The No Good, Not That Bad Debt Ceiling Deal

By Eric Levitz, features writer for Intelligencer who covers politics and economics

Photo: Jonathan Ernst/REUTERS

Photo: Jonathan Ernst/REUTERS

The Republican Party controls only one of the three institutions with direct input over the federal budget. And yet, on Saturday, Kevin McCarthy's House majority secured a fiscal "compromise" that consists entirely of concessions to the conservative agenda. The fact that this deal falls well short of Republicans' audacious initial demands should not obscure this basic point: The GOP has succeeded in securing a lopsided spending agreement via threats of economic sabotage. Extortion paid off.

Republicans had threatened to block a debt-ceiling hike — thereby precipitating a global financial crisis — unless President Biden and Senate Democrats agreed to cut non-defense discretionary spending. The ostensible rationale behind this brinksmanship was that the United States is on the cusp of a debt crisis, and conservative lawmakers were therefore duty-bound to force a fiscal reckoning by any means necessary. This was malarkey.

If the House GOP genuinely believed that the deficit was a national crisis demanding extraordinary measures, then they would have been prepared to make some ideological concessions to address it. But they were prepared to make none. Republicans refused to consider any tax increases in negotiations. To the contrary, they remained officially committed to increasing the deficit by nearly $3 trillion through an extension of the Trump tax cuts. Meanwhile, McCarthy pushed for an even larger increase to defense spending than Biden had initially proposed. Perhaps most egregiously, the speaker successfully sought a cut in IRS funding that will increase the deficit by undermining tax collection.

It's quite plain then that, for Republicans, the point of the debt-ceiling standoff was not to advance deficit reduction, but rather, a budget that prioritized low taxes for the rich and high spending on the military over all other fiscal priorities. They won this on the strength of their reputation for nihilism. Biden believed that Republicans just might deliberately make Americans poorer if he did not consent to their desired spending cuts. McCarthy, by contrast, did not believe that Democrats would engineer a recession if his caucus refused to, say, close the carried interest loophole. This is partly attributable to the fact that the sitting president is likely to take the lion's share of blame for any economic crisis. Still, congressional Democrats' refusal to use the debt ceiling as a vehicle for extortion under Trump indicates that the two parties are not equally credible hostage takers.

The agreement's basic contours testify to this inequality. The deal leaves tax rates untouched and increases spending on the military and veterans. Deficit reduction is achieved entirely by cutting non-defense discretionary spending, and tightening work requirements on the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF). Specifically, spending on all discretionary social programs and government agents will remain fixed at slightly below its current level next year, and then grow by 1 percent the year after that. Since the deal increases spending on services for veterans - and such programs fall under the heading of non-defense discretionary spending - there appears to be a small but significant reduction in the funding of other domestic programs (on the order of $1 billion). Regardless, the compromise will yield a substantial cut in social spending in real terms, due to inflation. In exchange for this austerity, Republicans conceded nothing but a debt ceiling increase that will extend until after the 2024 election. The agreement also includes some minor reforms to the permitting process for energy projects. Exact details of those provisions are still pending.

All this said, the deal could have been far worse. Republicans had pushed to cap discretionary spending at its 2022 level, while exempting various conservative priorities (such as the military and border enforcement). This would have translated into cuts of between 13 and 22 percent to all other government programs and agencies. And Republicans wished to maintain tight caps on discretionary spending for as long as a decade. Instead, Democrats will have a chance to chart a different fiscal course in two years, in the (admittedly unlikely) scenario that they secure full control of the federal government in 2025.

Meanwhile, negotiators found a way to avert substantial cuts to social programs by taking $20 billion from the IRS and using it to offset cuts to such programs. This is indefensible on the merits. Cutting $20 billion from the IRS does not "pay for" social spending since skimping on tax enforcement costs the government money. But given that the cut still leaves the IRS budget $60 billion higher than when Biden took office, taking money from tax collectors is preferable to taking services from America's most vulnerable. In any case, because the original $80 billion increase to the IRS budget was meant to last for a decade, the agency can continue its modernization efforts as planned, and then seek to recover the $20 billion lost to the deal from a future Democratic congress.

