tag:theconversation.com,2011:/uk/topics/us-debt-ceiling-7605/articlesUS Debt Ceiling – The Conversation2023-08-10T12:42:10Ztag:theconversation.com,2011:article/2110922023-08-10T12:42:10Z2023-08-10T12:42:10ZUS losing Fitch’s top AAA credit rating may portend future economic weakness<figure><img src="https://images.theconversation.com/files/541770/original/file-20230808-25-a9fldt.jpg?ixlib=rb-1.1.0&rect=132%2C150%2C6139%2C3131&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Money doesn't grow on trees for governments either.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/falling-dollar-bills-from-money-tree-royalty-free-image/157593960?adppopup=true">imagedepotpro/E+ via Getty Images</a></span></figcaption></figure><figure class="align-center zoomable">
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<p>The formerly pristine reputation of the U.S. government’s debt lost a little more luster after another prominent rating agency <a href="https://www.vox.com/2023/8/2/23817311/fitch-downgrades-us-credit-rating">demoted Uncle Sam from its AAA perch</a>.</p>
<p>What does a downgrade of U.S. creditworthiness like this actually mean?</p>
<p>While the downgrade is unlikely to have much of an impact in the short term, its implications about the state and size of U.S. indebtedness will likely reverberate on Capitol Hill, where <a href="https://apnews.com/article/congress-spending-bills-shutdown-aea04e44447fcb8a818a01a54854ac12">stalled negotiations over the budget</a> could mark a step toward the Biden administration’s first government shutdown.</p>
<p>Fitch Ratings’ decision on Aug. 1, 2023, led to small declines in the stock and bond markets. But as an economist who <a href="https://scholar.google.com/citations?user=czu6ChoAAAAJ&hl=en&oi=ao">studies the effects of monetary and fiscal policies</a>, I’ve got longer-term concerns about the downgrade’s implications for U.S. economic growth.</p>
<p>To understand why, you have to look at both the reasons for Fitch’s downgrade and what it means for U.S. borrowing going forward.</p>
<h2>Why Fitch downgraded the US</h2>
<p>Just like people, the federal government has to balance the income it takes in and the money it spends for each fiscal year. Most federal income consists of tax revenue.</p>
<p>Since 2001, <a href="https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/">that revenue has rarely covered enough</a> of the costs of everything the U.S. government pays for, from roadways to wars. When federal income falls short, the government fills the gap by borrowing money from investors. </p>
<p>That gap has gotten a lot bigger in recent years as the U.S. has spent trillions fighting COVID-19, contending with financial crises and funding several wars. As of Aug. 1, the U.S. Treasury <a href="https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny">owed US$32.6 trillion</a>, both to bondholders and other parts of the federal government. </p>
<p><a href="https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023">That’s part of the reason</a> that Fitch cut the U.S. government’s long-term creditworthiness by one notch, from AAA – its highest rating – to AA+. Fitch also cited an “erosion of governance,” specifically pointing to <a href="https://theconversation.com/political-compromises-like-the-debt-limit-deal-have-never-been-substitutes-for-lasting-solutions-206964">recent efforts by conservatives</a> to prevent the U.S. from raising its debt ceiling. </p>
<h2>What happened last time</h2>
<p>This was not the first time that a rating agency lowered the credit of the U.S. government. </p>
<p>In 2011, Standard & Poor’s, one of Fitch’s competitors, also <a href="https://www.cnn.com/2023/08/02/investing/premarket-stocks-trading/index.html">downgraded its rating for the U.S.</a> from AAA to AA+. S&P <a href="https://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit-rating/2011/08/05/gIQAqKeIxI_story.html">similarly blamed governance issues</a> – that downgrade followed a similar debt ceiling standoff – as well as the burden of rising government debt. </p>
<p>At the time, Fitch issued a warning but it didn’t cut the U.S.’s credit rating until now.</p>
<p>The 2011 episode had <a href="https://www.wsj.com/articles/SB10001424127887323984704578203593473607014">no long-term effects on financial markets</a>, including Treasury bonds – meaning investors remained happy to continue lending to the U.S. at favorable rates.</p>
<p>Does that mean Fitch’s downgrade will similarly have little long-term impact? Not necessarily.</p>
<h2>Why things might be different</h2>
<p>Any country seeking to borrow money in perpetuity needs lenders who are happy to lend.</p>
<p>For the U.S., that means it needs a constant supply of <a href="https://theconversation.com/why-the-national-debt-doesnt-matter-or-how-i-learned-to-stop-worrying-and-love-treasuries-38775">buyers for Treasury bonds</a> and the other securities it sells. These <a href="https://www.treasurydirect.gov/auctions/">securities are sold in auctions</a> and then traded on global financial markets.</p>
<p>Investors of all kinds around the world find Treasurys attractive. They’re <a href="https://www.investopedia.com/ask/answers/042215/what-are-risks-associated-investing-treasury-bond.asp">seen as safe</a>, because the U.S. government is considered less likely to default than, say, a company going bankrupt.</p>
<p><a href="https://www.fitchratings.com/">Rating agencies like Fitch</a> assess these risks and periodically adjust their credit rating scores based on their assessment on the ability of the federal government – and other borrowers – to keep up with their debt obligations.</p>
<p>“Repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said in its announcement, in a reference to recurring <a href="https://theconversation.com/political-compromises-like-the-debt-limit-deal-have-never-been-substitutes-for-lasting-solutions-206964">fights among lawmakers over raising the debt ceiling</a>.</p>
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<a href="https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="American flag design on a cracked background, worn and torn." src="https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/541773/original/file-20230808-27-no5i2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Rifts between Republicans and Democrats are making it harder for Congress to pass budgets and get other important work done.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/concept-american-flag-on-cracked-background-royalty-free-image/607610082?phrase=flag+fractured&adppopup=true">Delpixart/iStock via Getty Images Plus</a></span>
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<p>But if economists and financial analysts deem Treasurys to be growing riskier, then investors may become less interested in buying them. Alternatively, they may demand a higher interest rate in exchange for taking on the risk that the U.S. may default on its debts.</p>
<p>So, however the market reacts, I believe that this downgrade reflects the real deterioration of America’s fiscal standing as well as its ability to safeguard it. </p>
<p>And as economists and financial analysts decide Treasurys are becoming a riskier security to hold – whether because of the size of overall U.S. debt or because <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">political brinkmanship</a> is making a once-unthinkinkable default more likely – then investors may become less interested in buying them. Or, at least, they may demand the U.S. pay them more to take on the risk, resulting in higher borrowing costs for the government.</p>
<p>Ultimately, this means there will be less money for everything else the U.S. might want to spend money on – or the overall debt load will rise even faster.</p>
<h2>Limited options</h2>
<p>To cover its growing borrowing costs, the federal government has few options – none good.</p>
<p>It can borrow more money, which is seen as riskier – like taking out one loan to pay off another – and could result in an even lower credit rating and a continuous spiral of rising borrowing costs. Or it could hike tax rates or cut spending, both of which have political consequences and could be hard to accomplish given the <a href="https://www.pewresearch.org/short-reads/2022/03/10/the-polarization-in-todays-congress-has-roots-that-go-back-decades/">degree of polarization in Congress</a>.</p>
<p>Furthermore, <a href="https://doi.org/10.1111/rode.12661">research has shown that higher government debt</a> is generally associated with lower long-term economic growth, which reinforces the problem by reducing revenue and thus requiring more debt. </p>
<p>So, while Fitch’s downgrade doesn’t signal an imminent financial crisis, it does serve as a warning as Congress engages in its fiscal fights – including the <a href="https://apnews.com/article/congress-spending-bills-shutdown-aea04e44447fcb8a818a01a54854ac12">one over the budget</a> that will heat up in September.</p><img src="https://counter.theconversation.com/content/211092/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hakan Yilmazkuday does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The rating agency demoted the US government’s creditworthiness to AA+, its second-highest ranking, on Aug. 1, 2023.Hakan Yilmazkuday, Professor of Economics, Florida International UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2071642023-06-08T12:30:43Z2023-06-08T12:30:43ZWill faster federal reviews speed up the clean energy shift? Two legal scholars explain what the National Environmental Policy Act does and doesn’t do<figure><img src="https://images.theconversation.com/files/530445/original/file-20230606-19-c60dar.jpg?ixlib=rb-1.1.0&rect=7%2C3%2C2396%2C1589&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">NEPA requires federal agencies to analyze environmental impacts of projects like interstate highway construction.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/big-dig-workers-work-in-the-area-of-ft-point-on-the-route-news-photo/114791218">John Bohn/The Boston Globe via Getty Images</a></span></figcaption></figure><p><em>The National Environmental Policy Act, enacted in 1970, is widely viewed as a <a href="https://www.eli.org/land-biodiversity/national-environmental-policy-act-nepa">keystone U.S. environmental law</a>. For any major federal action that affects the environment, such as building an interstate highway or licensing a nuclear power plant, NEPA requires relevant agencies to analyze environmental impacts, consider reasonable alternatives and accept public input. It also allows citizens to sue if they believe government has not complied.</em> </p>
<p><em>Critics argue that NEPA reviews <a href="https://www.aei.org/articles/reform-of-the-national-environmental-policy-act/">delay projects and drive up costs</a>. In May 2023 negotiations over raising the federal debt ceiling, President Joe Biden agreed to certain <a href="https://www.whitehouse.gov/briefing-room/press-briefings/2023/05/28/background-press-call-on-the-bipartisan-budget-agreement/">changes to NEPA reviews</a>, which both the White House and congressional Republicans said would streamline permitting for infrastructure projects. Legal scholars <a href="https://scholar.google.com/citations?user=x0K9avIAAAAJ&hl=en">J.B. Ruhl</a> and <a href="https://scholar.google.com/citations?user=qD5L-u0AAAAJ&hl=en">James Salzman</a> explain these changes and what they mean for protecting the environment and expanding clean energy production.</em></p>
<h2>What kinds of projects typically require NEPA reviews?</h2>
<p>The statutory text of NEPA is quite sparse and open-ended. When people speak of what NEPA requires, they really are talking about how the White House <a href="https://www.whitehouse.gov/ceq/">Council on Environmental Quality</a>, or CEQ, federal agencies and the courts have implemented the law over the past 50 years. </p>
<p>The simple requirement is for agencies to create a detailed statement on the impacts of any major federal action that significantly affects the environment. A whole body of law and policy creates filters that sort projects into different NEPA buckets. </p>
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<figcaption><span class="caption">NEPA requires all federal agencies to analyze the environmental impacts of their major actions, consider alternatives and receive public comment.</span></figcaption>
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<p>First, only projects that will be carried out, funded or authorized by a federal agency are subject to NEPA. That’s a pretty big universe, but it also excludes a lot. For example, a wind farm built on private land by a private utility might not require any federal funding or approval. That means it wouldn’t be subject to NEPA. </p>
<p>If a project is subject to NEPA, the federal agency that has primary oversight assesses its impacts to decide how much analysis is needed. Many agencies use a classification known as <a href="https://ceq.doe.gov/nepa-practice/categorical-exclusions.html">categorical exclusions</a> to winnow out minor actions that they know have no significant impacts, either individually or cumulatively. For example, the Interior Department categorically excludes planned burns to clear brush on <a href="https://bianepatracker2.doi.gov/doi_and_bureau_categorical_exclusions.pdf">areas smaller than 4,500 acres</a>. </p>
<p>If the expected impacts are more extensive, but it’s not clear by how much, the agency can prepare an environmental assessment. If that assessment finds the impacts to the human environment will not be significant, that’s the end of the NEPA process. </p>
<p>If the impacts are significant, the agency will prepare a <a href="https://cdxapps.epa.gov/cdx-enepa-II/public/action/eis/search;jsessionid=A75C26C6A17A75907053FA67AC41B7AE?search=&__fsk=2062199394#results">full-blown environmental impact statement</a>, or EIS, which is a far more intensive process. <a href="https://ceq.doe.gov/laws-regulations/regulations.html">CEQ guidelines</a> establish an elaborate template of topics agencies must evaluate, and the public has opportunities to comment on a draft version. </p>
<p>A CEQ review of EISs prepared by all federal agencies from 2010 through 2018 found that, on average, it took <a href="https://ceq.doe.gov/docs/nepa-practice/CEQ_EIS_Timeline_Report_2020-6-12.pdf">about four and a half years</a> to issue an EIS, not including added time if someone sued. The lengths of these reviews ranged widely but <a href="https://ceq.doe.gov/docs/nepa-practice/CEQ_EIS_Length_Report_2020-6-12.pdf">averaged 575 pages</a>.</p>
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<a href="https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Flow chart showing numerous steps in the NEPA process." src="https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=854&fit=crop&dpr=1 600w, https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=854&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=854&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1073&fit=crop&dpr=1 754w, https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1073&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/530618/original/file-20230607-15-xre1jv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1073&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">A schematic of the NEPA process.</span>
<span class="attribution"><a class="source" href="https://www.nasa.gov/agency/nepa/process.html">NASA</a></span>
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<p>If an agency conducts lots of the same actions under a particular program, such as timber leasing on federal land, it might conduct a high-level programmatic EIS to cover the large-scale issues and then follow up with individual NEPA analyses for specific projects. </p>
<p>Decisions not to issue an EIS can be challenged in court. So can the EIS itself if critics believe that it’s inadequate.</p>
<h2>What are NEPA critics’ central arguments?</h2>
<p>Critiques of NEPA come from many different interests. The law mainly affects land development, industry and resource extraction activities such as logging, mining and drilling for oil and gas, particularly on federal public lands. </p>
<p>NEPA requires an impact assessment, but it doesn’t prescribe any particular outcome. Still, it unquestionably can add substantial time and cost to any significant project. If a project is controversial, interested parties can submit public comments that get their views on the record. If opponents aren’t happy with the final EIS, they can sue the agency responsible for the decision in federal court. </p>
<p>Between agency review and litigation, NEPA can add many years to a project’s development timeline before it is “shovel ready.” For example, it takes <a href="https://www.perc.org/2022/06/14/does-environmental-review-worsen-the-wildfire-crisis/">roughly four to seven years</a> to complete environmental reviews for prescribed burns that the U.S. Forest Service carries out to reduce wildfire risks.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1651944242137145344"}"></div></p>
<p>Supporters argue that NEPA reviews have <a href="https://www.nrdc.org/resources/never-eliminate-public-advice-nepa-success-stories">avoided many bad decisions</a>. In our view, the NEPA process is an important feature of the country’s stewardship of its natural resources. But we also share the growing concern that it can be used to <a href="https://twitter.com/AlecStapp/status/1654456917081595905">delay building renewable energy infrastructure</a> that the U.S. urgently needs to mitigate climate change. </p>
<h2>Did the debt ceiling agreement significantly change the NEPA process?</h2>
<p>Many of the changes are little more than tweaks. Others codify long-standing practices based on how the Council on Environmental Quality, agencies and courts implement the law. </p>
<p>One notable change is requiring a single lead agency and a single environmental impact statement for projects, even when those projects require multiple agency approvals. There also are some new time and page limits. For example, environmental impact statements will be required to be completed within two years and be no more that 150 pages long for most projects, and 300 pages for the most complex projects. </p>
<p>There also are some changes to definitions, such as what constitutes a “major federal action,” that narrow NEPA’s scope to some degree, although it will take time to sort out their meaning. Overall, we do not see these changes as a major overhaul of NEPA. </p>
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<a href="https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A dredge deposits crushed shells off a floating platform." src="https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/530437/original/file-20230606-19-3i9hzm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The U.S. Army Corps of Engineers places crushed shells in Maryland’s Tred Avon River as part of efforts to restore the Chesapeake Bay’s historic oyster reefs. After a 2009 NEPA review spotlighted risks associated with the proposed use of disease-resistant imported Chinese oysters, native oysters were used instead.</span>
<span class="attribution"><a class="source" href="https://flic.kr/p/QosdpW">Sean Fritzges, U.S. Army/Flickr</a></span>
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<h2>Will the changes speed up work on clean energy systems?</h2>
<p>Maybe, but not nearly as much as needed. First, NEPA applies to projects that need federal funding or approval, such as under the Endangered Species Act. Getting that money or agency green light can also involve delays and litigation independent of the NEPA review.</p>
<p>Second, many state and local laws can affect large renewable energy projects, and those statutes can also be used to slow projects down. The bottom line is that to move the needle, politicians will have to do more to reform the project review process.</p>
<p>The debt ceiling agreement left several big questions unaddressed. They include <a href="https://theconversation.com/the-us-needs-a-macrogrid-to-move-electricity-from-areas-that-make-it-to-areas-that-need-it-155938">where to build high-voltage electric transmission lines</a>; which <a href="https://www.doi.gov/pressreleases/interior-department-outlines-roadmap-continued-renewable-energy-progress-public-lands">federal public lands and offshore waters</a> can be used for power lines and renewable power production; and where to <a href="https://theconversation.com/the-us-is-worried-about-its-critical-minerals-supply-chains-essential-for-electric-vehicles-wind-power-and-the-nations-defense-157465">mine for essential minerals</a>.
