House Republicans narrowly passed the Limit, Save, Grow Act (LSGA) on April 26, as their plan to reduce federal deficits. It would raise the debt ceiling [a.k.a. limit] by a small amount for only one year, depress the economy with dramatic spending cuts and eliminate many of the climate change measures in President Biden’s Inflation Reduction Act. Still, some far-right members claimed it didn’t cut nearly enough.
Although the text of this legislation does not reduce funding for any mandatory programs, like Social Security and Medicare, it would cut all discretionary program funding, almost half of which is for defense. Speaker Kevin McCarthy (R-CA) and his conference, however, have made it clear that they won’t agree to cap spending for the military or veteran’s medical care, nor will they consider tax increases.
The Center for American Progress, an independent, nonpartisan policy institute, calculates that if defense and veteran’s care are protected (not cut) over the next 10 years, funding for nondefense discretionary programs in 2033 would be reduced to only 48% of fiscal year 2023 levels, after adjusting for inflation and population growth. This would literally gut the federal government and eliminate numerous programs on which the health, safety and welfare of the American public depend. Although the LSGA would hurt almost every citizen, even some Democrats are urging the president to negotiate on spending cuts.
Sadly, Americans seem to have very short memories about one significant reason why deficits are so large – Republican tax cuts. President Reagan reduced income taxes twice in the 1980s, created huge federal deficits and increased the national debt by over 180%. President Bill Clinton raised taxes significantly in 1993, cut spending and balanced the federal budget in the final four years of his presidency. (In case you are wondering, Eisenhower was the last GOP president to balance a budget.)
After President George W. Bush inherited a balanced budget from Clinton, he cut taxes in 2001, created a large federal deficit in 2002 and cut taxes again in 2003. He left President Obama with the Great Recession in 2009, along with massive unemployment and trillion-dollar deficits. The 2012 fiscal cliff deal that Obama negotiated with the GOP-controlled Congress, however, helped reduce yearly deficits for several years.
But just like two of his GOP predecessors, Donald Trump cut taxes in 2017, during his first year as president, which added around $2 trillion to the deficits over 10 years. Contrary to the gas lighting that Trump and Republicans constantly try when they get power, their tax cuts do not pay for themselves or even grow the economy all that much. They do, however, result in much larger federal deficits.
So, now Republicans want to put the United States’ excellent credit rating on the line in order to cut spending and reduce federal deficits. Yet, they absolutely refuse to raise taxes to help offset the trillions in red ink that their prior tax cuts and $7 trillion in Trump administration deficits helped create, which is simply absurd.
President Biden knows that if he yields to Republican demands now, in 12 months, they will insist on even more spending cuts before increasing the debt limit again and their blackmail will never end. Democrats would be fools to put themselves in that position.
Certainly, Republicans picked a very bad time for a debt limit standoff. Inflation is still high, interest rates are rising, three medium sized U.S. banks have failed since January and numerous regional banks remain under pressure from depositors and investors.
On the world stage, China is challenging America economically and militarily like the old Soviet Union never could. So, a U.S. debt default, or even a near default, would be a huge gift to Chinese President Xi Jinping and Russia’s Vladimir Putin, who would use either result to trumpet how American democracy is failing.
Make no mistake, there’s not much the Republicans are proposing that Biden can accept, and a compromise debt limit solution seems almost impossible. Nobel laureate economist Paul Krugman advises the Biden administration to do whatever it takes to avoid giving in to GOP extortion and the president does have several unprecedented unilateral options to avoid a debt default:
- He can simply state that failing to pay U.S. bills is unconstitutional under the 14th Amendment and have the Treasury keep issuing bonds for that purpose, or,
- The Treasury could mint a $1 trillion platinum coin, deposit it in the Treasury’s account with the Federal Reserve and draw on that account to pay the bills – without issuing new debt, or,
- As U.S. bonds mature and are redeemed, Treasury could issue new notes of equal par value but with a premium interest rate of say, 10%. These new instruments would not technically increase the national debt but they could be sold for more than par value, thus giving Treasury added funds to pay the bills.
I usually think about political maneuverings like the debt limit standoff as a game of vehicular chicken, where each side hopes the other will veer away before the crash (political fallout) occurs. But put yourself in the car with Biden and the Democrats; they fear the drivers in the other vehicle may not care about the consequences of a head-on collision. And I believe that is exactly where we are today.
So, friends, buckle up and get ready for a scary ride. Oh, and watch this space.