Republicans ultimately acquiesced to Biden's proposed hike to defense spending (as opposed to the GOP's larger one). This was a positive development, if scarcely a concession to Democratic priorities in a context where non-defense spending is singled out for cuts.

Ultimately, McCarthy's ransom was not steep enough to justify the political and economic hazards of unilateral action. Although Biden had several legally plausible means of averting default in the absence of a legislative agreement, all of these would have sowed at least temporary dysfunction in financial markets, as investors would have demanded a premium on new debt that the Supreme Court could potentially invalidate.

To an extent, Biden has the House GOP's own extremism to thank for the (relatively) modest price of averting calamity. As it became clear that a large share of McCarthy's caucus would not vote for any budget agreement that had a prayer of surviving the (Democratically controlled) Senate — and thus, that roughly 100 Democratic votes would be needed to move a deal through the House — the speaker was forced to give greater deference to Biden's red lines.

Nevertheless, the GOP's hostage-taking paid dividends. The debt-ceiling deal must be judged against what Republicans could have expected to win through ordinary budget negotiations this fall. It was inevitable that federal policy would shift right this year, from the moment that the GOP took the House in 2022. But the dynamics of an ordinary budget fight, and those of a debt ceiling showdown, are distinct.

In the former case, negotiators would actually need to haggle over cuts to specific appropriations. And debates over concrete fiscal policy choices — as opposed to whether spending should be higher or lower — tend to favor Democrats. One of the most consistent patterns in U.S. public opinion is that a majority of voters dislike deficits in the abstract, but oppose cutting spending on almost all particular initiatives that they're presented with. An AP-NORC poll taken in March found 60 percent of Americans saying that "the government is spending too much," while only 16 percent said it was spending too little. But when the survey confronted voters with 16 different types of federal spending that could be cut or increased, a majority favored reducing funding to only one of them: aid to foreign countries, which comprises less than 1 percent of the federal budget.

The debt ceiling enables Republicans to frame the debate over fiscal policy around the abstract question of how high the overall spending level should be. And this strengthens their hand. As a recent CNN poll showed, 60 percent of voters believed that the debt ceiling should only be raised if spending was cut, while 24 percent said it should be raised no matter what, and 15 percent said the U.S. should simply default on its debt. That the typical American likely does not truly understand what the debt ceiling is (i.e. that it does not increase federal spending, but only allows the government to finance it) serves the GOP's purposes just fine.

More critically, the GOP's vehicle for extortion in an ordinary budget negotiation is the threat of a government shutdown, rather than that of global financial crisis. In addition to being less menacing than the latter, government shutdowns tend to undermine conservatives, in that they provide the public with a vivid reminder of just how many indispensable functions their government performs. True, sitting presidents are keen to avoid the perception that they're too incompetent to keep the government's lights on. But despite this fact, Republican congresses have not reliably increased their leverage through government shutdowns, even under Democratic presidents.

Generally speaking, shutdown fights tend to yield continuing resolutions: Unable to reach agreement on a new budget, Congress extends the existing one. Thus, Republicans probably could have secured the debt ceiling deal's spending freeze through the ordinary budget process. But they would have had a harder time increasing work requirements if they didn't have the global economy as a hostage. Specifically, the agreement extends work requirements that currently apply to able-bodied SNAP recipients ages 18 to 49 to those aged 50 to 54. Since work requirements do not actually condition benefits on employment - but rather, on successfully proving one's employment through paperwork - the practical consequence of this reform will be to shake off food assistance to some working-poor Americans in their early 50s. The universe of people effected will be small. And Republicans did agree to newly exempt veterans and the homeless from SNAP's work requirements. Nevertheless, some vulnerable people will be hurt by a policy rooted in classism and ignorance.

Taking the debt ceiling hostage was, therefore, a tactical success for the Republican Party. Which makes this whole fiasco a loss for responsible governance in the United States: When extortion is rewarded, it will be repeated.

Democrats had the opportunity to preempt the GOP's hostage-taking by raising (or effectively abolishing) the debt ceiling when they had full control of government. Their failure to do so was malpractice. As a result, Republicans have secured a degree of influence over federal policy in excess of their formal power.