Beyond those immediate priorities, if carbon sequestration technology can be developed and scaled up, the U.S. will need an enormous <a href="https://theconversation.com/what-is-carbon-capture-and-storage-epas-new-power-plant-standards-proposal-gives-it-a-boost-but-ccs-is-not-a-quick-solution-205462">buildout of carbon capture and storage infrastructure</a> to meet net-zero goals. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/e0yWihp9RGg?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">As renewable energy scales up in the U.S., local opposition could impede some utility-scale projects.</span></figcaption>
</figure>
<p>All of these involve incredibly complex permitting processes, and tweaking NEPA won’t change that. Other hot-button issues – including federal preemption of state and local laws, impacts on Native American cultural lands, and environmental justice – will make further permitting reforms politically difficult. </p>
<p>Even this first small measure was hotly contested, and happened now only because it was tied to the debt limit legislation. As the inclusion of federal approval for the <a href="https://www.washingtonpost.com/climate-environment/2023/05/31/debt-deal-mountain-valley-pipeline/">Mountain Valley gas pipeline</a> in the debt ceiling agreement shows, in politics you need a quid in exchange for a quo. We expect to see a lot more deal-making if Congress takes permitting reform seriously.</p><img src="https://counter.theconversation.com/content/207164/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>J.B. Ruhl is Of Counsel to Smith-Robertson, a law firm located in Austin, Texas that occasionally provides Endangered Species Act, NEPA, and other environmental compliance counseling to infrastructure development projects, including wind power production facilities. </span></em></p><p class="fine-print"><em><span>James Salzman serves on the board of the Environmental Defense Center, an environmental advocacy group on the central coast of California.</span></em></p>Do environmental reviews improve projects or delay them and drive up costs? Two legal scholars explain how the law works and how it could influence the ongoing transition to renewable energy.J.B. Ruhl, Professor of Law, Director, Program on Law and Innovation, and Co-director, Energy, Environment and Land Use Program, Vanderbilt UniversityJames Salzman, Professor of Environmental Law, University of California, Los AngelesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2069642023-06-06T12:31:47Z2023-06-06T12:31:47ZPolitical compromises – like the debt-limit deal – have never been substitutes for lasting solutions<figure><img src="https://images.theconversation.com/files/530182/original/file-20230605-29-sz67gk.jpeg?ixlib=rb-1.1.0&rect=0%2C7%2C4800%2C3202&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will the debt ceiling bill negotiated by President Joe Biden, left, and House Speaker Kevin McCarthy be a lasting solution?</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CongressDebt/886fd8d91e3147b3831e60960864d0c0/photo?Query=(persons.person_featured:%22Kevin%20McCarthy%22)%20AND%20(persons.person_featured:%22Joe%20Biden%22)%20AND%20%20(Biden%20McCarthy)%20&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=124&currentItemNo=25">AP Photo/J. Scott Applewhite</a></span></figcaption></figure><p>The <a href="https://docs.house.gov/billsthisweek/20230529/BILLS-118hrPIH-fiscalresponsibility.pdf">compromise to avoid default</a> on the U.S. debt <a href="https://www.nytimes.com/2023/06/03/us/politics/biden-debt-bill.html">passed muster</a>, eventually. President Joe Biden and Speaker of the House Kevin McCarthy pulled it off.</p>
<p>The nation can breathe, at least for the next two years. And yet, the far right is <a href="https://www.nbcnews.com/politics/congress/far-right-members-unhappy-debt-deal-float-threatening-mccarthys-speake-rcna86797">unhappy</a>, many Democrats from the progressive wing are similarly <a href="https://www.cbsnews.com/video/why-some-democrats-are-unhappy-with-bidens-debt-ceiling-agreement/">annoyed</a>, and <a href="https://theconversation.com/covid-19-clawbacks-spending-caps-and-a-cut-what-house-republicans-got-in-return-for-pushing-the-us-to-the-brink-of-default-205958">the gnawing problem</a> – the ballooning national debt – that is at the bottom of this compromise hasn’t gone away.</p>
<p>But isn’t this precisely what politics is all about? As Biden said in a formal statement on the deal, “The agreement represents a compromise, which means <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2023/05/27/statement-from-president-joe-biden-on-bipartisan-budget-agreement-in-principle/">not everyone gets what they want</a>.” And he concluded: “That’s the responsibility of governing.”</p>
<p>Political scientists have long pondered over this exact topic: compromises. There seems to be a quasi-consensus that good governing <a href="https://press.princeton.edu/books/paperback/9780691160856/the-spirit-of-compromise">demands them</a> — the more, the better.</p>
<p><a href="https://www.press.jhu.edu/books/title/12786/first-among-men">As a historian</a>, I’m here to make the case that compromises are rarely a lasting solution. It’s true that they buy time. Also, they may be necessary to face an emergency. But they are <a href="https://www.graywolfpress.org/books/compromise">usually ugly</a>, like battles or slaughterhouses. Compromises leave many spattered with blood and gore.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A white-domed building at the end of a large street." src="https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/530183/original/file-20230605-29-tp9y66.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Is a solution crafted by Congress more democratic than one that two party leaders cobble together?</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Congress/01b983e1a06d4b12aa0d3244aee4c6ba/photo?Query=US%20Capitol%20building&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=8216&currentItemNo=248">AP Photo/Alex Brandon</a></span>
</figcaption>
</figure>
<h2>‘Doing what good we can’</h2>
<p>There’s nothing wrong with the spirit of compromise, generally speaking. As Thomas Jefferson said, experience teaches “the reasonableness of mutual sacrifices of opinion among those who are to act together.” </p>
<p>“When we cannot do all we would wish,” Jefferson determined, we should be content in “<a href="https://founders.archives.gov/documents/Jefferson/01-42-02-0066">doing what good we can</a>.”</p>
<p>The flip side is that compromises, or, in Jefferson’s words, the portion of good that can be done, often add up to hastily concocted responses to crises. And politics is – or should be – an art more ambitious than the management of crises and emergencies. Politics is nurtured by vision. It sees into the future and goes beyond the quest for last-minute, <a href="https://press.princeton.edu/books/paperback/9780691174051/politics-and-vision">temporary solutions</a>.</p>
<p>The <a href="https://constitutionus.com/constitution/what-is-the-3-5-compromise/">Three-Fifths Compromise</a> comes immediately to mind as an example of the poor quality – and only temporary utility – of compromise. When the <a href="https://teachingamericanhistory.org/resource/the-constitutional-convention-refurbished/">Constitutional Convention</a> met in Philadelphia in the summer of 1787, there was an urgency to fathom how to apportion representation. In the new nation, what would be the number of representatives each state would get?</p>
<p>It was clear to <a href="https://www.archives.gov/founding-docs/founding-fathers#:%7E:text=In%20all%2C%2055%20delegates%20attended,sessions%20in%20a%20sedan%20chair.">all delegates</a> that the tally had to be based somehow on each state’s population. More populous states would receive more representatives. But how to count enslaved persons? In the minds of these 18th-century men, the question was: Were they “inhabitants” or “property,” like cattle?</p>
<p>The debate soon turned rough. The clock was ticking. Were it not for two leaders, <a href="https://www.archives.gov/founding-docs/founding-fathers-pennsylvania#wilson">James Wilson</a> from Pennsylvania and <a href="https://www.archives.gov/founding-docs/founding-fathers-south-carolina#pinckney">Charles Pinckney</a> from South Carolina, the convention would have probably nose-dived into chaos.</p>
<p>The Three-Fifths Compromise, written into the <a href="https://constitutionus.com/constitution/articles/article1/">Article 1, Section 2, Clause 3 of the new Constitution</a>, was how these two leaders managed the crisis. Non-free persons who display, in the wording of Federalist #54, a “<a href="https://avalon.law.yale.edu/18th_century/fed54.asp">mixed character of persons and of property</a>,” will be counted not as whole persons but as three-fifths of a free person.</p>
<p>The compromise enabled the Constitution to be drafted, and later ratified, by nine of the 13 states comprising the union. It’s the proof that compromises, no matter how horrible, are used to solve seemingly intractable problems – but at a cost.</p>
<h2>Another compromise over enslavement</h2>
<p>In 1819, after the <a href="https://pressbooks-dev.oer.hawaii.edu/ushistory/chapter/the-missouri-crisis/">Missouri territory applied for statehood</a>, another big crisis shook the nation’s marrow. Would the new state make slavery legal?</p>
<p>At that moment, it was clear that breaking the balance of power between the 11 Northern states that opposed the expansion of slavery and the 11 Southern states that didn’t want to restrict human bondage would put the nation in serious jeopardy.</p>
<p>But the Speaker of the House, <a href="https://history.house.gov/People/Detail/11051">Henry Clay</a> from Kentucky – aka the “Great Compromiser” – was able to broker the <a href="https://www.archives.gov/milestone-documents/missouri-compromise">Missouri Compromise</a>. The idea, this time, was that Missouri would become a state without any restriction over slavery; and Maine, formerly a part of Massachusetts, would enter the union as a state where slavery was outlawed.</p>
<p>On March 6, 1820, President <a href="https://www.history.com/this-day-in-history/monroe-signs-the-missouri-compromise">James Monroe</a> signed the compromise into law. Just like Clay, he would emerge from this adventure as the savior of the nation, so much so that he went on to be elected to a second term by an almost unanimous vote.</p>
<p>Slaveholders were appeased, and the union saved. But the Missouri Compromise, like the Three-Fifths Compromise, did nothing to fix the problems that had caused the crises in the first place. Human bondage in the young country persisted.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A vintage portrait of an older man with receding brown hair, in a black coat with a white shirt." src="https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=735&fit=crop&dpr=1 600w, https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=735&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=735&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=924&fit=crop&dpr=1 754w, https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=924&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/530184/original/file-20230605-7458-5re7t2.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=924&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Speaker of the House Henry Clay, known as the ‘Great Compromiser,’ was able to broker the Missouri Compromise of 1820.</span>
<span class="attribution"><a class="source" href="https://npg.si.edu/object/npg_NPG.65.44">National Portrait Gallery, Smithsonian Institution</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Heroes and saviors vs. democracy</h2>
<p>The history of the United States is <a href="https://www.cnn.com/2013/10/17/politics/gallery/political-compromises/index.html">fraught with political compromises</a>. Many of them were ugly, <a href="https://guides.loc.gov/compromise-1850">at once a success and a failure</a>.</p>
<p>Compromises are often flimsy and abet major problems in the long run. Moreover, by calling the public attention to the few protagonists who play the game, they also distract. The compromise gives <a href="https://www.nytimes.com/2023/06/03/opinion/kevin-mccarthy-house-speaker.html">a platform</a> to the “heroes” and “saviors” – in the most recent case, Biden and McCarthy.</p>
<p>It can be dangerous to assume that politics, by its nature, only requires fast-moving, situation-assessing, occasion-grasping leaders who are eager to compromise – especially prominent and famous ones.</p>
<p>In politics, lasting solutions that would likely protect the common good come not from shrewd compromisers after a couple of weeks of pushing and pulling. They are ushered in by <a href="https://mccourt.georgetown.edu/news/bipartisan-index-rankings-117th-congress/">bipartisan measures</a> that require much more time and patience.</p>
<p>Beyond and above the frantic interplay among those in charge, there are the myriad standing committees, subcommittees, commissions and all the organisms of which Congress is made.</p>
<p>Real solutions that would reflect the democratic nature of U.S. government entail the daily work that takes place through deliberative discussions in Congress that allow the weighing of pros and cons.</p>
<p>The not-very-famous representatives who, day in and day out, participate in committees and commissions have time, focus and patience. Sometimes – quite often, indeed – they churn out <a href="https://www.washingtonpost.com/business/this-congressshowed-that-democracy-can-work/2022/12/22/c8fffcca-8244-11ed-8738-ed7217de2775_story.html">notable bipartisan agreements</a>. </p>
<p>It may not be sensational, but such regular organisms, not heroes and saviors, represent the real embodiment of democracy, of “We, the people.”</p><img src="https://counter.theconversation.com/content/206964/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Maurizio Valsania does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Compromises, no matter how horrible, have long been used to solve seemingly intractable political problems – but at a cost.Maurizio Valsania, Professor of American History, Università di TorinoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2064622023-06-01T12:31:37Z2023-06-01T12:31:37ZGetting Social Security on a more stable path is hard but essential – 2 experts suggest a way forward<figure><img src="https://images.theconversation.com/files/528714/original/file-20230528-19-7mz301.jpg?ixlib=rb-1.1.0&rect=54%2C39%2C5166%2C3475&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">No big Social Security reforms have taken effect since the Reagan administration.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/president-reagan-speaks-before-signing-the-social-security-news-photo/568872063">David Hume Kennerly/Getty Images</a></span></figcaption></figure><p>Social Security is in trouble. </p>
<p>The retirement and disability program has been running a cash-flow deficit since 2010. Its trust fund, which holds US$2.7 trillion, is rapidly diminishing. Social Security’s trustees, a group that includes the secretaries of the departments of Treasury, Labor, and Health and Human Services, as well as the Social Security commissioner, project that the trust fund will be <a href="https://www.ssa.gov/OACT/TR/2023/tr2023.pdf">completely drained by 2033</a>. </p>
<p>Under current law, when that trust fund is empty, Social Security can pay benefits only from dedicated tax revenues, which would by that point cover about <a href="https://www.ssa.gov/OACT/TRSUM/tr23summary.pdf">77% of promised benefits</a>. Another way to say this is that when the trust fund is depleted, under current law, Social Security beneficiaries would see a sudden 23% cut in their monthly checks in 2034. </p>
<p><a href="https://scholar.google.com/citations?hl=en&user=CwMgD5QAAAAJ">As economists</a> who <a href="https://scholar.google.com/citations?user=y0lrTOoAAAAJ&hl=en&oi=ao">study the Medicare and Social Security programs</a>, we view the above scenario as politically unacceptable. Such a sudden and dramatic benefit cut would anger a lot of voters. Unfortunately, the actions necessary now to avoid it – like raising taxes or cutting benefits – aren’t getting serious consideration today. But we believe there are strategies that could work.</p>
<p><iframe id="QOa9h" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/QOa9h/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Where the money for benefits comes from</h2>
<p>Roughly <a href="https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf">67 million Americans, most of whom are 65 or older</a>, receive Social Security benefits. The agency <a href="https://www.ssa.gov/news/press/releases/2021/#8-2021-2">disburses more than $1 trillion annually</a>. It’s the government’s largest single expenditure, constituting nearly <a href="https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/">20% of the total federal budget</a>.</p>
<p><a href="https://www.ssa.gov/oact/progdata/taxRates.html">Social Security is funded</a> by a payroll tax of 12.4% on wages split equally between workers and employers. Self-employed people pay the entire 12.4%. This payroll tax applies to earnings up to $160,200 as of 2023. The government increases this cap annually based on increases in the <a href="https://www.investopedia.com/terms/n/national-average-wage-index-nawi.asp">National Average Wage Index</a> – a measure that combines wage growth and inflation. The program also receives about 4% of its revenue from a <a href="https://www.ssa.gov/OACT/TR/2023/tr2023.pdf">tax on Social Security benefits</a>, though not everyone who receives them has to pay this tax.</p>
<p>Social Security tax revenue stayed relatively flat after 1990. But the costs of the program rose sharply in 2010, in part because of early <a href="https://doi.org/10.1177/0002716213499535">retirements in response to the Great Recession</a>.</p>
<p>Social Security spending has recently been growing more rapidly because of a <a href="https://www.pewresearch.org/short-reads/2020/11/09/the-pace-of-boomer-retirements-has-accelerated-in-the-past-year/">wave of baby boomer retirements</a>, which added to a decline in the <a href="https://retirementincomejournal.com/article/does-social-security-use-the-wrong-dependency-ratio">number of workers per retiree</a>.</p>
<p>Costs of the program are expected to further exceed the money that’s coming in, which will <a href="https://www.ssa.gov/OACT/TR/2023/tr2023.pdf">continue to drain the trust fund</a>, according to the program’s trustees. </p>
<p>Barring immediate action by the government, the trust fund’s exhaustion is only a little more than a decade away. And yet few members of Congress seem willing to do something about it. For example, <a href="https://thehill.com/homenews/sunday-talk-shows/3835082-mccarthy-social-security-medicare-cuts-off-the-table/">Social Security reform was not even</a> on the table during the 2023 negotiations over the debt ceiling and spending cuts.</p>
<h2>Trust fund</h2>
<p>Where did the trust fund, which helps cover the program’s costs, come from?</p>
<p>While the Social Security program was collecting surpluses from 1984 to 2009, that extra money funded other spending – keeping other taxes lower than they would have been otherwise and <a href="https://www.whitehouse.gov/omb/budget/historical-tables/">partially covering the budget deficit</a>.</p>
<p>During Social Security’s years of surplus, the excess revenues were credited to the trust fund in the form of <a href="https://www.ssa.gov/oact/progdata/specialissues.html">special-issue government bonds</a> that yielded the prevailing interest rates. When those bonds are needed to pay for Social Security expenses, the Treasury redeems them.</p>
<p>Those bonds are components of the <a href="https://www.crfb.org/papers/qa-gross-debt-versus-debt-held-public">government’s $31.4 trillion gross debt</a>. </p>
<h2>Last reformed during the Reagan administration</h2>
<p>Reducing the benefits current retirees receive would be extremely unpopular. Likewise, people now in the workforce who are nearing retirement would certainly object strongly if they were told to expect lower benefits in retirement than they have been promised throughout their careers.</p>
