A Few Optimistic Thoughts About the Debt Ceiling Deal

Some mellow Memorial Day weekend thoughts.

Photo by Kenny Eliason on Unsplash

The hard-working staff here at Drezner’s World was too busy travelling across nine time zones to spare much attention to the Beltway negotiations over the debt ceiling. With the announcement of a deal between Joe Biden and Kevin McCarthy at the start of the Memorial Day weekend, however, now seems like a good time to weigh in.¹

First, the actual terms of the deal:

1. The debt ceiling is raised until January 2025;

2. Defense and veteran’s spending are unaffected;

3. Zero growth in non-defense discretionary spending for 2024 and a one percent increase in 2025. There are no caps on growth afterward;

4. A few modest policy changes: tougher work requirements on some welfare programs, a modest cut in IRS funding, and I think some permitting reforms for new energy projects.

Maybe it is because I expected there to be at least one short-term extension deal cobbled together before a real agreement, or maybe it is because I am seeing the term “glide path” included in the headlines, but my take echoes the Biden administration’s thinking: “White House aides stressed, essentially, that in a divided government, things could have been a lot worse.”²

The natural comparative case study to consider is the 2011 debt ceiling negotiations. On the macroeconomic side of the ledger, the New York Times’ Jim Tankersley is correct to note that the state of the U.S. economy looks very different now from 13 years ago:

[Some] 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….

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.

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.

In essence, with record-low unemployment and inflation still an overriding concern, pursuing a modest contractionary fiscal policy ain’t the worst move. And as Furman noted to Tankersley, this gives the Fed more running room if it turns out the economy is in more fragile shape.

I am not crazy about the policy riders, particularly the one cutting IRS funding.³ But they all seem pretty modest as these things go.

The procedural concerns are more serious. In essence, congressional Republicans have now institutionalized and legitimated a strategy of taking the debt ceiling hostage whenever they control the House and a Democrat is residing at 1600 Pennsylvania Avenue. As a big fan of the verb “beclown,” I took notice of the Washington Post’s Catherine Rampell using it in her take on the debt ceiling deal. After pointing out that, “this much-ballyhooed ‘deal’ doesn’t seem terribly different from whatever budget agreement would have materialized anyway later this year, during the usual annual appropriations process, under divided government,” she lays into the absurdity of the entire process:

Yes, we have (fingers crossed) avoided a dreaded default. Which is better than a poke in the eye with a sharp stick. Meanwhile, the U.S. government, prodded by House Republicans, has spent the past few months beclowning itself before the rest of the world.

China and Russia have benefited from our obvious fiscal dysfunction, portraying the United States as an unstable democracy and unreliable economic partner. Discussions at the Group of Seven meetings were hijacked by concerns over the global fallout of a possible U.S. default. Biden had to cut short his diplomatic trip to Asia so he could prevent Republicans from throwing a temper tantrum, further undermining U.S. efforts to repair relations with our allies….

Recent sturm und drang have, at best, left America’s long-term fiscal challenges largely unchanged and tarnished our global reputation. At worst — well, I’d rather not contemplate that scenario just yet.

Rampell is hardly the only observer to make these points. Writing in World Politics Review, Paul Poast warns that repeated brinksmanship on the debt ceiling could accelerate the downfall of the dollar’s status as the global reserve currency, that “the regularly recurring disputes in Washington over raising the debt limit, without which the U.S. risks a catastrophic default on its sovereign debt, are” not great for the dollar’s standing.

Poast and Rampell may well be proven correct. My take, however, is akin to my first reaction to the Discord leaks about the U.S. spying on close allies: this was not the same surprise as the Snowden revelations from last decade, and so the public fallout was pretty minimal. Similarly, precisely because global capital markets went through this sturm und drang in 2011, the 2023 reprise lands more softly. Indeed, weirdly, the negotiations this time around felt much less contentious than they did in 2011.

I share the procedural distaste of using the debt ceiling as a means to extract policy concessions. And maybe I will rue these comments in eighteen months. Still, in reaching a deal, the procedural worst-case scenarios were avoided, and that ain’t beanbag.

Critics believe that this is a horrible way to run a railroad. They are right — but an important theme of one of my books is that it all could have been so much worse. All in all, the deal is a pretty good way to get the summer started.

1. Everyone else sure is.

2. The fact that Politico also reports this messaging was well-received by most Democrats is also a good sign that last-minute congressional shenanigans will be kept to a minimum.

3. This GOP demand is the ultimate tell-on-yourself reveal that Republicans don’t really care about the size of the budget deficit or the national debt. Cutting tax enforcement spending is a great way to encourage more tax avoidance and less revenue collected. No, this is about ensuring GOP donors continue to swipe right.