The debt ceiling deal: What was the whole point?

A manufactured crisis leads to an ineffectual "solution"

Photo by WorldSkills UK, CC BY 2.0.

It feels a bit strange to type these words, but over the last three years I became a lot more optimistic about U.S. politics. Covid relief bills in 2020 showed that Congress could take effective, bipartisan action in an emergency. The bipartisanship continued under Biden, with the infrastructure bill and (more importantly) the CHIPS Act. Meanwhile, the 2022 midterms weren’t characterized by an angry backlash “wave”. On foreign policy too, there was an unusual amount of accord — the GOP leadership remains steadfastly supportive of Ukraine, while Biden and the Dems have agreed on the need to resist growing Chinese power.

The recent fight over the debt ceiling, however, seems more like a return to the pointless obstructionism and grandstanding that characterized politics in the 2010s. There was absolutely zero reason for the House GOP leadership to use the debt ceiling — they could have just forced a deal through the normal appropriations process. Few people actually believed that the country’s leaders would let the U.S. default on its sovereign debt due to a random minor budget fight — I certainly didn’t. So the net effect of using this tactic seems to have been to make the U.S. look like a dysfunctional clown show in front of our allies, at a time when we need to be projecting an image of dependability.

Anyway, it appears the crisis is over — or at least, close to being over — with the announcement of a deal between the Biden administration and the House GOP leadership. The main elements of the deal appear to be:

• A freeze on non-defense discretionary spending in 2024 and a 1% increase in 2025

• A 3% increase in defense spending

• Expanding work requirements for SNAP (food stamps) and some smaller welfare programs

• Resumption of student debt payments (though no alteration to Biden’s debt relief plan)

• Reducing IRS funding

• Clawing back unused Covid relief money

• Some very minor changes on permitting

Remember that because inflation is still running at over 4%, a 1% increase in nominal spending actually represents a modest cut. In fact, if inflation doesn’t fall further in the next year, even the 3% increase in defense spending will represent a cut in real terms.

Now, if you forced me to have an optimistic take on this deal, it would be something along the lines of:

1. Yay, the U.S. won’t have a sovereign default over absolutely nothing! (A fairly low bar, but OK.)

2. Across-the-board restraints in nominal spending are actually a good way to cut spending (in fact I suggested this earlier).

3. The House GOP had initially demanded large cuts in nominal spending, which would have been pretty destabilizing to a lot of essential programs (research, infrastructure, etc.). These demands might have been just an initial negotiating tactic, or their absence might speak to Biden’s negotiating ability, but anyway it’s good that they didn’t make it into the deal.

4. Clawing back unused Covid funds and resuming student debt payments are both good moves. The pandemic is over, and these are emergency measures that are no longer needed.

5. SNAP benefits will have expanded work requirements, but there will be expanded access for veterans and the homeless, which is good.

6. Any progress at all on permitting reform is good.

But as I said, that’s what I would write if you held an armed quadcopter drone to my head and forced me to have an optimistic take. In fact, I’m free to have whatever take I want, and honestly this whole episode has deflated some of my budding optimism about the effectiveness of the American political system.

First of all, it doesn’t include any tax increases. In fact, the House GOP apparently originally wanted to include tax cuts in the deal, which if you ask me is pretty crazy to include in a package of measures designed to limit the federal debt. Thankfully there aren’t any explicit tax cuts in the deal, but in practice the partial defunding of the IRS could make it harder to collect on existing taxes, and will thus raise the deficit. In any case, taxes are an important part of austerity, and without them, the power of this deal to limit government borrowing will be greatly reduced.

Second, the overall spending cuts will be modest. Only about 27% of our federal spending is classified as “discretionary”; about 65% is “mandatory” spending, which only means that it doesn’t go through the appropriations process. (The remainder is interest on the debt.) The spending restraint in this deal will affect only the “discretionary” portion, leaving the “mandatory” majority untouched. Here’s what we include in “mandatory” spending:

Source: CBO

The obvious thing to cut here would be Biden’s student loan cancellation, which is included here as a $482 billion charge — almost 2% of GDP. But that was left untouched. It would also be possible to slow the growth of government health benefits like Medicare; this is politically very difficult to do, but will be increasingly unavoidable in the years to come.