<p>The last time the government made big changes to Social Security was in 1983, during the Reagan administration, when the government enacted reforms that <a href="https://www.ssa.gov/history/1983amend.html">slowly reduced benefits over time</a>. These changes included raising the full retirement age, a change that is <a href="https://www.ssa.gov/benefits/retirement/planner/agereduction.html">still being phased in</a>. Because of those changes, workers born in 1960 or later cannot retire with full benefits until age 67 – two years later than the original retirement age.</p>
<p>The 1983 reforms also included increases in the Social Security payroll tax rate from 10.4% in 1983 to 12.4% by 1990, and for the first time levied federal income taxes on higher-income retirees’ benefits. Workers bore the burden of the payroll tax increases and <a href="https://faq.ssa.gov/en-us/Topic/article/KA-02471">higher-income retirees bore the burden of the tax on benefits</a>.</p>
<p>Those changes bolstered the program’s finances, but they no longer suffice.</p>
<p>The bipartisan <a href="https://www.ssa.gov/history/reports/pcsss/pcsss.html">2001 Commission to Strengthen Social Security</a> tried – and failed – during George W. Bush’s presidency to get Congress to enact reforms to shore up the program’s finances. There’s been no momentum toward resolving the problem since then.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A man with gray hair sits at a table in front of a giant replica of a Social Security card." src="https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=394&fit=crop&dpr=1 600w, https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=394&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=394&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/529392/original/file-20230531-27-mc2adl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">George W. Bush sought to reform Social Security early in his presidency.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/george-bush-speaks-about-social-security-during-a-news-photo/525606778">Brooks Kraft LLC/Sygma via Getty Images</a></span>
</figcaption>
</figure>
<h2>4 principles</h2>
<p>We believe that policymakers and lawmakers need to follow four principles as they consider how to move forward.</p>
<ol>
<li><p>The program should be self-funded in the long run so that its annual revenues match its annual expenses. That way the many questions that arise related to trust fund accounting and whether Social Security tax revenues are being used for their intended purposes would be eliminated. </p></li>
<li><p>The reform burden should be shared across generations. Current retirees can share the burden through a reform that reduces the cost-of-living adjustment. Today’s workers can share the burden through an increase in the cap on income subjected to Social Security taxes so that 90% of total earnings are taxed. Continued gradual increases in the retirement age to keep pace with <a href="https://www.cbo.gov/system/files/2022-07/57975-demographic-outlook.pdf">anticipated longevity gains</a> would also be borne by current workers. </p></li>
<li><p>The government should make sure that Social Security benefits will be adequate for lower-income retirees for years to come. That means reforms that slow the benefit growth of future retirees would be designed to affect only higher-income retirees. </p></li>
<li><p>Any changes to Social Security should help constrain the future growth of federal spending, given the <a href="https://www.cbo.gov/publication/58946#_idTextAnchor004">current and projected growth in the budget deficit</a>.</p></li>
</ol>
<h2>Advantages of ending the delay</h2>
<p>It appears that the U.S. – citizens and elected officials included – are deferring serious debate on this urgent matter until the trust fund’s depletion is imminent. That’s unwise. Acting sooner rather than later would leave more options available to gradually resolve the program’s financial shortfalls. </p>
<p>Ending this procrastination would also give the millions of people who rely on Social Security benefits, taxpayers and businesses more time to prepare for any changes required by overdue reforms.</p><img src="https://counter.theconversation.com/content/206462/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Rettenmaier does not work for, consult, or own shares in or receive funding from any company or organization that would benefit from this article. He has received funding from the American Enterprise Institute, the Bradley Foundation, the Charles Koch Foundation, and the National Center for Policy Analysis. </span></em></p><p class="fine-print"><em><span>Dennis W. Jansen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If Congress and the White House fail to take action, Social Security beneficiaries would see a sudden 23% cut in their monthly checks in 2034.Andrew Rettenmaier, Executive Associate Director of the Private Enterprise Research Center, Texas A&M UniversityDennis W. Jansen, Professor of Economics and Director of the Private Enterprise Research Center, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2068372023-06-01T02:37:06Z2023-06-01T02:37:06ZHouse approval of debt ceiling deal a triumph of the political center<figure><img src="https://images.theconversation.com/files/529495/original/file-20230601-21610-qy6u5o.jpeg?ixlib=rb-1.1.0&rect=17%2C17%2C5973%2C3970&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The U.S. Capitol, where on May 31, 2023, the House passed a debt limit deal on a bipartisan vote.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DebtLimit/3a53a2902bfa4fc8807afbe178dfe25d/photo?Query=debt%20limit&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1940&currentItemNo=3">AP Photo/Jose Luis Magana</a></span></figcaption></figure><p>Talking with a friend about the debt ceiling negotiations, I mentioned that there were incentives for centrists in Congress to cobble together a deal. My friend said, incredulously, “Do we actually have centrists in Congress?”</p>
<p>Certainly, it is true that the country’s two major parties have <a href="https://www.pewresearch.org/short-reads/2022/03/10/the-polarization-in-todays-congress-has-roots-that-go-back-decades/">sorted and separated</a> over the last 50 years. The average Democrat is more liberal and the average Republican more conservative than the average in the 1970s – or even 10 years ago. </p>
<p>But with the <a href="https://www.washingtonpost.com/politics/interactive/2023/house-vote-debt-ceiling-deal/?itid=hp-top-table-main_p001_f002">House vote</a> on GOP Speaker Kevin McCarthy’s deal with Democratic President Joe Biden <a href="https://www.cnn.com/2023/05/31/politics/house-vote-debt-limit-bill/index.html#:%7E:text=The%20House%20of%20Representatives%20voted,to%20be%20signed%20into%20law.">to suspend the debt ceiling through Jan. 1, 2025</a>, successful passage was undoubtedly carried by centrists. The middle may <a href="https://www.brookings.edu/articles/the-disappearing-political-center-congress-and-the-incredible-shrinking-middle/">be shrinking</a>, but it still exists, and it is critical in a closely divided Congress. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Two gray-haired men in dark suits and white shirts and ties, standing outside on a large set of steps." src="https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/529460/original/file-20230531-23355-r30h9j.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The deal was negotiated by President Joe Biden, left, House Speaker Kevin McCarthy and their representatives.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CongressDebt/886fd8d91e3147b3831e60960864d0c0/photo?Query=(persons.person_featured:%22Joe%20Biden%22)%20AND%20(persons.person_featured:%22Kevin%20McCarthy%22)%20AND%20%20(mccarthy%20biden)%20&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=122&currentItemNo=23">AP Photo/J. Scott Applewhite</a></span>
</figcaption>
</figure>
<h2>Ideological space within parties</h2>
<p>Why did the center carry such weight? </p>
<p>As a starting point, it helps to look at the spectrum of ideology within each party. There is significant <a href="https://voteview.com/congress/house/-1">ideological distance</a> between, say, <a href="https://www.sacbee.com/news/politics-government/election/california-elections/article273778515.html">Barbara Lee, a liberal California Democrat</a>, or the four progressive members of what’s called “<a href="https://www.cnn.com/2019/07/15/politics/who-are-the-squad/index.html">The Squad</a>,” and the two moderate Democrats, <a href="https://www.washingtonpost.com/politics/2023/05/05/maine-moderate-debt-ceiling/">Jared Golden of Maine</a> and Washington state’s <a href="https://www.politico.com/news/magazine/2023/01/19/marie-gluenskamp-perez-democrats-middle-class-00078215">Marie Gluesenkamp Perez</a>, who voted with Republicans in late May <a href="https://www.wmtw.com/article/jared-golden-student-loan-cancellation-vote/44002364">to overturn</a> Biden’s student debt relief policies. </p>
<p>Similarly, there is ideological space between Golden and Gluesenkamp Perez’s fellow member of the moderate, bipartisan <a href="https://problemsolverscaucus.house.gov/">Problem Solvers Caucus</a>, <a href="https://apnews.com/hub/don-bacon">Don Bacon, a Republican from Nebraska</a>, and <a href="https://www.nytimes.com/2022/12/12/us/politics/lauren-boebert-colorado-elected.html">Colorado Republican and conservative firebrand Lauren Boebert</a>. </p>
<p>Within the Republican-controlled House, this left ample space for GOP defectors to <a href="https://www.washingtonpost.com/politics/interactive/2023/house-vote-debt-ceiling-deal/?itid=hp-top-table-main_p001_f002">vote against the debt ceiling compromise</a>, but also yielded <a href="https://www.nytimes.com/interactive/2023/05/31/us/politics/house-debt-limit-live-vote.html">dozens of Democrats who voted in favor</a>, in the <a href="https://www.washingtonpost.com/business/2023/05/31/debt-ceiling-deal-house-vote-bill/">final 314-117 bipartisan vote</a>. The two-party division of Congress belies the fact that the ideological distance between moderates in either party is not that great. </p>
<p>Another explanation of the center’s power in Congress now – and in the House debt ceiling vote – is the incentive that exists to be seen as a winning party. Being perceived by voters as a party that gets things done <a href="https://www.jstor.org/stable/pdf/4620079.pdf?refreqid=excelsior%3Aab2cff103fcd9ba9ea8b92447a562ff4&ab_segments=&origin=&initiator=&acceptTC=1">helps win elections</a> – and centrists are often the ones whose votes are up for grabs, one way or another.</p>
<p>That said, there is an electoral cost for a party being too unified. On well-publicized votes on which party unity is enforced by party leaders, voters may come to see their representatives as too far from their own preferences. This is what some research has suggested <a href="https://journals.sagepub.com/doi/pdf/10.1177/1532673X11433768">happened to Democrats</a> in the 2010 midterms with regard to the <a href="https://www.healthcare.gov/glossary/affordable-care-act/">Affordable Care Act</a>. Democrats had <a href="https://www.washingtonpost.com/news/fact-checker/wp/2017/06/22/history-lesson-how-the-democrats-pushed-obamacare-through-the-senate/">ferociously advocated for the legislation</a>; as one scholarly study put it, they “<a href="https://journals.sagepub.com/doi/pdf/10.1177/1532673X11433768">paid a significant price at the polls</a>” for that advocacy. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A pile of several pages of black printing on white paper." src="https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/529472/original/file-20230531-21610-laomo2.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The draft of the bill that President Joe Biden and House Speaker Kevin McCarthy of California negotiated to raise the nation’s debt ceiling.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DebtLimit/e40d26db299b42049016ad134bd04214/photo?Query=debt%20ceiling&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1114&currentItemNo=6">AP Photo/Jon Elswick</a></span>
</figcaption>
</figure>
<h2>The middle matters</h2>
<p>These incentives set the stage for the political wrangling over the debt ceiling. Speaker McCarthy had an incentive to pass legislation – to be seen as a winner. At the same time, there were Democratic House members who were driven by their own electoral prospects who wanted to be seen as moderate. </p>
<p><a href="https://ballotpedia.org/Josh_Gottheimer">Josh Gottheimer</a>, for example, who co-chairs the Problem Solvers caucus, is a Democrat from a moderate New Jersey district with just a <a href="https://www.cookpolitical.com/cook-pvi/2022-partisan-voting-index/district-map-and-list">narrow Democratic tilt</a>. The bipartisan Problem Solvers Caucus proved critical to the bill’s passage by <a href="https://thehill.com/homenews/4028426-bipartisan-problem-solvers-caucus-endorses-debt-deal/">providing Democratic votes</a> to help the bill survive GOP defections. </p>
<p>Complicating this incentive structure is the currently divided U.S. government. If one party controlled Congress and the presidency, then it would be clear that that party would be blamed in the event the legislation didn’t pass. But with a Democratic president and a GOP House, <a href="https://maristpoll.marist.edu/polls/raising-the-u-s-debt-ceiling/#:%7E:text=43%25%20say%20President%20Biden%20would,neither%20will%20be%20at%20fault.">polling data</a> shows an almost even split in terms of who would be blamed if a debt ceiling deal failed. Thus, both Democrats and Republicans had an incentive to get a deal done. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1664079568204972032"}"></div></p>
<p>While there is some debate in political science over the <a href="https://www.jstor.org/stable/pdf/2130434.pdf?casa_token=EgfButYy6kEAAAAA:ikSRnN0eCfGBTXHWUPHOSdR0iTizhcPu86tbf_e38rCWiZcwZ2t3cJ-ijI5xB1g6RDvda80nLhRQlMcnXErz4gWG6qiOUuSbWh2fHeonT-Axdv7OVMw">power of presidential coattails</a>, Democrats themselves may believe their future electoral fortunes are at least <a href="https://www.nbcnews.com/politics/2024-election/house-democrats-stick-by-biden-presidential-election-2024-rcna73240">partially tied to that of President Biden</a>, another incentive to support legislation he backs. </p>
<p>From here, the deal goes to the Senate, where moderates may be just as influential. </p>
<p>Given the smaller size of the upper chamber and the Democrats’ narrow majority, the influence of individual senators is more pronounced. The deal already contains a victory for West Virginia’s Joe Manchin, a Democrat looking at a <a href="https://thehill.com/homenews/campaign/4026468-justice-tops-manchin-by-22-points-in-new-poll-on-senate-race/">brutal reelection fight</a> in 2024. <a href="https://www.nytimes.com/2023/05/29/business/debt-ceiling-agreement.html">The bill contained approval</a> for a natural gas pipeline project in his state that Manchin has championed. </p>
<p>Although the Senate vote is still pending, the House debt ceiling maneuvering demonstrates that the middle, while shrinking, continues to matter.</p><img src="https://counter.theconversation.com/content/206837/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matt Harris does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The news media spent a lot of time reporting on how much progressive Democrats and conservative Republicans didn’t like the debt ceiling deal. But centrists had enough votes to pass it in the House.Matt Harris, Assistant Professor, Political Science, Park UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2059582023-05-30T12:24:51Z2023-05-30T12:24:51ZCOVID-19 clawbacks, spending caps and a cut – what House Republicans got in return for pushing the US to the brink of default<figure><img src="https://images.theconversation.com/files/528884/original/file-20230529-2706-grqeae.jpg?ixlib=rb-1.1.0&rect=206%2C170%2C5784%2C3817&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">House Speaker Kevin McCarthy has billed the deal as a victory for his party. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DebtLimitMcCarthy/140101daf62343f1bde85a3eb62b8849/photo?Query=debt%20ceiling&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1087&currentItemNo=44">AP Photo/J. Scott Applewhite</a></span></figcaption></figure><p>House Republicans pushed the U.S. to the edge of a fiscal crisis because they <a href="https://www.nytimes.com/interactive/2023/05/08/upshot/federal-budget-republicans.html">wanted deep cuts in government spending</a>. </p>
<p>So, based on the deal President Joe Biden <a href="https://www.msn.com/en-us/news/politics/biden-signs-bipartisan-debt-ceiling-bill-to-avert-government-default/ar-AA1c5t9d/">signed into law on June 3, 2023</a>, how did they do? </p>
<p>In broad strokes, the <a href="https://apnews.com/article/debt-ceiling-deal-food-aid-student-loans-3c284b01d95f8e193bca8d873386400e">deal suspends the debt limit</a> until January 2025, freezes nondefense discretionary funding at current levels and makes a few additional cuts and policy changes that were designed to appeal to enough Republicans and Democrats to get it through Congress. The deal also includes an incentive to motivate lawmakers to pass a budget on time in four months.</p>
<p>That provision and the 2025 expiration date should mean the U.S. will avoid any self-inflicted fiscal crises until at least after the next presidential election. </p>
<p>No one got everything they wanted. Biden didn’t get the <a href="https://www.politico.com/news/2023/05/20/dems-debt-limit-biden-00097925">clean debt ceiling increase</a> he had insisted on for months. Republicans didn’t get most of <a href="https://www.nytimes.com/2023/04/26/us/politics/debt-limit-vote-republicans.html">what they sought in a bill</a> they passed in April – though they did get some of it. </p>
<p>As a <a href="https://www.linkedin.com/in/raymond-scheppach-19b98536/">professor of public policy</a> and former deputy director at the Congressional Budget Office, I believe the deal, which passed through both Houses of Congress just ahead of the June 5 deadline to avoid default, does hardly anything to address America’s long-term debt problem. To me, this outcome shows why a debt ceiling standoff is not the right way to solve it. </p>
<p>Let’s take a closer look at what I would consider the five main components of the new law to see what they’ll accomplish.</p>
<h2>1. Expanded work requirements for SNAP</h2>
<p>The Supplemental Nutrition Assistance Program has been a <a href="https://www.cbpp.org/research/food-assistance/house-republicans-proposals-could-take-food-away-from-millions-of-low">Republican target for a while</a>. </p>
<p>Under current law, an <a href="https://otda.ny.gov/programs/snap/qanda.asp">individual must work</a> or be in training for 80 hours per month if they receive SNAP food benefits in three or more out of 36 months, is able-bodied, does not live with dependent children and is under 50 years old. This entitlement program is 100% funded by the federal government but is administered by states, which have the ability to waive the requirements in some low-unemployment areas.</p>
<p>The new deal expands the eligibility requirements to people up to age 54 and limits some of the state waiver authority. It excludes veterans and homeless people from the tougher work requirements and will expire in 2030. </p>
<p>The <a href="https://www.cbo.gov/system/files/2023-05/hr3746_Letter_McCarthy.pdf">Congressional Budget Office estimated the changes</a> would result in a net gain of 78,000 people getting benefits, according to a letter sent to Congress May 30. And while that provision was intended to reduce spending, because of the exclusions the CBO expects it to actually increase spending by US$1.8 billion over the next decade. </p>
<p>The bill also contains some additional work requirements for welfare recipients for the temporary assistance for needy families program, but the changes are relatively minor.</p>
<h2>2. Cap on nondefense discretionary spending</h2>
