In a replay of the Obama years, House Republicans are demanding spending cuts to raise the national debt ceiling and President Joe Biden isn’t inclined to negotiate. U.S. Treasury Secretary Janet Yellen is making unnecessary ruminations about a federal default if the limit is not raised.
Across cycles of expansion, macroeconomic crises and recession, the national debt grows more rapidly than the U.S. economy. The Congressional Budget Office projects it will increase to 195% of GDP in 2053 from 98% in 2023 .
The Treasury could sell bonds and the Federal Reserve print money to purchase as many bonds as necessary to keep interest rates in a range that sustains employment. In that cas, somewhere along the line America would become much like the U.K.
British Prime Minister Rishi Sunak is coping with much higher inflation than in the United States, plus union strikes and a health care crisis that would require 110% of GDP to resolve and keep British living standards from spiraling down. At some point, the U.K. hits a wall imposed by financial markets, as the budget plans of Sunak’s short-lived predecessor, Liz Truss, learned.
Currently, U.S. entitlements are about 64% of federal spending, interest payments about 9% and defense and other discretionary spending about 27% — the latter includes everything from the departments of Transportation, Education and Defense to U.S. embassies abroad.
The hard left and right in the House both have reservations about wartime aid to Ukraine and overall defense spending. Military retirements and personnel practices need an overhaul, but whatever savings are obtained should be allocated to help beef up the U.S. Navy for the threats posed by China and defending Taiwan.
“ You can’t get most Republicans within throwing distance of a competitive election to run on entitlement reform. ”
Entitlement reform is where the money is. We don’t need to be giving food stamps and Medicaid to adults who won’t work and blank checks to universities through student loans, but you can’t get most Republicans within throwing distance of a competitive election to run on entitlement reform.
Meanwhile, the hard left in the Democratic Party has embraced an interpretation of New Monetary Theory, which posits that federal deficits can be financed by printing money.
For his part, Biden can have flexible views when it suits his political reality. As a senator he voted for the Defense of Marriage Act and against raising the debt ceiling but currently appears captive to hard-left progressives.
Getting to a compromise
House Speaker Kevin McCarthy is hostage to the Freedom Caucus and can’t release a vote on the debt ceiling that does not slash spending. For McCarthy, the way out is to encourage more moderate members in the Republican House caucus to negotiate a compromise on entitlements and other spending cuts with willing House Democratics and senators from both parties.
If those problem solvers could cobble a compromise appealing to moderates in both parties, they could obtain a House vote via a discharge petition and perhaps get a vote in the Senate from Majority Leader Chuck Schumer.
In another scenario, moderates could embrace Senator Joe Manchin’s proposal for a bipartisan commission on entitlements reform, but only if it has teeth enough to convince real reforms were in the offing.
The commission’s mandate should include drafting a bill within 120 days enumerating specific savings and annual entitlement spending ceilings for the next decade. Attach that draft legislation to a bill raising the debt ceiling by a modest amount and require an up or down vote on the commission’s reform bill.
Biden could either sign the bill or let the country run out of out of money when extraordinary measures expire around June.
The federal government defaults only if the president and Yellen are not doing their jobs. The debt ceiling must be raised to finance new spending, but past spending has been paid for by the debt already outstanding.
The federal government would have 78% of what it needs to pay its bills. Biden could declare a state of emergency and prioritize. Existing debt could be rolled over — new bonds replacing those that are redeemed — the interest on the debt must be paid. That would leave about 69% of fiscal 2023 spending.
Prioritizing does require contingency plans at the Treasury to decide which bills get paid — Social Security checks and Medicare and Medicaid bills for sure, but food stamps and other entitlements could be trimmed.
What occurs then would look like past U.S. government shutdowns. Those were not pretty but didn’t end the country as we know it. Ultimately, U.S. borrowing capacity was sustained, and enough of our elected officials got reasonable to work out compromises.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.