A third problem with the deal is that because the discretionary spending freeze is pretty indiscriminate, it could scuttle attempts to revitalize federal research spending. Here’s Jim Pethokoukis of the American Enterprise Institute:

Whatever the exact details, it seems pretty likely that the big increase in federal spending on science and innovation isn’t going to happen as set out in the bipartisan CHIPS and Science Act passed last year. Now things won’t be as bad as if the bill passed by House Republicans—it would reduce discretionary spending by more than $3.5 trillion over the coming decade—were to actually happen. In that case, according to science budget analyst Matt Hourihan, federal science investment would decline by 19 percent, or $442 billion, through 2033 versus a baseline scenario in which spending increases with inflation.

That’s really bad news for the nascent attempt to shore up America’s technological competitiveness vis-a-vis the hard-charging China. Once again, the U.S. government is proving more adept at promising big sums of money than at actually delivering tangible results. Hopefully science and technology funding will get carved out of the spending restraint in the final deal; there are things worth spending a lot more money on, and this is one of them.

A fourth problem with the deal is the work requirements for SNAP. It’s not a huge change — the age limit for work requirements will reportedly be raised from 50 to 54 — but that will be enough to kick a number of needy people off the program. That’s the finding of Gray et al. (2020):

Work requirements are common in many U.S. safety net programs. Evidence remains limited, however, on the extent to which work requirements increase economic self-sufficiency or screen out vulnerable individuals…[W]e find that work requirements reduce SNAP participation by 52 percent. Very low-income and homeless adults are disproportionately screened out. We statistically rule out employment increases of more than 2 percentage points.

Americans really, really love work requirements for welfare programs; this has been true since the time of FDR. People argue back and forth about the overall effectiveness of these requirements in actually getting people to work, but it seems unlikely that making 54-year-olds work for their food stamps will have much of an incentive effect; if “not being poor enough to need food stamps” isn’t already enough of an incentive to go get a job, it’s unlikely that the threat of having your food stamps revoked will suddenly change your calculus. And indeed, this is exactly what Gray et al. find. So really, this is just kicking a bunch of middle-aged people off of food stamps — a little bit of cruelty for a paltry bit of government savings.

But perhaps the most underwhelming aspect of the debt ceiling deal is that it had a chance to address America’s inability to build critical infrastructure…and it didn’t take that chance. Here’s the White House’s explanation of what the bill does:

Streamlining the agency process for submitting environmental review might represent a very modest increase in state capacity. But as Alec Stapp, Joshua Siegel, and many others have pointed out, this doesn’t include either a limitation on people’s ability to sue projects to make them do more NEPA reviews, or deadlines limiting how long those reviews can take. Those were the two major items that advocates of permitting reform have sought; without either, this deal will mainly be window dressing.

And as for giving electricity transmission special treatment in the NEPA process (as we currently give some types of fossil fuel infrastructure), this was dropped altogether in favor of a study — no actual policy! — of one narrow aspect of the issue:

Remember that without a lot more transmission, it will be impossible to complete the transition to green energy, and the Inflation Reduction Act will largely be an exercise in futility.

Apparently House Speaker Kevin McCarthy has promised to work with Biden on permitting reform in a separate bill, so hopefully that will pan out. But the fact that it was cut from the debt ceiling deal just makes that deal even more ineffectual.

In other words, the debt ceiling deal has a little bit of positive, a little bit of negative, and a whole lot of disappointing “meh”. Normally, a bill like that would be nothing to write home about; I probably wouldn’t even bother with a blog post, even on a slow news week. But what frustrates me about this nothingburger of a result is how incredibly costly it was to produce. The House GOP went through months of dramatic, high-stakes negotiations, forced the administration to consider the Fourteenth Amendment and the trillion dollar coin, got the media talking seriously about the prospect of a U.S. sovereign default, and made America look like a dysfunctional circus in front of our allies at a time when China is looking for any excuse to declare that the West is failing…and all that for a little bit of discretionary spending restraint, a few added work requirements for food stamps, and a little defunding of the IRS? Seriously?? It’s like if a guy walked into a restaurant with a ticking bomb demanding to blow everyone up if he didn’t get a free peppermint!

Look, I try to stay optimistic. This isn’t a bad deal, and I still hold out hope that now that McCarthy has convinced the GOP base that he’s just as much of a tough guy as Republicans were in the days of yore, he can get back to creating the same kind of actually useful bipartisan legislation that we saw in Biden’s first two years. But this whole debt ceiling saga really just has me rubbing my face in my hands.

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