<p>The main way the agreement restricts federal spending is through the temporary cap on nondefense discretionary spending. </p>
<p>Spending on everything other than defense, entitlements like Social Security, and veterans benefits will stay flat in next year’s budget relative to the 2023 amount and increase 1% the following year, with no limits after that. </p>
<p>But ultimately, the caps apply to just a small share of total government spending – less than 13%. So not only is it a very minor reduction in spending, it involves a small fraction of the federal budget. </p>
<p>In their House bill, Republicans had sought a larger cut in discretionary spending.</p>
<p>Entitlement programs will be unaffected by the deal, while defense spending will grow by 3.3% next year, as <a href="https://www.defensenews.com/congress/budget/2023/05/29/debt-ceiling-agreement-locks-in-bidens-proposed-defense-budget/">Biden requested in his budget</a>. </p>
<p>According to the Congressional Budget Office, the savings from the caps <a href="https://www.cbo.gov/system/files/2023-05/hr3746_Letter_McCarthy.pdf">will amount to about $1.3 trillion</a> over the next decade, with another $188 billion in total interest savings.</p>
<p>But I – and the White House – believe the actual savings will be much more modest, likely under $200 billion. The White House <a href="https://www.nytimes.com/2023/06/03/business/biden-debt-ceiling-deal.html">puts it at as little as $136 billion</a>. </p>
<p>That’s because enforcement mechanisms exist for only the first two years of the deal, and some accounting tricks make the total savings seem higher than they are. After that anything goes, and Congress <a href="https://www.cbpp.org/research/federal-budget/new-budget-deal-needed-to-avert-cuts-invest-in-national-priorities">has a record of restoring</a> funding lost to those types of caps. </p>
<p>One item that will see actual cuts is the <a href="https://www.cnbc.com/2023/04/07/what-the-irs-80-billion-funding-plan-means-for-taxpayers.html">$80 billion that previously had been allocated</a> to beef up IRS enforcement of tax cheats. The deal trims that by $1.4 billion immediately, while another $20 billion will be “repurposed” to shore up other discretionary items facing spending caps.</p>
<p>The Congressional Budget Office estimates the $1.4 billion cut will actually increase the deficit by $900 billion over a decade because it’ll result in reduced tax revenue due to less enforcement. The actual impact could be a lot higher, but the CBO didn’t do an estimate for the other $20 billion.</p>
<p>Republicans <a href="https://www.pbs.org/newshour/politics/heres-whats-in-the-gop-bill-to-lift-the-u-s-debt-limit">had wanted to slash IRS enforcement by a lot more</a>, or $71 billion of the $80 billion originally approved.</p>
<figure class="align-center ">
<img alt="A black man in a suit speaks at a lectern in front of several other people" src="https://images.theconversation.com/files/528935/original/file-20230529-22-cxfp48.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/528935/original/file-20230529-22-cxfp48.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/528935/original/file-20230529-22-cxfp48.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/528935/original/file-20230529-22-cxfp48.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/528935/original/file-20230529-22-cxfp48.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/528935/original/file-20230529-22-cxfp48.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/528935/original/file-20230529-22-cxfp48.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">House Minority Leader Hakeem Jeffries managed to round up more Democratic votes for the bill than Speaker McCarthy did, even though Republicans are in the mnajority.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DebtLimit/a459d037959f46279efd48ffbde47463/photo?Query=debt%20ceiling&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1087&currentItemNo=49">AP Photo/J. Scott Applewhite</a></span>
</figcaption>
</figure>
<h2>3. Streamlining energy leasing and permitting</h2>
<p>Both Republicans and Democrats have interest in expediting the environmental review process for new energy leases, but they have very different priorities. </p>
<p>Republicans are more interested in gas pipelines and fossil fuel projects, while Democrats are more interested in wind, solar and other alternative energy installations. The problem for both is that the approval of environmental and technical plans <a href="https://www.eenews.net/articles/drilling-permits-spiked-then-plunged-under-biden/">is very slow</a> and often involves all three levels of government. Also, at the federal level decisions often involve federal agencies with overlapping jurisdictions. </p>
<p>The new deal makes some minor changes to the environmental review process to make it go faster – though it’s less than what Republicans initially wanted. </p>
<h2>4. COVID-19 funding clawback</h2>
<p>White House and House Republican negotiators <a href="https://apnews.com/article/debt-ceiling-deal-food-aid-student-loans-3c284b01d95f8e193bca8d873386400e#:%7E:text=The%20agreement%20would%20rescind%20about,and%20broadband%20for%20rural%20areas.">agreed to claw back</a> $27 billion in unspent funds from six COVID-19 programs passed by Congress. </p>
<p>Some of these funds were allocated to various agencies, while others have already been distributed to states and even to local governments. The Congressional Budget Office expects the actual spending to go down by just $11 billion. </p>
<h2>5. No government shutdown</h2>
<p>Negotiators included a provision that should ensure there isn’t another fiscal crisis related to the 12 appropriations bills Congress must pass by October to keep the government funded into the next fiscal year. I think this is the most important component of the deal.</p>
<p>It automatically funds everything at 99% of the previous year’s level if Congress fails to pass the bills in time. Besides eliminating the possibility of a shutdown over the budget, as the U.S. <a href="https://theconversation.com/link-205178">has experienced in the past</a>, the 1% decrease in funding – on everything from education to defense – provides a strong incentive for Republicans and Democrats to negotiate a compromise that keeps their priorities fully funded.</p>
<h2>The bottom line</h2>
<p>As you can see, while the deal limits some spending in the short run, it does very little to tackle America’s long-term debt problem, which I believe urgently needs to be addressed. </p>
<p>The <a href="https://fred.stlouisfed.org/series/GFDEBTN">U.S. national debt has exploded</a>, most recently as a result of trillions of dollars in spending related to the COVID-19 pandemic. At a <a href="https://www.usdebtclock.org/">little under $32 trillion</a>, it’s over 120% of gross domestic product, which <a href="https://www.gao.gov/products/gao-23-106201">is considered unsustainably high</a> and <a href="https://fred.stlouisfed.org/series/A091RC1Q027SBEA">is costing well over half a trillion dollars</a> in annual interest payments. At some point, investors may begin to see U.S. government bonds as a risky investment and stop buying, which would lead to higher borrowing costs and could bring down the entire U.S. financial system.</p>
<p>But using the debt ceiling as a negotiating tactic is unlikely to achieve the kinds of tough choices needed to meaningfully slow the growing mountain of U.S. debt. </p>
<p><a href="https://www.cbpp.org/research/federal-budget/where-do-our-federal-tax-dollars-go">About 60% of total government spending</a> goes to fund just a few items, such as Social Security, Medicare and national defense, <a href="https://theconversation.com/link-206462">that are very hard</a>, politically, to cut. And political realities make it nearly impossible to increase taxes. </p>
<p>But a <a href="https://www.congress.gov/93/statute/STATUTE-88/STATUTE-88-Pg297.pdf">budgeting process known as reconciliation</a> was created specifically for this purpose because it allows Congress to cut any mandatory spending and entitlement program and increase taxes in one bill. It also can’t be filibustered in the Senate – it just needs a majority. </p>
<p>To truly address the debt problem, what is needed, in my view, is a balanced bipartisan proposal that includes cuts to all programs, as well as some significant tax increases. <a href="https://theconversation.com/voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-ceiling-206465">Political brinkmanship</a> won’t get America there.<br>
For all the debt ceiling drama and the risks of profound economic damage and global tensions that resulted from it, Republicans achieved only a two-year cap on a small fraction of the total budget. Reconciliation – and lawmakers willing to govern and compromise – is a far superior way to attain a comprehensive deficit-reduction plan. </p>
<p><em>This article was updated to include deal’s passage and CBO estimates.</em></p><img src="https://counter.theconversation.com/content/205958/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Raymond Scheppach does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Congress passed and the president signed the deal just days before the US was expected to default on its debt.Raymond Scheppach, Professor of Public Policy, University of VirginiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2061742023-05-28T17:15:23Z2023-05-28T17:15:23ZDebt ceiling negotiators reach a deal: 5 essential reads about the tentative accord, brinkmanship and the danger of default<figure><img src="https://images.theconversation.com/files/528698/original/file-20230528-145930-1dir73.jpeg?ixlib=rb-1.1.0&rect=49%2C437%2C7766%2C4957&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden speaks to reporters about the tentative accord. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DebtLimit/5f4e2743ebcf4b4795d386cd54ea90d4/photo?Query=debt%20ceiling&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1041&currentItemNo=0">AP Photo/Susan Walsh</a></span></figcaption></figure><p>President Joe Biden and House Speaker Kevin McCarthy on May 27, 2023, <a href="https://www.bloomberg.com/news/articles/2023-05-28/white-house-republicans-reach-deal-to-avert-historic-us-default">agreed in principle to a tentative deal</a> that would raise the debt ceiling while capping some federal spending at current levels.</p>
<p>The accord, if approved by both houses of Congress, would avert an unprecedented default that threatens to derail the economy and put hundreds of thousands of Americans out of work. Negotiators agreed to lift the ceiling for two years – past the 2024 presidential election – while putting a temporary cap on most nondefense spending at 2023 levels. It would also reduce planned funding for the IRS, impose new work requirements on some people who receive benefits from the federal program known as SNAP and claw back billions of unspent funds from pandemic relief programs.</p>
<p>The Conversation has been covering the debt ceiling drama since January, when Republicans took over the House, raising fears that brinkmanship would lead to an economic catastrophe. Here are five articles from our archive to help you make sense of a couple key aspects of the tentative deal and provide context on the debt ceiling fight.</p>
<h2>1. What is the debt ceiling?</h2>
<p>First some basics. The debt ceiling was established by the U.S. Congress in 1917. It limits the total national debt by setting out a maximum amount that the government can borrow.</p>
<p>Steven Pressman, an <a href="https://ww4.newschool.edu/nssr/faculty/steven-pressman/">economist at The New School</a>, explained the original aim was “to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to US$11.5 billion and required legislation for any increase.”</p>
<p>Since then, the debt ceiling has <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">been increased dozens of times</a>. It currently stands at $31.4 trillion – a figure reached in January. The Treasury has taken “extraordinary measures” to enable the government to keep borrowing without breaching the ceiling. Such measures, however, can only be temporary – meaning at one point Congress will have to act to lift the ceiling or default on its debt obligations, which is expected to happen by June 5, <a href="https://www.reuters.com/markets/us/yellen-moves-forecast-earliest-potential-us-default-date-june-5-2023-05-26/">according to Treasury Secretary Janet Yellen</a>, if the deal isn’t approved in time.</p>
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Read more:
<a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">Why America has a debt ceiling: 5 questions answered</a>
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<h2>2. The trouble with work requirements</h2>
<p>One of the biggest sticking points toward the end of negotiations was work requirements for recipients of government aid. The tentative deal would raise the age for existing work requirements from 49 to 54 years on able-bodied adults who have no children. This is less than what Republicans had earlier sought. There are exceptions for veterans and the homeless. </p>
<p>But if the goal is to help people find jobs and make more money, work requirements <a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">don’t actually do the job</a>, wrote <a href="https://scholar.google.com/citations?user=Zoc5_aMAAAAJ&hl=en&oi=ao">Kelsey Pukelis</a>, a doctoral student in public policy at Harvard Kennedy School who has studied the issue. Rather, they make it much harder for people who need food aid to get it. </p>
<p>“Our findings do suggest that work requirements restrain federal spending by reducing the number of people getting SNAP benefits,” she explained. “But our work also indicates that in today’s context, these savings would be at the expense of already vulnerable people facing additional economic hardship at a time when a new recession could be around the corner.”</p>
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<em>
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Read more:
<a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">SNAP work requirements don’t actually get more people working – but they do drastically limit the availability of food aid</a>
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<h2>3. IRS funding takes a hit</h2>
<p>The deal also takes aim at a big boost in spending Congress gave the Internal Revenue Service beginning in 2022 to crack down on tax cheats and upgrade its software. Democrats agreed to a Republican demand to cut the extra IRS funding from $80 billion to $70 billion. </p>
<p>Back in August 2022, <a href="https://scholar.google.com/citations?user=J_S5pkkAAAAJ&hl=en&oi=ao">Nirupama Rao</a>, an economist at the University of Michigan, <a href="https://theconversation.com/will-the-inflation-reduction-act-actually-reduce-inflation-how-will-the-corporate-minimum-tax-work-an-economist-has-answers-188786">explained why Democrats included all that funding</a> in their Inflation Reduction Act and how it would help the IRS collect more tax revenue, since the agency does not fully collect all the taxes that are owed.</p>
<p>“The main target of this spending is the so-called tax gap, which is currently estimated at about $600 billion a year,” she wrote. “While an $80 billion investment that returns $204 billion already sounds pretty impressive, it may be possible that it’s a conservative estimate.”</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/will-the-inflation-reduction-act-actually-reduce-inflation-how-will-the-corporate-minimum-tax-work-an-economist-has-answers-188786">Will the Inflation Reduction Act actually reduce inflation? How will the corporate minimum tax work? An economist has answers</a>
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<h2>4. The hard road to compromise</h2>
<p>It took a long time for Republicans and Democrats to get the current agreement. </p>
<p>Yellen warned in January that the government was about to hit the debt limit and would be unable to pay all its bills by May or June. McCarthy and House Republicans, who hold a razor-thin majority, appeared unwilling to raise the debt ceiling unless they could extract <a href="https://apnews.com/article/debt-limit-bill-house-republicans-kevin-mccarthy-f73e6c2fce8abdfab4973c727ea79517">deep spending cuts</a>. Meanwhile, Biden <a href="https://www.reuters.com/world/us/biden-will-talk-budget-wont-negotiate-debt-ceiling-congress-meeting-white-house-2023-05-02/">refused to negotiate</a>, insisting on a clean debt ceiling bill. Both of those positions were dropped during negotiations. </p>
<p>Why did it take so long for them to reach a compromise? </p>
<p>Blame political trends that have been accelerating for decades, explained <a href="https://scholar.google.com/citations?user=cfH3-8sAAAAJ&hl=en&oi=ao">Laurel Harbridge-Yong</a>, a specialist in partisan conflict and the lack of bipartisan agreement in American politics at Northwestern University. Many Republicans come from very safe districts, which means their primary against other conservatives is more important than the general election. <a href="https://theconversation.com/most-voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-limit-206465">This makes it more important to stand firm</a> and fight until the bitter end. </p>
<p>“So you now have many Republicans who are more willing to fight quite hard against the Democrats because they don’t want to give a win to Biden,” she wrote. “Democrats are also resistant to compromising, both because they don’t want to gut programs that they put in place and also because they don’t want to make this look like a win for Republicans, who were able to play chicken and get what they wanted.”</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-ceiling-206465">Voters want compromise in Congress -- so why the brinkmanship over the debt ceiling?</a>
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<h2>5. Latest in a long line of fiscal crises</h2>
<p>This was hardly the first fiscal crisis the U.S. government has faced. In fact, there have been many – including 22 government shutdowns since just 1976. </p>
<p><a href="https://www.linkedin.com/in/raymond-scheppach-19b98536">Raymond Scheppach</a>, a professor of public policy at University of Virginia, <a href="https://theconversation.com/link-205178">offered a brief history</a> of recent crises and the damage they’ve caused – and why a default would be far more consequential than past crises.</p>
<p>“While these were very disruptive and damaged the economy and employment, they pale in comparison to the potential effects of failing to lift the debt ceiling, which could be catastrophic,” he wrote. “It could bring down the entire international financial system. This in turn could devastate the world gross domestic product and create mass unemployment.”</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">A brief history of debt ceiling crises and the political chaos they've unleashed</a>
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<p><em>Editor’s note: This story is a roundup of articles from The Conversation’s archives. Portions of this article originally appeared in <a href="https://theconversation.com/yellen-puts-congress-on-notice-over-impending-debt-default-date-5-essential-reads-on-whats-at-stake-204863">a previous article</a> published on May 2, 2023.</em></p><img src="https://counter.theconversation.com/content/206174/count.gif" alt="The Conversation" width="1" height="1" />
The deal would raise the ceiling for two years, cap some federal spending and impose new work requirements on certain federal benefits. It still needs the blessing of Congress.Bryan Keogh, Managing EditorMatt Williams, Senior International EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2055372023-05-16T17:34:27Z2023-05-16T17:34:27ZWar rooms and bailouts: How banks and the Fed are preparing for a US default – and the chaos expected to follow<figure><img src="https://images.theconversation.com/files/526339/original/file-20230515-21691-8klpm5.jpg?ixlib=rb-1.1.0&rect=53%2C80%2C3534%2C2308&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'Default doomscrolling' again, Mr. Powell?
