are called “extraordinary measures” and using current tax receipts to pay the nation’s bills. These short-term solutions will only suffice until sometime in early June, according to the Congressional Budget Office.
President Biden rolled out his fiscal year 2024 budget in March as required by law. He challenged deficit hawk Republicans to produce their budget, which the House typically passes by April or May each year. The president wanted these two plans to form the basis for negotiations as part of the regular yearly appropriations process. He wanted to keep this separate from the debt limit increase legislation.
Republicans, however, either could not agree on their budget specifics or declined to do so because their proposals to slash spending from specific programs would be wildly unpopular with the electorate. So, they barely passed the Limit, Save, Grow Act (LSGA) in April, a 300-page ultra-conservative wish list that proposes massive, unspecified spending cuts that would extend through FY 2033. In fact, it would accomplish what most Republican politicians have wanted to do for decades, absolutely cripple the federal government.
But here’s the thing. I am confident that Republicans would be afraid to make this legislation the law, even if they had enough members in Congress to pass it and a Republican in the White House. It is just that draconian.
As stated in my most recent blog, the LSGA would reduce spending for discretionary programs by 2033 to only 48% of fiscal year 2023 levels if defense and veteran’s care are not cut. This would include funding for nutrition assistance for poor mothers and infants, air traffic control, the State Department, cancer research, the FBI and the Social Security Administration, to name a few. Agriculture Department programs, which many Republicans strongly support because many of their constituents are farmers, could also be trimmed by over one half.
In practice though, spending restrictions would not be applied equally across all departments. Consequently, future appropriations hearings would result in vicious food fights that would include plates, pots, pans and knives.
The LSGA, however, would do much than cut spending, most of which Biden could never accept, including:
- Repealing executive actions related to student loan forgiveness.
- Expanding work requirements significantly for Medicaid, food stamps and Temporary Assistance for Needy Families (TANF).
- Repealing climate change mitigation provisions of Biden’s Inflation Reduction Act.
- Rescinding additional funding for the IRS to improve service and enforcement.
- Requiring that major federal regulations be first approved by Congress.
- Raising the debt limit by only $1.5 trillion and for less than one year.
Neither Biden nor McCarthy can politically afford to give significantly on their positions, which are currently oceans apart. That is why I believe default is more possible this year than ever before. If McCarthy agrees to raise the debt limit without substantial concessions from Biden, many in his conference won’t vote for the resulting bill and he will likely lose his position as speaker.
If Biden gives in to Republican demands and significantly cuts spending and/or weakens the social safety net, his chances of winning the Democratic primary next year will be in jeopardy. In fact, all Democrats running next year will be in serious trouble because many discouraged supporters simply won’t turn out to vote.
Of course, allowing a default will hurt both parties. But most of the public simply won’t understand who is really at fault for the resulting catastrophe so a lot of blame will fall on the party in the White House.
Former president Trump is seeking revenge by encouraging Republicans to force a default if they don’t get “massive” spending cuts in exchange for raising the debt limit. To make matters worse, Republicans have rejected a White House offer to freeze domestic spending at FY2023 levels and have increased their original work requirements for food stamp recipients, according to a Politico Playbook article on Sunday. And they are also demanding that new immigration provisions from their recently passed border bill be added to the LSGA.
Democrats have raised hopes by setting the stage for a discharge petition that would allow 218 House members to vote on a debt limit increase bill if McCarthy refuses to bring one to the House floor for a vote. But they need five Republicans to join this effort. And on Sunday, Biden stated that he believes he has the “authority” under the 14th Amendment to raise the debt limit without an act of Congress. But these probably aren’t viable solutions.
McCarthy has rejected a short-term increase to allow more time for negotiations, but that doesn’t mean it won’t happen. As June 1 approaches, however, the pressure to find some way to prevent an immediate fiscal disaster may become politically unbearable. But perhaps it will take a steep decline in the stock markets to finally force a debt limit agreement. Unfortunately, nothing is certain.