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US's debt-ceiling crisis is over but the debt crisis remains

Matthew Yglesias for Bloomberg
Matthew Yglesias for Bloomberg • 6 min read
US's debt-ceiling crisis is over but the debt crisis remains
Washington has already surprised us — and itself — once. Maybe a debate over the deficit can help make American politics productive again, says Matthew Yglesias. Photo: Bloomberg
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Maybe the most surprising aspect of the debt-ceiling increase President Joe Biden signed into law last week is that, once all the kicking and screaming was done, it not only passed Congress but passed easily. And maybe the most intriguing question raised by this whole debate is whether we should be prepared for more surprises.

With the Fiscal Responsibility Act, leaders on both sides made sales pitches to their respective caucuses, but there was no last-minute scrambling for votes or intense arm-twisting. The margins were comfortable enough that the dozens of members who want reputations as purists were able to vote “no” with no hard feelings.

This was by no means a foregone conclusion even once the contours of an ultimate settlement became clear. From the point of view of Democrats, the law has essentially nothing to recommend it. It violates the principle that the way to reduce the deficit is to balance tax increases and spending cuts, and on the spending side it violates the rule of parity between defense and non-defense spending. For Republicans, the agreement abandons almost all the demands of the partisan debt-ceiling bill that the House passed in April. Republicans basically settled for a normal appropriations bill paired with some changes to the SNAP program that the Congressional Budget Office says will not reduce spending.

So it’s easy to imagine a world in which members of both parties accused their leaders of selling out, leaving leadership scrounging for a bare majority to avoid default. Instead, there was an outbreak of good vibes.

Part of the reason is that both Biden and House Speaker Kevin McCarthy are underrated politicians: They’re not orators, ideologues or policy wonks, but true creatures of Congress, an institution that’s broadly hated and poorly understood. Low expectations let them both emerge from the process with their personal reputations enhanced, avoiding the zero-sum dynamics that often plague American politics.

The other part is that policymaking genuinely isn’t a zero-sum game.

See also: Three reasons why US financial markets are cruising through a long Fed hold

To be clear, the legislation unapologetically advances conservative policy aims. But it does so while protecting Democrats’ favourite programs. And — this may be the most important part — it does so at a time of high inflation and rising interest rates. A time, in other words, when a little fiscal austerity may actually be called for.

Good policy can advance multiple objectives simultaneously. Most Republicans and most Democrats voted for the bill because they could say, accurately, that it was not only better than default, but an improvement on the status quo.

And now for the bad news: The legislation’s success is largely due to the fact that it studiously avoids anything controversial. America’s current tax revenue is on the low side by historical standards, even as the elderly share of the US population is rising. Meanwhile, the cost of an open-ended commitment to meeting seniors’ health needs has risen on a per-person basis. By ignoring taxes, Social Security, Medicare, and Medicaid, Biden and McCarthy were able to get to yes and make a useful start on deficit reduction. But to stabilize the debt-to-GDP ratio, which is something the federal government should really try to do, it needs to both trim the scheduled growth of these programs and increase revenue.

See also: The US economy won’t be immune to high rates forever

McCarthy has actually suggested he wants to form a congressional commission to look at cuts to these programs. But his comments are notably mostly for what he didn’t say: the words “senior citizens” or “health care,” or any names of programs that he thinks could be cut. The Biden administration’s initial plan for the debt-ceiling debate was to bait House Republicans into proposing these kind of cuts — and then lambaste them. But when Biden called the GOP out during the State of the Union address, McCarthy’s colleagues angrily denied the charge, and McCarthy later issued a set of demands that left major retirement programs untouched.

But even McCarthy knows it’s not possible to achieve the needed spending cuts this way. The Biden administration, by contrast, has put forward a plan that achieves $3 trillion in deficit reduction without cutting Social Security or Medicare benefits. Instead it raises taxes on the rich, and puts some price controls on prescription drugs — both of which are anathema to Republicans.

It’s not that hard, conceptually, to understand what a major bipartisan deal on the deficit would look like.

McCarthy has alluded to a desire to cut entitlement spending, but is reluctant to discuss the matter in public. The cuts could be achieved if he had bipartisan cover. And he could get that cover if he gave the White House some of the stuff it wants.

Or, looking at it from the other direction, presiding over a major-deficit reduction package would help Biden achieve his economic policy goal of controlling inflation. A hefty dose of tax increases would help him achieve his social policy goal of reducing inequality. But to get the necessary Republican votes, he would need to give them something — some of those spending cuts that are too politically risky for Republicans to do unilaterally.

This basic framework is well understood. What’s hard is getting the deal done in a climate of rising polarisation and declining trust.

These remain formidable obstacles to any kind of big-picture budget deal. But the miniature era of good feelings that broke out in the aftermath of the bipartisan debt-limit deal offers reason for optimism. It wasn’t knowable at the time, even by the people in the negotiating room, that their bargain would be welcomed so warmly. Now it’s clear that, while some self-consciously extreme members voted will always no, compromise may be welcomed by mainstream members of both parties — and it can generate good press for both leaders.

Reaching a bigger deal would be difficult, obviously. But the failed efforts at a grand bargain during the presidency of Barack Obama needn’t generate too much pessimism. Those talks unfolded in an environment of low interest rates, low inflation and high unemployment — when there would have been little practical benefit to a deficit- reduction package. These days, austerity makes much more sense, making possible all sorts of win-win bargains.

Washington has already surprised us — and itself — once. Maybe a debate over the deficit can help make American politics productive again.

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