</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/JapanG7Finance/c9f9b3cb0a3542858fc79ab85ea9d5f7/photo?Query=Jerome%20powell&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2123&currentItemNo=20">Kimimasa Mayama/Pool Photo via AP</a></span></figcaption></figure><p><a href="https://www.bloomberg.com/news/articles/2023-05-11/jpmorgan-convenes-weekly-war-room-over-us-debt-ceiling-standoff?srnd=premium">Convening war rooms</a>, <a href="https://www.axios.com/2023/04/19/fed-debt-ceiling-default-playbook">planning speedy bailouts</a> and <a href="https://www.reuters.com/markets/us/how-wall-street-is-preparing-possible-us-debt-default-2023-05-15/">raising house-on-fire alarm bells</a>: Those are a few of the ways the biggest banks and financial regulators are preparing for a potential default on U.S. debt.</p>
<p>“You hope it doesn’t happen, but hope is not a strategy – so you prepare for it,” Brian Moynihan, CEO of Bank of America, the nation’s second-biggest lender, <a href="https://www.cnn.com/2023/02/06/investing/bank-of-america-ceo-brian-moynihan-debt-default/index.html">said in a television interview</a>. </p>
<p>The doomsday planning is a reaction to a <a href="https://apnews.com/article/debt-limit-biden-mccarthy-white-house-meeting-c613984327ba0fc039853c057878f7e7#:%7E:text=WASHINGTON%20(AP)%20%E2%80%94%20House%20Speaker,raise%20its%20legal%20borrowing%20limit.">lack of progress</a> in talks between President Joe Biden and House Republicans over raising the US$31.4 trillion debt ceiling – <a href="https://www.nytimes.com/2023/05/16/us/politics/biden-mccarthy-debt-ceiling.html">another round of negotiations</a> took place on May 16, 2023. Without an increase in the debt limit, the U.S. can’t borrow more money to cover its bills – all of which have already been agreed to by Congress – and in practical terms that means a default.</p>
<p>What happens if a default occurs is an open question, but economists – <a href="https://www.bakerinstitute.org/expert/john-w-diamond">including me</a> – generally expect financial chaos as access to credit dries up and borrowing costs rise quickly for companies and consumers. A severe and prolonged global economic recession would be all but guaranteed, and the reputation of the U.S. and the dollar as beacons of stability and safety <a href="https://theconversation.com/link-198395">would be further tarnished</a>. </p>
<p>But how do you prepare for an event that <a href="https://www.nytimes.com/2023/03/07/us/politics/debt-default-economy.html">many expect would trigger</a> the worst global recession since the 1930s? </p>
<h2>Preparing for panic</h2>
<p>Jamie Dimon, who runs JPMorgan Chase, the biggest U.S. bank, told Bloomberg he’s <a href="https://www.bloomberg.com/news/articles/2023-05-11/jpmorgan-convenes-weekly-war-room-over-us-debt-ceiling-standoff?srnd=premium&sref=Hjm5biAW">been convening a weekly war room</a> to discuss a potential default and how the bank should respond. The meetings are likely to become more frequent as June 1 – the date on which the <a href="https://www.reuters.com/markets/us/us-may-run-short-cash-after-june-1-without-debt-limit-hike-treasury-2023-05-01/">U.S. might run out of cash</a> – nears. </p>
<p>Dimon described the wide range of economic and financial effects that the group must consider such as the impact on “contracts, collateral, clearing houses, clients” – basically every corner of the financial system – at home and abroad. </p>
<p>“I don’t think it’s going to happen — because it gets catastrophic, and the closer you get to it, you will have panic,” he said.</p>
<p>That’s when rational decision-making <a href="https://www.brookings.edu/blog/ben-bernanke/2018/09/13/financial-panic-and-credit-disruptions-in-the-2007-09-crisis">gives way to fear and irrationality</a>. Markets overtaken by these emotions are chaotic and leave lasting economic scars.</p>
<p>Banks haven’t revealed many of the details of how they are responding, but we can glean some clues from how they’ve reacted to past crises, such as the <a href="https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath">financial crisis in 2008</a> or the <a href="https://www.bakerinstitute.org/research/reflecting-budget-control-act-2011-and-its-relevance-now">debt ceiling showdowns of 2011</a> and <a href="https://www.nytimes.com/2013/10/17/us/congress-budget-debate.html">2013</a>. </p>
<p>One important way banks can prepare is by <a href="https://www.bloomberg.com/news/articles/2022-10-10/the-most-powerful-buyers-in-treasuries-are-all-bailing-at-once">reducing exposure</a> to Treasury securities – some or all of which could be considered to be in default once the U.S. exhausts its ability to pay all of its bill. All U.S. debts are referred to as Treasury bills or bonds. </p>
<p>The value of Treasurys is likely to plunge in the case of a default, which could weaken bank balance sheets even more. The recent bank crisis, in fact, was <a href="https://www.npr.org/2023/03/19/1164531413/bank-fail-how-government-bonds-turned-toxic-for-silicon-valley-bank">prompted primarily by a drop</a> in the market value of Treasurys due to the sharp rise in interest rates over the past year. And a default would only make that problem worse, with close to 190 banks <a href="http://dx.doi.org/10.2139/ssrn.4387676">at risk of failure</a> as of March 2023.</p>
<p>Another strategy banks can use to hedge their exposure to a sell-off in Treasurys is to buy <a href="https://www.investopedia.com/terms/c/creditdefaultswap.asp">credit default swaps</a>, financial instruments that allow an investor to offset credit risk. Data suggests this is already happening, as the cost to protect U.S. government debt from default <a href="https://www.bloomberg.com/news/articles/2023-05-10/us-default-insurance-cost-eclipses-brazil-mexico-as-x-day-nears">is higher than that of Brazil, Greece and Mexico</a>, all of which have defaulted multiple times and have much lower credit ratings. </p>
<p>But buying credit default swaps at ever-higher prices limits a third key preventive measure for banks: keeping their cash balances as high as possible so they’re able and ready to deal with whatever happens in a default. </p>
<figure class="align-center ">
<img alt="Four white men sit on white couches in a large office filled with presidential portraits." src="https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Little has come out of fiscal negotiations between Mitch McConnell, left, Kevin McCarthy, second from left, President Joe Biden, second from right, and Chuck Schumer.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CongressDebtLimit/96a3bb6abb544bc98158ccfb77f4c61d/photo?Query=biden%20mccarthy&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=666&currentItemNo=1">AP Photo/Evan Vucci</a></span>
</figcaption>
</figure>
<h2>Keeping the financial plumbing working</h2>
<p>Financial industry groups and financial regulators have also gamed out a potential default with an eye toward keeping the financial system running as best they can.</p>
<p>The Securities Industry and Financial Markets Association, for example, <a href="https://www.reuters.com/markets/us/how-wall-street-is-preparing-possible-us-debt-default-2023-05-15/">has been updating</a> <a href="https://www.sifma.org/wp-content/uploads/2018/01/SIFMA-Treasury-Payment-Disruption-Playbook-December-2021.pdf">its playbook</a> to dictate how players in the Treasurys market will communicate in case of a default. </p>
<p>And the Federal Reserve, which is broadly responsible for ensuring financial stability, has been pondering a U.S. default for over a decade. One such instance came in 2013, when Republicans <a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">demanded the elimination</a> of the Affordable Care Act in exchange for raising the debt ceiling. Ultimately, Republicans capitulated and raised the limit one day before the U.S. was expected to run out of cash. </p>
<p>One of the biggest concerns Fed officials had at the time, according to a <a href="https://www.federalreserve.gov/monetarypolicy/files/FOMC20131016confcall.pdf">meeting transcript recently made public</a>, is that the U.S. Treasury would no longer be able to access financial markets to “roll over” maturing debt. While hitting the current ceiling prevents the U.S. from issuing new debt that exceeds $31.4 trillion, the government still has to roll existing debt into new debt as it comes due. On May 15, 2023, for example, the government <a href="https://home.treasury.gov/news/press-releases/jy1460">issued just under $100 billion</a> in notes and bonds to replace maturing debt and raise cash. </p>
<p>The risk is that there would be too few buyers at one of the <a href="https://www.treasurydirect.gov/auctions/upcoming/">government’s daily debt auctions</a> – at which investors from around the world bid to buy Treasury bills and bonds. If that happens, the government would have to use its cash on hand to pay back investors who hold maturing debt. </p>
<p>That would further reduce the amount of cash available for Social Security payments, federal employees wages and countless other items the <a href="https://fiscaldata.treasury.gov/americas-finance-guide/#">government spent over $6 trillion on</a> in 2022. This would be nothing short of apocalyptic if the Fed could not save the day. </p>
<p>To mitigate that risk, the Fed said it could could immediately step in as a buyer of last resort for Treasurys, quickly lower its lending rates and provide whatever funding is needed in an attempt to prevent financial contagion and collapse. The Fed is likely having the same conversations and preparing similar actions today.</p>
<h2>A self-imposed catastrophe</h2>
<p>Ultimately, I hope that Congress does what it has done in every previous debt ceiling scare: raise the limit. </p>
<p>These contentious debates over lifting it have become too commonplace, even as lawmakers on both sides of the aisle express concerns about the growing federal debt and the need to <a href="https://www.nytimes.com/2023/01/19/us/politics/republicans-democrats-debt-ceiling.html">rein in government spending</a>. Even when these debates result in some bipartisan effort to rein in spending, as they did in 2011, <a href="https://www.bakerinstitute.org/research/reflecting-budget-control-act-2011-and-its-relevance-now">history shows they fail</a>, as energy analyst Autumn Engebretson and I recently explained in a review of that episode. </p>
<p>That’s why one of the most important ways banks are preparing for such an outcome is by speaking out about the serious damage not raising the ceiling is likely to inflict on not only their companies but everyone else, too. This increases the pressure on political leaders to reach a deal.</p>
<p>Going back to my original question, how do you prepare for such a self-imposed catastrophe? The answer is, no one should have to.</p><img src="https://counter.theconversation.com/content/205537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John W. Diamond does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Major players in the financial system are pondering the unthinkable as the US inches closer to an unprecedented default.John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2047312023-05-08T12:17:57Z2023-05-08T12:17:57ZMedicaid work requirements would leave more low-income people without health insurance – but this policy is unlikely to pass this time around<figure><img src="https://images.theconversation.com/files/524627/original/file-20230505-6263-k3g9u0.jpg?ixlib=rb-1.1.0&rect=55%2C7%2C5230%2C2868&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Speaker Kevin McCarthy got the House to approve a package that could reduce the Medicaid program's scale.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/house-speaker-kevin-mccarthy-speaks-about-the-countrys-debt-news-photo/1463574682">Alex Wong/Getty Images</a></span></figcaption></figure><p><em>The legislative package the U.S. <a href="https://www.congress.gov/bill/118th-congress/house-bill/2811/text">House of Representatives passed on April 26, 2023</a>, by a narrow margin would pare federal spending over the next decade while also <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">raising the debt ceiling</a>. One important measure in the Republican-backed bill would restrict access to Medicaid for millions of Americans.</em></p>
<p><em>About <a href="https://theconversation.com/1-in-4-americans-are-covered-by-medicaid-or-chip-a-program-that-insures-low-income-kids-176424">1 in 4 Americans have health coverage</a> through the program, which primarily serves low-income and disabled people and which is <a href="https://doi.org/10.1215/03616878-2882219">funded jointly by the federal government and the states</a>. Should the Republican-backed legislation prevail, the federal government would require <a href="https://apnews.com/article/senate-hearing-debt-ceiling-bae2b777086b0e232cc0d51fe03a3930">adults insured by Medicaid who are 19 to 55</a> years old and don’t have children or other dependents to spend 80 hours a month doing paid work, job training or community service.</em></p>
<p><em>The Conversation asked <a href="https://scholar.google.com/citations?user=QY68LSIAAAAJ&hl=en&oi=ao">Simon F. Haeder</a>, a public health scholar, to explain what the proposed work requirements would do and why the <a href="https://apnews.com/article/medicaid-enrollees-removed-review-health-insurance-pandemic-bffc3c67ab2767e4e3cea8250683ea7a">Republican effort to institute them matters</a> for the millions of Americans who rely on Medicaid.</em></p>
<h2>What would change if this policy took effect?</h2>
<p>Unlike some other government programs that assist low-income Americans, including the <a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">Supplemental Nutrition Assistance Program</a>, or SNAP, and <a href="https://www.acf.hhs.gov/ofa/programs/temporary-assistance-needy-families-tanf">Temporary Assistance for Needy Families</a>, Medicaid currently has no work requirements.</p>
<p>The package the House recently passed would require all states to implement this policy. <a href="https://www.cbo.gov/system/files/2023-04/59109-Pallone.pdf">An estimated 15 million Americans</a> with Medicaid would need to comply with the requirements.</p>
<p>This change would dramatically increase bureaucratic hassles for Medicaid beneficiaries who are disproportionately low-income, disabled and nonwhite. KFF, a health care research nonprofit, <a href="https://www.kff.org/medicaid/issue-brief/tough-tradeoffs-under-republican-work-requirement-plan-some-people-lose-medicaid-or-states-could-pay-to-maintain-coverage/">estimates that 1.7 million</a> people would lose federal coverage. However, states have the option to continue to pay for these individuals solely with state funds.</p>
<p>Those who would be subject to the new rules would not be the only ones at risk. It is well known that many of the exempt populations, including the aged and disabled, <a href="https://www.milkenreview.org/articles/tangled-up-in-side-effects">struggle to complete paperwork</a> or fail to understand complex bureaucratic rules. Many experts predict that coverage losses could be <a href="https://doi.org/10.1056/NEJMsr1901772">even higher among these demographics</a>, as states would consider them to be out of compliance with work requirements. </p>
<h2>Are there precedents for this policy?</h2>
<p>This is <a href="https://www.milkenreview.org/articles/tangled-up-in-side-effects">not the first time</a> that Republicans sought to make access to Medicaid contingent on meeting work requirements for at least some beneficiaries. The Trump administration worked with various Republican-led states to use what are known as <a href="https://www.kff.org/medicaid/issue-brief/the-landscape-of-medicaid-demonstration-waivers-ahead-of-the-2020-election/">1115 demonstration waivers</a> for that purpose. These waivers allow states to make temporary changes to their Medicaid programs that depart from certain statutory requirements. However, those efforts were <a href="https://www.kff.org/policy-watch/medicaid-work-requirements-at-u-s-supreme-court/">quickly blocked in court</a>. Most were never even piloted before the Biden administration rescinded them.</p>
<p>One exception is Arkansas. </p>
<p>Arkansas began imposing work requirements on Medicaid recipients on adults ages 30 to 49 starting in June 2018. As a result, about <a href="https://www.cbpp.org/research/health/states-experiences-confirm-harmful-effects-of-medicaid-work-requirements">1 in 4 Arkansans</a> subject to that policy ended up <a href="https://www.doi.org/10.1056/NEJMsr1901772">losing their coverage by the end of that year</a> before <a href="https://www.kff.org/medicaid/issue-brief/an-overview-of-medicaid-work-requirements-what-happened-under-the-trump-and-biden-administrations/">courts deemed it unlawful</a>.</p>
<p>The <a href="https://theconversation.com/medicaid-work-requirements-where-do-they-stand-after-the-blue-wave-107762">Arkansas experience</a>, which was particularly burdensome for beneficiaries, reaffirmed many concerns of those who oppose work requirements. Importantly, the reason many lost coverage was not that they failed to complete the required hours of paid work, job training or community service, but that they struggled to <a href="https://abcnews.go.com/Health/wireStory/congress-eyes-work-rules-millions-covered-medicaid-98967684">overcome bureaucratic challenges</a>.</p>
<p>Efforts are also underway in <a href="https://www.commonwealthfund.org/blog/2023/far-reaching-implications-georgia-medicaid-work-experiment">Georgia to impose work requirements</a> on Medicaid beneficiaries despite legal hurdles and the Biden administration’s objections. With President Joe Biden in office, it’s going to remain difficult to experiment with this policy unless Congress approves a measure like the one in the House package.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&rect=71%2C58%2C2910%2C1886&q=45&auto=format&w=1000&fit=clip"><img alt="A white woman with short brown hair with her hands holding her face looks sad." src="https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&rect=71%2C58%2C2910%2C1886&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/524626/original/file-20230505-17-jus7is.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Elizabeth Cloinger lost access to Medicaid in Arkansas despite her eligibility when the state adopted work requirements.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/elizabeth-cloinger-was-tossed-off-of-the-arkansas-works-news-photo/1175367574?adppopup=true">Michael S. Williamson/The Washington Post via Getty Images</a></span>
</figcaption>
</figure>
<h2>What would be different this time?</h2>
<p>States had to actively seek out those waivers that Republicans embraced when former President Donald Trump was in the White House. That meant that Medicaid beneficiaries in states with Democratic leadership, such as California, were unlikely to ever confront them. </p>
<p>The proposed changes in the <a href="https://www.congress.gov/bill/118th-congress/house-bill/2811/text">House legislation would force all states</a> to implement work requirements for adults from 18 to 55 without dependents. Failure to comply would put states at risk of losing federal funding, so even Democratic-led states would have to adopt these rules. The proposed changes would also circumvent many of the legal concerns that previously prevented the widespread implementation of Medicaid work requirements.</p>
<p>Importantly, this policy change would coincide with <a href="https://osf.io/xzaf4">ongoing upheaval for Medicaid beneficiaries</a>. This is because millions of Medicaid beneficiaries are already losing coverage because of the expiration of the COVID-19 <a href="https://www.kff.org/medicaid/issue-brief/10-things-to-know-about-the-unwinding-of-the-medicaid-continuous-enrollment-provision/">public health emergency declaration</a> on May 11 and states’ restarting eligibility determinations of Medicaid beneficiaries <a href="https://www.kff.org/medicaid/issue-brief/10-things-to-know-about-the-unwinding-of-the-medicaid-continuous-enrollment-provision/">on April 1</a>. As long as the government’s continuous enrollment policy was in effect, <a href="https://osf.io/xzaf4">states couldn’t kick anyone off of Medicaid</a>.</p>
<p>The number of people covered by the program soared to <a href="https://www.medicaid.gov/medicaid/program-information/medicaid-and-chip-enrollment-data/report-highlights/index.html">93 million as of January 2023</a>.</p>
<p><iframe id="ELIcj" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ELIcj/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Is this policy compatible with the purpose of Medicaid?</h2>
<p>The point of Medicaid has always been providing eligible low-income people with <a href="https://www.ssa.gov/OP_Home/ssact/title19/1901.htm">access to comprehensive health coverage</a> for as long as they need it. That is, <a href="https://doi.org/10.1215/03616878-10637708">Medicaid is exclusively a health insurance program</a>.</p>
<p>Some other safety net programs are supposed to achieve multiple goals. For example, the official mission of <a href="https://www.acf.hhs.gov/ofa/programs/tanf/about">Temporary Assistance for Needy Families</a> is to “end the dependence of needy parents on government benefits by promoting job preparation, work and marriage,” rather than just to help those needy parents make ends meet.</p>
<p>At the same time, there is evidence that <a href="https://www.kff.org/medicaid/issue-brief/the-relationship-between-work-and-health-findings-from-a-literature-review/">Medicaid leads to greater workforce participation</a>, because it provides affordable health coverage as well as access to needed medical care. If you have an illness, it can be much easier to stay on the job if you’re getting the treatment your condition requires. Indeed, <a href="https://www.kff.org/medicaid/issue-brief/understanding-the-intersection-of-medicaid-work-a-look-at-what-the-data-say/">most able-bodied adults on Medicaid are employed</a>.</p>
<p>Ironically, pushing people off Medicaid, either for failing to fulfill work requirements or because they struggle with navigating the bureaucracy, would likely <a href="https://www.kff.org/medicaid/issue-brief/the-relationship-between-work-and-health-findings-from-a-literature-review/">reduce the number of people who work</a>.</p>
<h2>Why is this significant?</h2>
<p>It seems unlikely that Medicaid work requirements will become law in 2023 or 2024, because <a href="https://doi.org/10.1215/03616878-8802198">Democrats have steadfastly opposed</a> their implementation and the party commands a majority in the Senate. However, given the <a href="https://www.whitehouse.gov/cea/written-materials/2021/10/06/life-after-default/">potentially dramatic implications of defaulting on the federal debt</a>, some Democrats may be willing to compromise.</p>
<p>For now, I think it’s far more likely that the Republicans in Congress are setting the stage for future efforts to make more public assistance programs contingent on complying with work requirements, especially the next time a Republican becomes the president of the United States.</p>
<p>If measures like the one the House passed as part of the Republican debt-ceiling package were to become law, even states with entrenched Democratic leadership could have little recourse to fight back.</p><img src="https://counter.theconversation.com/content/204731/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon F. Haeder receives funding from the Robert Wood Johnson Foundation and the Commonwealth of Pennsylvania.</span></em></p>Adults insured by Medicaid who are 19 to 55 years old and don’t have children or other dependents would need to spend 80 hours a month doing paid work, job training or community service.Simon F. Haeder, Associate Professor of Public Health, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2048632023-05-02T17:23:54Z2023-05-02T17:23:54ZYellen puts Congress on notice over impending debt default date: 5 essential reads on what’s at stake<figure><img src="https://images.theconversation.com/files/523872/original/file-20230502-28-3tukkp.jpg?ixlib=rb-1.1.0&rect=12%2C38%2C4230%2C2723&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Treasury Secretary Janet Yellen doesn't want to look back in anger over a debt deadline missed.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/secretary-janet-yellen-leaves-after-an-open-session-of-a-news-photo/1483917268?adppopup=true">Photo by Alex Wong/Getty Images</a></span></figcaption></figure><p>Lawmakers have been <a href="https://apnews.com/article/x-date-debt-ceiling-yellen-treasury-borrowing-f726fd88a9bb7f72e50f0b948731ac57">given notice of a new deadline</a> if they are to avoid a damaging default on U.S. debt: June 1, 2023.</p>
<p>If Congress fails to raise the nation’s borrowing limit by that date, <a href="https://home.treasury.gov/news/press-releases/jy1454">Treasury Secretary Janet Yellen warned</a>, then the federal government risks being “unable to continue to satisfy all of the government’s obligations.”</p>
<p>Giving herself a little wiggle room by saying that it is pretty hard to work out the exact date of default, Yellen was clear on the potential impact: “If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”</p>
<p>Yikes!</p>
<p>The warning may spur leaders in Congress into action. House Speaker Kevin McCarthy <a href="https://apnews.com/article/speaker-kevin-mccarty-debt-ceiling-biden-1dd542c6c7acfc2287e68e6facae2be4">fired the starting pistol on negotiations</a> over the debt ceiling in April, laying out the criteria under which Republicans would accept an increase. But McCarthy’s proposals – which have since passed <a href="https://www.theguardian.com/us-news/2023/apr/26/us-house-debt-ceiling-bill-passed-kevin-mccarthy">a narrow vote in the House</a> – have been shot down by the Biden administration for <a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">having strings attached</a> that Democrats deemed unacceptable.</p>
<p>Explaining why the U.S. has a debt ceiling in the first place – and why it is a constant source of political wrangling – is a complicated matter. Here are five articles from The Conversation’s archive that provide some of the answers.</p>
<h2>1. What exactly is the debt ceiling?</h2>
<p>So, some basics. The debt ceiling was established by the U.S. Congress in 1917. It limits the total national debt by setting out a maximum amount that the government can borrow.</p>
<p>Steven Pressman, an <a href="https://ww4.newschool.edu/nssr/faculty/steven-pressman/">economist at The New School</a>, explained the original aim was “to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to US$11.5 billion and required legislation for any increase.”</p>
<p>Since then, the debt ceiling has <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">been increased dozens of times</a>. It currently stands at $31.4 trillion – a figure already reached. As a result, the Treasury has taken “extraordinary measures” to enable it to keep borrowing without breaching the ceiling. Such measures, however, can only be temporary – meaning at one point Congress will have to act to lift the ceiling or default on its debt obligations, which <a href="https://www.nytimes.com/2023/04/18/business/debt-limit-wall-street.html">is expected to happen in July</a> or August.</p>
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Read more:
<a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">Why America has a debt ceiling: 5 questions answered</a>
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<h2>2. ‘Catastrophic’ consequences</h2>
<p>How bad could it be if the U.S. does default on its debt obligations? Well, <a href="https://theconversation.com/if-the-us-defaults-on-debt-expect-the-dollar-to-fall-and-with-it-americans-standard-of-living-169079">pretty bad</a>, according to Michael Humphries, <a href="https://tci.touro.edu/academics/faculty/">deputy chair of business administration at Touro University</a>, who wrote two articles on the consequences. </p>
<p>“The knock-on effect of the U.S. defaulting would be catastrophic. Investors such as pension funds and banks holding U.S. debt could fail. Tens of millions of Americans and thousands of companies that depend on government support could suffer. The dollar’s value could collapse, and the U.S. economy would most likely sink back into recession,” he wrote.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/if-the-us-defaults-on-debt-expect-the-dollar-to-fall-and-with-it-americans-standard-of-living-169079">If the US defaults on debt, expect the dollar to fall – and with it, Americans' standard of living</a>
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<h2>3. Undermining the dollar</h2>
<p>And that’s not all. </p>
<p>Such a default could undermine the U.S. dollar’s position as a “unit of account,” which makes it a widely used currency in global finance and trade. Loss of this status would be a <a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">severe economic and political blow</a> to the U.S. But Humphries conceded that putting a dollar value on the price of a default is hard: </p>
<p>“The truth is, we really don’t know what will happen or how bad it will get. The scale of the damage caused by a U.S. default is hard to calculate in advance because it has never happened before.”</p>
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Read more:
<a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">US debt default could trigger dollar’s collapse – and severely erode America’s political and economic might</a>
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<h2>4. Can McCarthy make a deal?</h2>
<p>Many of these concessions are known, such as allowing a single member of the House to call for a vote to remove him as speaker. But there many be others that remain secret and <a href="https://theconversation.com/house-speaker-mccarthys-powers-are-still-strong-but-hell-be-fighting-against-new-rules-that-could-prevent-anything-from-getting-done-197391">could be influencing McCarthy’s decision-making</a>, argued <a href="https://pennstatelaw.psu.edu/faculty/brand">Stanley M. Brand</a>, a law professor at Penn State and former general counsel for the House. These could make it much harder to reach a deal with Biden over the debt ceiling.</p>
<p>“Some of the new rules spawned by McCarthy’s concessions may appear to democratize the procedures for considering and passing legislation. But they are likely to make it difficult for members to get the working majority necessary to pass legislation,” Brand explained. “That could make things such as raising the statutory debt ceiling, which is necessary to avert a government shutdown and financial crisis, and passing legislation to fund the government, difficult.”</p>
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Read more:
<a href="https://theconversation.com/house-speaker-mccarthys-powers-are-still-strong-but-hell-be-fighting-against-new-rules-that-could-prevent-anything-from-getting-done-197391">House Speaker McCarthy's powers are still strong – but he'll be fighting against new rules that could prevent anything from getting done</a>
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<h2>5. The GOP endgame: A balanced budget</h2>
<p>Another condition McCarthy agreed to in January is to push for a “balanced budget” within 10 years.</p>
<p>The U.S. government hasn’t had a balanced budget since 2001, the year President Bill Clinton left office. <a href="https://www.hks.harvard.edu/faculty/linda-bilmes">Linda J. Bilmes</a>, a senior lecturer in public policy and public finance at Harvard Kennedy School who worked in the Clinton administration from 1997 to 2001, explained how they achieved that rare feat and <a href="https://theconversation.com/i-helped-balance-the-federal-budget-in-the-1990s-heres-just-how-hard-it-will-be-for-the-gop-to-achieve-that-same-rare-feat-198363">why it’s unlikely to be repeated today</a>. </p>
<p>“Back in 1997, after the smoke cleared, both the Clinton administration and the Republicans in Congress were able to claim some political credit for the resulting budget surpluses,” she wrote. “But – crucially – both parties recognized that a deal was in the best interest of the country and were able to line up their respective members to get the votes in Congress needed to approve it. The contrast with the current political landscape is stark.”</p>
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Read more:
<a href="https://theconversation.com/i-helped-balance-the-federal-budget-in-the-1990s-heres-just-how-hard-it-will-be-for-the-gop-to-achieve-that-same-rare-feat-198363">I helped balance the federal budget in the 1990s – here's just how hard it will be for the GOP to achieve that same rare feat</a>
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<p><em>Editor’s note: This story is a roundup of articles from The Conversation’s archives. Sections of this article appeared in a <a href="https://theconversation.com/speaker-mccarthy-lays-out-initial-cards-in-debt-ceiling-debate-5-essential-reads-on-why-its-a-high-stakes-game-204079">previous article</a> published on April 19, 2023.</em></p><img src="https://counter.theconversation.com/content/204863/count.gif" alt="The Conversation" width="1" height="1" />
If the US fails to increase its debt ceiling by June 1, it could be forced into an embarrassing – and hugely costly – default on its obligations.Matt Williams, Senior International EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2042572023-04-28T12:46:52Z2023-04-28T12:46:52ZSNAP work requirements don’t actually get more people working – but they do drastically limit the availability of food aid<figure><img src="https://images.theconversation.com/files/523084/original/file-20230426-1034-acwsi3.jpg?ixlib=rb-1.1.0&rect=0%2C108%2C6573%2C3935&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">These benefits make it easier for millions of Americans to buy groceries.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/unrecognizable-woman-marvels-at-grocery-bread-royalty-free-image/1041147560?phrase=grocery%20shopping&adppopup=true">SDI Productions/E+ via Getty Images</a></span></figcaption></figure><p>The House of Representatives has passed a bill that would cut spending, in part by <a href="https://www.cnn.com/2023/04/19/politics/mccarthy-debt-limit-bill/index.html">expanding work requirements</a> for the Supplemental Nutrition Assistance Program, through which nearly <a href="https://www.fns.usda.gov/pd/supplemental-nutrition-assistance-program-snap">43 million low-income Americans get help buying groceries</a>. The House bill calls for this policy to apply to <a href="https://www.cnn.com/2023/04/26/politics/work-requirements-food-stamps-medicaid-debt-ceiling/index.html">adults as old as 55</a>, while today this policy only applies to adults under 50. Some Democrats, in contrast, are <a href="https://lee.house.gov/news/press-releases/reps-lee-adams-introduce-improving-access-to-nutrition-act">seeking to eliminate work requirements altogether</a>.</p>
<p>The <a href="https://www.nytimes.com/2023/04/26/us/politics/debt-limit-vote-republicans.html">bill passed by a 217-215 vote</a>, with <a href="https://clerk.house.gov/Votes/2023199">all but four Republicans in favor</a> and every Democrat opposed, on April 26, 2023. Tied to a <a href="https://www.vox.com/policy/2023/4/19/23688022/debt-ceiling-2023-kevin-mccarthy-medicaid-work-requirement">standoff over raising the debt ceiling</a>, the bill would also make Medicaid – the U.S. program that helps low-income and disabled people get health care – contingent on work requirements for some eligible Americans. It’s not clear whether that’s possible, since <a href="https://theconversation.com/medicaid-work-requirements-is-there-a-path-forward-that-could-help-the-poor-not-harm-them-114497">a federal court</a> has <a href="https://www.kff.org/medicaid/issue-brief/an-overview-of-medicaid-work-requirements-what-happened-under-the-trump-and-biden-administrations/">struck down similar measures</a> enacted in some states previously. </p>
<p><a href="https://www.politico.com/story/2018/08/22/clinton-signs-welfare-to-work-bill-aug-22-1996-790321">Since the Clinton administration, the government has required</a> that at least some people getting SNAP, commonly known as food stamps, <a href="https://www.fns.usda.gov/snap/work-requirements">do paid work, get job training or volunteer</a> – otherwise they can’t continue receiving benefits. Those <a href="https://www.brookings.edu/research/who-stands-to-lose-if-the-final-snap-work-requirement-rule-takes-effect/">requirements were paused in 2020</a> because of the COVID-19 pandemic. They are set to <a href="https://www.fns.usda.gov/snap/ffcra-impact-time-limit-abawds">return</a> in <a href="https://www.hhs.gov/about/news/2023/02/09/fact-sheet-covid-19-public-health-emergency-transition-roadmap.html">July 2023</a> regardless of the fate of the House bill – which is <a href="https://apnews.com/article/speaker-mccarthy-debt-biden-republicans-d4995f10a26d6c8bfa89a2bbfd1de93c">unlikely to pass in the Democratic-controlled Senate</a>.</p>
<p>I’m a member of a team of economists <a href="https://doi.org/10.1257/pol.20200561">studying the social safety net and work</a>. Because the <a href="https://clintonwhitehouse4.archives.gov/WH/Accomplishments/welfare.html">rationale for work requirements</a> is that they encourage adults who are able to work to earn more money and become more economically self-sufficient, we wanted to determine whether this policy boosts employment and earnings. We also looked into whether SNAP work requirements lead low-income adults to lose their benefits.</p>
<p>We found that the policy doesn’t make people more likely to find a job or make more money, but it does make Americans who could use help buying groceries less likely to get it. </p>
<p><iframe id="1yfFb" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/1yfFb/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Tracing a similar case study</h2>
<p>Adults with SNAP benefits who are subject to work requirements must document at least 80 hours per month of paid work, job training or volunteering. Otherwise, they can get the benefits for only three months within a three-year period. </p>
<p>Before the pandemic, these rules applied to most so-called “able-bodied” adults without children who were under 50, and that policy will again apply in July. <a href="https://www.fns.usda.gov/snap/work-requirements">There are some exceptions</a>, such as if the person with benefits is caring for kids younger than 6, has disabilities incompatible with holding a steady job or is in a drug or alcohol rehabilitation program.</p>
<p>To determine this policy’s impact, we studied SNAP, employment and earnings data in Virginia from both the period of the state’s previous suspension of work requirements and afterward.</p>
<p>Virginia, like many other states, <a href="https://www.cbpp.org/research/food-assistance/states-have-requested-waivers-from-snaps-time-limit-in-high-unemployment">suspended work requirements for several years</a> beginning in the Great Recession. During this period, adults could enroll in the program and continue to receive benefits regardless of their employment status.</p>
<p>In October 2013, however, Virginia reinstated work requirements, and they remained in effect in most counties for several years. In those areas, adults under the age of 50 without dependents who were considered able to work needed to either satisfy work requirements or receive an individual exemption to keep their SNAP benefits, while similar adults over the age of 50 did not.</p>
<p>We followed both age groups over time, comparing whether they worked and were getting SNAP benefits both before and after work requirements returned.</p>
<h2>No employment boost</h2>
<p>By comparing older and younger adults previously getting SNAP benefits, we found that work requirements did not increase employment or earnings 18 months after their reinstatement.</p>
<p>We also detected nearly identical patterns of employment before and after work requirements were reinstated for people in both age groups.</p>
<p>Adults without dependents, whether or not they lost their SNAP benefits to the resumption of work requirements, were earning at most an additional US$28 per month.</p>
<h2>Many lost their benefits</h2>
<p>But we did find that work requirements dramatically reduced the number of people enrolled in SNAP. Among the adults subject to work requirements once they were restored in 2013, over half lost their benefits because of the policy. </p>
<p>We also found that work requirements disproportionately led people who had faced great economic hardships, such as those without housing or earned income, to lose benefits. </p>
<p>Only 44% of the currently or formerly homeless people getting benefits remained enrolled in SNAP 18 months after work requirements were reinstated, compared with 64% of everyone else, our estimates suggest. Similarly, only 59% of those with no earned income remained enrolled, relative to 73% of those with prior earnings. </p>
<p>Because they are likely to qualify for an individual exemption to work requirements, adults with a history of a disability were more likely to retain benefits compared with others.</p>
<p>Adults kicked out of SNAP because of work requirements typically stood to lose $189 in benefits per month – the most a single person could obtain at the time. It also amounted to about two-thirds of their gross income.</p>
<p>We studied work requirements in Virginia because of the availability of detailed data on both earnings and SNAP benefits. </p>
<p>Although work requirements enforcement varies across states, we believe that our results are likely to be representative of the impacts of this policy, since SNAP recipients in Virginia <a href="https://www.fns.usda.gov/snap/characteristics-snap-households-fy-2020-and-early-months-covid-19-pandemic-characteristics">look similar</a> to nationwide averages on most demographic characteristics except race. </p>
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<p>Our findings do suggest that work requirements restrain federal spending by reducing the number of people getting SNAP benefits.</p>
<p>But our work also indicates that in today’s context, these savings would be at the expense of already vulnerable people facing additional economic hardship at a time when a <a href="https://www.cnbc.com/2023/04/26/how-long-a-recession-could-last-according-to-economists.html">new recession could be around the corner</a>.</p><img src="https://counter.theconversation.com/content/204257/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kelsey Pukelis receives funding from the National Science Foundation's Graduate Research Fellowship Program under Grant No. DGE1745303. Any opinion, findings, and conclusions or recommendations expressed in this material are those of the author and do not necessarily reflect the views of the National Science Foundation.
</span></em></p>A team of economists looked at what happened after Supplemental Nutrition Assistance Program work requirements were reinstated in Virginia in 2013.Kelsey Pukelis, Ph.D. Student in Public Policy, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2040792023-04-19T12:45:41Z2023-04-19T12:45:41ZSpeaker McCarthy lays out initial cards in debt ceiling debate: 5 essential reads on why it’s a high-stakes game<figure><img src="https://images.theconversation.com/files/521699/original/file-20230418-26-iftz44.jpg?ixlib=rb-1.1.0&rect=16%2C5%2C3673%2C2458&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Speaker Kevin McCarthy said the House would vote on a debt ceiling bill 'within weeks.'</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/c33e956e6b474714aaf9a87409ddb852?ext=true">AP Photo/Seth Wenig</a></span></figcaption></figure><p>House Speaker Kevin McCarthy has <a href="https://apnews.com/article/speaker-kevin-mccarty-debt-ceiling-biden-1dd542c6c7acfc2287e68e6facae2be4">laid out an opening gambit</a> in what is likely to be a lengthy battle over the debt ceiling, suggesting that Republicans are open to a deal – but at a very high price.</p>
<p>On April 17, 2023, McCarthy <a href="https://www.nytimes.com/2023/04/17/us/politics/mccarthy-debt-ceiling-increase.html">told a gathering</a> at the New York Stock Exchange that the Republican-controlled House would vote “in the coming weeks” on a bill to “lift the debt ceiling into the next year.” The catch? The Democrats would have to agree to freeze spending at 2022 levels and roll back regulations, among other conditions.</p>
<p>It is unlikely that such a bargain would get through the Democratic-controlled Senate or get the signature of President Joe Biden. As such, McCarthy’s comments might best be viewed as an early salvo in what could be protracted negotiations to avert a debt ceiling crisis.</p>
<p>Explaining why the U.S. has a debt ceiling in the first place – and why it is a constant source of political wrangling – is a complicated matter. Here are five articles from The Conversation’s archive that provide some of the answers.</p>
<h2>1. What exactly is the debt ceiling?</h2>
<p>So, some basics. The debt ceiling was established by the U.S. Congress in 1917. It limits the total national debt by setting out a maximum amount that the government can borrow.</p>
<p>Steven Pressman, an <a href="https://ww4.newschool.edu/nssr/faculty/steven-pressman/">economist at The New School</a>, explained the original aim was “to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to $11.5 billion and required legislation for any increase.”</p>
<p>Since then, the debt ceiling has <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">been increased dozens of times</a>. It currently stands at US$31.4 trillion – a figure already reached. As a result, the Treasury has taken “extraordinary measures” to enable it to keep borrowing without breaching the ceiling. Such measures, however, can only be temporary – meaning at one point Congress will have to act to lift the ceiling or default on its debt obligations, which <a href="https://www.nytimes.com/2023/04/18/business/debt-limit-wall-street.html">is expected to happen in July</a> or August.</p>
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Read more:
<a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">Why America has a debt ceiling: 5 questions answered</a>
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<h2>2. ‘Catastrophic’ consequences</h2>
<p>How bad could it be if the U.S. does default on its debt obligations? Well, <a href="https://theconversation.com/if-the-us-defaults-on-debt-expect-the-dollar-to-fall-and-with-it-americans-standard-of-living-169079">pretty bad</a>, according to Michael Humphries, <a href="https://tci.touro.edu/academics/faculty/">deputy chair of business administration at Touro University</a>, who wrote two articles on the consequences. </p>
<p>“The knock-on effect of the U.S. defaulting would be catastrophic. Investors such as pension funds and banks holding U.S. debt could fail. Tens of millions of Americans and thousands of companies that depend on government support could suffer. The dollar’s value could collapse, and the U.S. economy would most likely sink back into recession,” he wrote.</p>
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Read more:
<a href="https://theconversation.com/if-the-us-defaults-on-debt-expect-the-dollar-to-fall-and-with-it-americans-standard-of-living-169079">If the US defaults on debt, expect the dollar to fall – and with it, Americans' standard of living</a>
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<h2>3. Undermining the dollar</h2>
<p>And that’s not all. </p>
<p>Such a default could undermine the U.S. dollar’s position as a “unit of account,” which makes it a widely used currency in global finance and trade. Loss of this status would be a <a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">severe economic and political blow</a> to the U.S. But Humphries conceded that putting a dollar value on the price of a default is hard: </p>
<p>“The truth is, we really don’t know what will happen or how bad it will get. The scale of the damage caused by a U.S. default is hard to calculate in advance because it has never happened before.”</p>
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Read more:
<a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">US debt default could trigger dollar’s collapse – and severely erode America’s political and economic might</a>
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<h2>4. Can McCarthy make a deal?</h2>
<p>Many of these concessions are known, such as allowing a single member of the House to call for a vote to remove him as speaker. But there many be others that remain secret and <a href="https://theconversation.com/house-speaker-mccarthys-powers-are-still-strong-but-hell-be-fighting-against-new-rules-that-could-prevent-anything-from-getting-done-197391">could be influencing McCarthy’s decision-making</a>, argued <a href="https://pennstatelaw.psu.edu/faculty/brand">Stanley M. Brand</a>, a law professor at Penn State and former general counsel for the House. These could make it much harder to reach a deal with Biden over the debt ceiling.</p>
<p>“Some of the new rules spawned by McCarthy’s concessions may appear to democratize the procedures for considering and passing legislation. But they are likely to make it difficult for members to get the working majority necessary to pass legislation,” Brand explained. “That could make things such as raising the statutory debt ceiling, which is necessary to avert a government shutdown and financial crisis, and passing legislation to fund the government, difficult.”</p>
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Read more:
<a href="https://theconversation.com/house-speaker-mccarthys-powers-are-still-strong-but-hell-be-fighting-against-new-rules-that-could-prevent-anything-from-getting-done-197391">House Speaker McCarthy's powers are still strong – but he'll be fighting against new rules that could prevent anything from getting done</a>
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<h2>5. The GOP endgame: A balanced budget</h2>
<p>Another condition McCarthy agreed to in January is to push for a “balanced budget” within 10 years. His most recent speech on the debt ceiling made no mention of this, but it’s likely hardliners within his party will continue to demand it – putting his ability to negotiate a compromise in jeopardy. </p>
<p>The U.S. government hasn’t had a balanced budget since 2001, the year President Bill Clinton left office. <a href="https://www.hks.harvard.edu/faculty/linda-bilmes">Linda J. Bilmes</a>, a senior lecturer in public policy and public finance at Harvard Kennedy School who worked in the Clinton administration from 1997 to 2001, explained how they achieved that rare feat and <a href="https://theconversation.com/i-helped-balance-the-federal-budget-in-the-1990s-heres-just-how-hard-it-will-be-for-the-gop-to-achieve-that-same-rare-feat-198363">why it’s unlikely to be repeated today</a>. </p>
<p>“Back in 1997, after the smoke cleared, both the Clinton administration and the Republicans in Congress were able to claim some political credit for the resulting budget surpluses,” she wrote. “But – crucially – both parties recognized that a deal was in the best interest of the country and were able to line up their respective members to get the votes in Congress needed to approve it. The contrast with the current political landscape is stark.”</p>
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Read more:
<a href="https://theconversation.com/i-helped-balance-the-federal-budget-in-the-1990s-heres-just-how-hard-it-will-be-for-the-gop-to-achieve-that-same-rare-feat-198363">I helped balance the federal budget in the 1990s – here's just how hard it will be for the GOP to achieve that same rare feat</a>
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<img src="https://counter.theconversation.com/content/204079/count.gif" alt="The Conversation" width="1" height="1" />
House Speaker Kevin McCarthy agreed to raise the debt ceiling – and avoid an unprecedented US default – but only if Democrats agree to freeze spending and agree to several other demands.Bryan Keogh, Managing EditorMatt Williams, Senior International EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1983632023-02-01T13:20:49Z2023-02-01T13:20:49ZI helped balance the federal budget in the 1990s – here’s just how hard it will be for the GOP to achieve that same rare feat<figure><img src="https://images.theconversation.com/files/506717/original/file-20230127-14-dnxa9d.jpg?ixlib=rb-1.1.0&rect=53%2C58%2C2903%2C1884&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bill Clinton, at right, oversaw the first balanced budget since 1969, with some help from a bipartisan deal with Newt Gingrich.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/PresidentBillClintonHandshakeNewtGingrich/0bb5ca6edcaf46bd97a5b7bda3ab6cfc/photo?Query=clinton%20gingrich&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=73&currentItemNo=24">AP Photo/Doug Mills</a></span></figcaption></figure><p>Kevin McCarthy reportedly <a href="https://www.vox.com/policy-and-politics/2023/1/6/23542817/kevin-mccarthy-speaker-deal-congress-debt-ceiling">promised many things</a> to Republican hardliners en route to clinching his job as speaker of the U.S. House of Representatives. <a href="https://www.brookings.edu/blog/fixgov/2023/01/10/mccarthy-paid-a-steep-price-for-his-speakership-now-what/">One of them</a> was a “balanced budget” in 10 years. </p>
<p>As part of that plan, Republicans <a href="https://www.foxnews.com/opinion/house-republicans-right-no-debt-limit-increase-until-balanced-budget-plan-place">are demanding substantial spending cuts</a> and budget reforms in exchange for lifting the debt ceiling this year – <a href="https://theconversation.com/link-164977">putting the U.S. at risk of default</a>.</p>
<p>But a look at the numbers – and the history – shows just how difficult balancing the budget will be. </p>
<p>Doing so requires the federal government to generate enough income to pay for all its spending. The U.S. <a href="https://www.whitehouse.gov/omb/budget/historical-tables/">has managed this feat only twice</a> in the past 60 years – and both times involved raising taxes, something <a href="https://www.forbes.com/sites/howardgleckman/2023/01/17/balancing-the-federal-budget-in-10-years-without-raising-taxes-is-impossible/?sh=5fe413c215b3">Republicans are loath to do</a>. President Lyndon B. Johnson managed to do it in 1969, and President Bill Clinton created a surplus that ran from the fiscal years 1998 to 2001, when he left office. </p>
<p>As a <a href="https://www.hks.harvard.edu/faculty/linda-bilmes">member of the Clinton administration</a> in the Commerce Department from 1997 to 2001, I participated in achieving that rare balanced budget and understand the obstacles to delivering a repeat performance. A quick look back at how we did it, along with how much has changed, shows that Republicans are unlikely to manage a similar performance. </p>
<h2>How Clinton balanced the budget</h2>
<p>When Clinton took office in 1993, the budget deficit in the previous year <a href="https://fred.stlouisfed.org/series/FYFSGDA188S">was just under 5% of gross domestic product</a>, and the nonpartisan Congressional Budget Office <a href="https://www.cbo.gov/sites/default/files/103rd-congress-1993-1994/reports/93doc03.pdf">predicted a bleak fiscal outlook</a>. </p>
<p>Clinton’s balanced-budget recipe was a mixture of higher revenues and lower spending, with help from a booming economy. In his second term, he also negotiated a bipartisan budget deal with Republicans. </p>
<p>After <a href="https://www.nytimes.com/1993/01/07/us/clinton-backs-off-his-pledge-to-cut-the-deficit-in-half.html">campaigning on a pledge to cut the deficit</a>, Clinton raised taxes on the wealthy during his first year in office. He <a href="https://www.investopedia.com/terms/t/tax-reform-act-of-1993.asp">introduced higher top personal income tax brackets</a>, raised corporate taxes, increased taxes on Social Security benefits, added 4.3 cents per gallon onto gas taxes and eliminated a number of itemized tax deductions. On the spending side, Clinton took advantage of the “<a href="https://www.newsweek.com/peace-dividend-169570">peace dividend</a>” that followed the collapse of the Soviet Union to reduce defense spending from 4.3% of GDP in 1993 to 2.9% by 2000.</p>
<p>These measures helped <a href="https://fred.stlouisfed.org/series/FYFSGDA188S">slash the overall deficit</a> to 1.3% of GDP by the end of Clinton’s first term. That’s the smallest it had been in 22 years. </p>
<p>The higher taxes invited pushback from Republicans, who gained majorities in the House and Senate in 1995. Clinton wrangled continually with then-Republican Speaker Newt Gingrich, who <a href="https://www.npr.org/2019/01/12/683304824/the-longest-government-shutdown-in-history-no-longer-how-1995-changed-everything">forced a government shutdown</a> that same year. </p>
<p>As part of budget negotiations, Congress eventually passed the <a href="https://www.cbpp.org/sites/default/files/archive/908mcaid.htm">Balanced Budget Act of 1997</a>, which retained Clinton’s original tax increases but cut capital gains taxes and reduced spending on Medicare and Medicaid. Meanwhile, the economy, fueled by a tech boom, <a href="https://www.stlouisfed.org/publications/regional-economist/second-quarter-2017/growth-in-tech-sector-returns-to-glory-days-of-the-1990s">expanded rapidly</a> during Clinton’s second term. </p>
<p>Higher tax rates on the wealthiest Americans, strong economic growth and continued restraint in government spending <a href="https://fred.stlouisfed.org/series/FYFSD">produced a budget surplus of US$69 billion</a> in 1998. The surplus peaked in 2000 at $236 billion before falling to $128 billion in 2001. The surplus – which hasn’t been seen since – allowed the U.S. to pay down the national debt by over $450 billion. </p>
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<h2>Lessons for today</h2>
<p>The lesson for Republicans today is that if they are serious about balancing the budget, it will require some very unpalatable choices. </p>
<p>On the spending side, so-called entitlements – mandatory programs such as Social Security, Medicare and veterans benefits – now <a href="https://www.cbpp.org/research/federal-budget/introduction-to-the-federal-budget-process">account for almost two-thirds of the federal budget</a>, compared with <a href="https://sgp.fas.org/crs/misc/RL33074.pdf">less than half</a> when Clinton took office. Funding for these programs is set by formula, making it difficult to change. And the population of Americans 65 or older <a href="https://usafacts.org/data/topics/people-society/population-and-demographics/our-changing-population?endDate=2021-01-01&startDate=1993-01-01">has grown by 32%</a> since 1993, increasing demand for entitlements. </p>
<figure class="align-right ">
<img alt="A group of white man clap as president Clinton sits on at desk with the words a balanced budget witten in front" src="https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=756&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=756&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=756&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=950&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=950&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=950&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">When Clinton signed the Balanced Budget Act of 1997, it was the first time since 1969 that the U.S. had made ends meet.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/house-majority-leader-newt-gingrich-r-ga-applaudes-us-news-photo/52023875?phrase=clinton%20gingrich">Paul Richards/AFP via Getty Images</a></span>
</figcaption>
</figure>
<p><a href="https://www.cbpp.org/research/federal-budget/introduction-to-the-federal-budget-process">Defense spending takes up another 14%</a> of taxpayer dollars, greatly exceeding every other item in the so-called discretionary budget, which includes everything else from transportation and energy to airline traffic control and national parks.</p>
<p>The U.S. spends 8% of the budget simply paying interest on the national debt. This percentage hasn’t changed much, but the debt itself has soared from $4.5 trillion in 1993 to <a href="https://www.usdebtclock.org/">$31 trillion today</a> <a href="https://www.nytimes.com/2023/01/22/business/economy/federal-debt-history.html">mainly because of massive tax cuts</a> during the Bush and Trump administrations, costly wars in Iraq and Afghanistan and vast public spending to address the 2008 financial crisis and the COVID-19 pandemic.</p>
<p>Now that historically low interest rates <a href="https://www.ft.com/content/6d312b6c-9f74-4816-ad7e-7e797c5e0f6b">have come to an end</a>, the U.S. will be forced to devote a bigger slice of the pie to paying interest. </p>
<p>The policy nonprofit Committee for a Responsible Federal Budget <a href="https://www.crfb.org/blogs/what-would-it-take-balance-budget">recently estimated</a> that if spending on defense, veterans, Social Security and Medicare were off the table, Congress would need to reduce all other spending by 85% to get to an overall balance. In other words, simple arithmetic means it is not feasible to achieve anything close to a balanced budget without addressing military spending and entitlement programs. </p>
<p>Reducing military spending is always controversial – and many Republicans (as well as some Democrats) would resist such cuts – but especially so at a time when the U.S. is ramping up military aid to Ukraine and the Pentagon perceives a threat from China. It’s the very opposite of the Clinton-era peace dividend. </p>
<p>Cutting mandatory spending would require significant reforms. The U.S. has one of the youngest minimum retirement thresholds in the world, at age 62, compared with 65 in Canada and 67 in Britain and Germany. Even France <a href="https://apnews.com/article/france-retirement-age-limit-protests-866eb86aea5cf0d39894b96d2888c26f">may soon have a higher minimum retirement age</a> of 64 – though the current protests there over increasing it from 62 illustrate the political perils of such a change.</p>
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<h2>Can they do it again?</h2>
<p>Certainly, opportunities do exist to close the gap between income and spending. </p>
<p>The Congressional Budget Office has released a <a href="https://www.cbo.gov/publication/58163">report outlining 76 options</a> for reducing the deficit. But many of the ideas require further hard choices, such as rolling back some or all of the last three tax cuts, increasing taxes on the wealthy, ending or curtailing tax deductions and adopting a consumption-based value-added tax or a <a href="https://theconversation.com/us/topics/carbon-tax-320">carbon tax</a>, as well as fundamental reforms to entitlement programs. </p>
<p>Unfortunately, Congress shows limited appetite to tackle such issues.</p>
<p>Back in 1997, after the smoke cleared, both the Clinton administration and the Republicans in Congress were able to claim some political credit for the resulting budget surpluses. But – crucially – both parties recognized that a deal was in the best interest of the country and were able to line up their respective members to get the votes in Congress needed to approve it. The contrast with the current political landscape is stark. </p>
<p>The Republican Study Committee, a bloc of more than 160 conservative lawmakers, <a href="https://banks.house.gov/uploadedfiles/rsc_2023_budget_final_version.pdf">released a budget blueprint</a> in June 2022 that promises to balance the budget in seven years. The plan proposes trillions of dollars in spending cuts, many of which would fall hardest on low-income Americans. These include shrinking Medicaid, paring veterans benefits and raising the age for full Social Security retirement benefits from 67 to 70. It also calls for higher military spending and further tax cuts – which would require even more draconian cuts to core safety net programs. </p>
<p>It would also lock in the Trump tax cuts of 2017 – the opposite of what the Congressional Budget Office recommends or what Clinton did in the 1990s to secure a balanced budget. </p>
<p>Without a credible Republican deficit-cutting plan on the table, I believe that the odds favor a protracted stand-off over the debt ceiling, which <a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">could tip the precarious U.S. economy</a> into recession.</p>
<p>While Congress <a href="https://www.econlib.org/archives/2018/04/the_us_is_unlik.html">seems highly unlikely</a> to allow a debt default, this brawl would waste time and energy that could be better spent on figuring out how to strengthen programs like Social Security and close tax loopholes that drain revenue. </p>
<p>Balancing the budget is not an end in itself. <a href="https://www.cbpp.org/research/federal-budget/deficits-debt-and-interest#:%7E:text=When%20interest%20rates%20rise%20or,and%201.6%20percent%20of%20GDP">Most economists agree</a> that governments should reduce public debt during periods of prosperity and run deficits to assist people when the economy is weak. </p>
<p>The U.S. was fortunate in the late 1990s to enjoy a buoyant economy that enabled Congress and the president to achieve a fiscal surplus. What the country needs now, in my view, is not more quick fixes but a sustainable pathway to stabilizing the national debt. That requires growing revenues and reducing nonessential spending in a responsible way.</p><img src="https://counter.theconversation.com/content/198363/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Linda J. Bilmes is the Daniel Patrick Moynihan Senior Lecturer in Public Policy and Public Finance at the Harvard Kennedy School, Harvard University. She is affiliated with the National Academy of Public Administration, where she serves on the Board of Directors, and the United Nations Committee of Experts on Public Administration, where she is the member for the United States. She served as the Senate-confirmed Assistant Secretary and CFO of the US Department of Commerce from 1999-2001, and as Deputy Assistant Secretary of Commerce for Administration and Budget from 1997-1998. </span></em></p>House Speaker McCarthy wants to put the US on a path to a balanced budget as debt ceiling negotiations begin with President Biden. Here’s why it won’t be easy to repeat what Bill Clinton accomplished.Linda J. Bilmes, Daniel Patrick Moynihan Senior Lecturer in Public Policy and Public Finance, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1982802023-01-30T16:59:54Z2023-01-30T16:59:54ZDebt ceiling impasse: Fed rate hikes are already forcing US to spend record amounts on interest payments – and it’s going to keep getting worse<figure><img src="https://images.theconversation.com/files/506694/original/file-20230126-24850-6yp4hf.jpg?ixlib=rb-1.1.0&rect=159%2C0%2C5330%2C3488&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Putting your money where his mouth is.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/iou-royalty-free-image/184998590?phrase=iou">DNY59/E+ via Getty Images</a></span></figcaption></figure><p>Consumers and businesses aren’t the only ones <a href="https://www.bloomberg.com/news/articles/2022-11-30/debt-rising-interest-rates-put-consumers-and-businesses-at-risk">feeling the pain of higher borrowing costs</a> because of Federal Reserve rate hikes. Uncle Sam is, too.</p>
<p>The U.S. government spent a <a href="https://fred.stlouisfed.org/series/NA000308Q">record US$232 billion in interest payments</a> on its debt in the first quarter of 2023, over 50% more than a year ago and over three times what it paid in the same period of 2003. That comes as the Fed <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">lifted interest rates a whopping 5 percentage points</a> beginning March 2022, including a quarter point on May 3, 2023. </p>
<p>As <a href="https://scholar.google.com/citations?user=PlJn0LIAAAAJ&hl=en&oi=ao">an economist</a>, I am concerned that the effect of higher interest payments on the government’s budget is being ignored – even as the <a href="https://www.brookings.edu/2023/04/24/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/">debate over raising the debt ceiling</a> puts a spotlight on the growing national debt.</p>
<p>Higher interest payments mean the federal government will either have to lower spending, raise taxes or issue more debt to service its obligations. And financing interest payments by issuing more debt could be a particularly poor choice – sooner or later, the bill will come due.</p>
<h2>Getting deeper in the red</h2>
<p>The <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">national debt</a> – the amount the federal government borrows to balance the budget – increases when spending is greater than revenue and accumulates over time. As a general rule, it rises over time because of increases in spending, revenue and the deficit. </p>
<p>Inflation, which recently has run at the <a href="https://fred.stlouisfed.org/series/CPIAUCSL#0">fastest pace since the 1980s</a>, <a href="https://www.pgpf.org/blog/2022/07/how-does-inflation-affect-the-federal-budget">tends to increase</a> government spending, as well as revenue and deficits. As a result, the dollar value of government debt increases in times of inflation. Debt also tends to grow as the economy gets bigger – although this is not inevitable, as policymakers could choose to balance the government’s budget.</p>
<p>In this way, total government <a href="https://fred.stlouisfed.org/series/GFDEBTN">debt has climbed over the years</a> – by the end of 2022, it was 10 times larger than it was in 1990. It currently <a href="https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/">stands at $31.4 trillion dollars</a> and represents more than 120% of the nation’s gross domestic product. GDP is the total annual amount of goods and services produced by a country and often is used to judge whether debt is high or low.</p>
<p>Since 1990, <a href="https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/">government debt has more than doubled</a> relative to the size of the economy, indicating that servicing debt could be quite a bit more of an issue than it once was.</p>
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<h2>A decade of record-low borrowing costs</h2>
<p>But how concerning are these numbers? After all, it is not as if the government debt has to be paid off every year. </p>
<p>Government borrowing has some similarities to a person paying for an expensive item with a credit card, with the actual amount due to be paid off over an extended period. Just as with purchases on credit, interest is applied – and can add to the overall outlay. The federal government is different from consumers, though; it need not pay off its debt for the foreseeable future.</p>
<p>In terms of interest payments, the U.S. has been fortunate in recent years. <a href="https://fred.stlouisfed.org/series/FEDFUNDS">Historically low interest rates</a> since the <a href="https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath">2008 financial crisis</a> have held down interest payments. And just as low interest rates encourage would-be homeowners, for example, to take out a larger mortgage, they have also made it much more attractive for the federal government to borrow money to pay for whatever Congress and the administration want to finance.</p>
<p>But then came 2022. <a href="https://www.economist.com/finance-and-economics/2022/12/21/2022-has-been-a-year-of-brutal-inflation">Soaring inflation</a>, which <a href="https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm#:%7E:text=Consumer%20prices%20up%209.1%20percent,U.S.%20Bureau%20of%20Labor%20Statistics">reached levels not seen in 40 years</a>, meant an end to the days of near-zero interest rates. </p>
<p>To restrain inflation, the <a href="https://www.cbsnews.com/news/federal-reserve-hikes-interest-rates-seventh-time-2022/">Fed raised rates seven times</a> in 2022 and on three more occasions in 2023, taking the base rate from near zero to a range of 5% to 5.25% as of May 2023. On May 3, the Fed <a href="https://www.reuters.com/markets/us/fed-likely-hike-rates-hint-pause-tightening-cycle-2023-05-03/">signaled it may take a pause</a> as the economy slows and a banking crisis continues to brew.</p>
<p>Not all government debt, however, carries these current higher interest rates. Just as with typical U.S. mortgages, much of the government debt bears the interest rate applied when it was taken on. The difference is, unlike homeowners, the government does not pay off its debt. Instead, it rolls over old debt into new debt – and when it does so, it takes on whatever the interest rate is when the debt is rolled over. And when this happens and interest rates have risen, the cost of servicing the overall debt goes up.</p>
<h2>There may be trouble ahead</h2>
<p>The federal government’s interest expense has only begun to reflect the higher interest rates. The average rate the U.S. paid in the first quarter of 2023 <a href="https://fred.stlouisfed.org/graph/?g=hW9">was 2.7%</a> – that’s the most in over a decade, and it’s almost certainly going to continue to climb throughout 2023.</p>
<p>As for the debate over the debt ceiling, Republicans are trying to make it about the state of the nation’s finances, but months ago <a href="https://www.cnbc.com/2023/01/30/social-security-medicare-off-table-in-debt-ceiling-talks-mccarthy.html">they ruled out addressing</a> the most significant pieces of the national debt: Social Security and Medicare. And their plan, as passed by the House, wouldn’t actually cut spending much since it <a href="https://www.nytimes.com/2023/04/26/us/politics/debt-limit-vote-republicans.html">would freeze spending at last year’s levels</a> – still higher than before the COVID-19 pandemic. </p>
<p>Meanwhile, Democrats, in my view, are acting as if it’s business as usual by not negotiating. And their proposal to raise taxes to reduce the deficit is very unlikely to pass the Republican-controlled House.</p>
<p>It may all sound a little worrying, especially amid <a href="https://www.cnn.com/2023/05/02/investing/premarket-stocks-trading/index.html">talk of a recession</a>. It is as if the interest on your credit card or mortgage suddenly jumped at a time when you were facing a possible cut in wages. </p>
<p>But there are some reassuring economic projections as well. Inflation <a href="https://www.cato.org/blog/inflation-fell-19-second-half-2022-107-first-1">declined substantially</a> in the second half of 2022 and <a href="https://fred.stlouisfed.org/series/CPIAUCSL#0">has fallen further in 2023</a> to <a href="https://www.bls.gov/news.release/cpi.nr0.htm">4.9% as of April</a>.</p>
<p>And there is good reason to think that interest rates of 4% – or even less – are in the U.S.’s future for 2024 and beyond, as well as in <a href="https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20230322.htm">the Federal Reserve projections</a>. Whether there will be a “soft landing” in the economy – that is, a slowdown that avoids a recession – is not so obvious. While it is not inevitable, <a href="https://www.usnews.com/news/economy/articles/2023-03-17/leading-indicators-fall-again-in-february-signaling-recession-on-the-horizon">many indicators point to a recession</a> in 2023.</p>
<p>Either way, the days of the federal government borrowing trillions of dollars at near-zero interest rates to finance extravagant spending are over for the foreseeable future.</p>
<p><em>This is an updated version of an article originally published on Jan. 30, 2023.</em></p><img src="https://counter.theconversation.com/content/198280/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gerald P. Dwyer is affiliated with the American Institute for Economic Research. </span></em></p>The US spent $232 billion paying interest on the national debt in the first quarter of 2023 as the Fed jacked up borrowing costs.Gerald P. Dwyer, Professor Emeritus of Economics and BB&T Scholar, Clemson UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1983952023-01-30T13:13:37Z2023-01-30T13:13:37ZUS debt default could trigger dollar’s collapse – and severely erode America’s political and economic might<figure><img src="https://images.theconversation.com/files/525410/original/file-20230510-12317-tw7ct7.jpg?ixlib=rb-1.1.0&rect=79%2C70%2C5832%2C3864&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Kevin McCarthy., left, Chuck Schumer, right, and President Joe Biden meet at the White House on May 9, 2023.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/bd4ffc74fe4e4646a58a1be1324ae5df/photo?Query=mccarthy&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=now-24h&totalCount=57&currentItemNo=42">AP Photo/Evan Vucci</a></span></figcaption></figure><p><a href="https://www.bloomberg.com/news/articles/2023-05-09/joe-biden-kevin-mccarthy-meet-on-debt-limit-as-threat-of-first-us-default-looms?sref=Hjm5biAW">Congressional leaders</a> at loggerheads over a debt ceiling impasse sat down with President Joe Biden on May 9, 2023, as the clock ticks down to a potentially catastrophic default if nothing is done <a href="https://apnews.com/article/x-date-debt-ceiling-yellen-treasury-borrowing-f726fd88a9bb7f72e50f0b948731ac57">by the end of the month</a>.</p>
<p>Republicans, who <a href="https://www.politico.com/news/2022/11/16/house-control-midterm-elections-results-2022-00066546">regained control of the House of Representatives</a> in November 2022, are <a href="https://www.cnn.com/2023/04/26/politics/debt-ceiling-house-vote-negotiations/index.html">threatening not to allow an increase in the debt limit</a> unless they get spending cuts and regulatory rollbacks in return, which they outlined in a bill passed in April 2023. In so doing, they risk pushing the U.S. government into default.</p>
<p>It feels a lot like a case of déjà vu all over again.</p>
<p>Brinkmanship over the debt ceiling has <a href="https://www.latimes.com/business/story/2023-01-17/the-u-s-economy-is-again-being-held-hostage-to-our-ridiculous-federal-debt-ceiling">become a regular ritual</a> – it <a href="https://newrepublic.com/article/93043/obama-clinton-debt-ceiling-crisis">happened under the Clinton administration</a> in 1995, then again <a href="https://apnews.com/article/biden-politics-united-states-government-national-debt-us-republican-party-d6bfc59aa623c8c972c44e1aced85d9c">with Barack Obama as president in 2011</a>, and <a href="https://crsreports.congress.gov/product/pdf/IN/IN11702#:%7E:text=The%20new%20limit%20stands%20just,pace%20of%20federal%20debt%20accumulation.">more recently in 2021</a>.</p>
<p>As <a href="https://tci.touro.edu/academics/faculty/">an economist</a>, I know that defaulting on the national debt would have real-life consequences. Even the threat of pushing the U.S. into default has an economic impact. In August 2021, the mere prospect of a potential default led to an <a href="https://www.wsj.com/articles/SB10001424053111903454504576492724028210348">unprecedented downgrade</a> of the the nation’s credit rating, hurting America’s financial prestige as well as countless individuals, including retirees.</p>
<p>And that was caused by the mere specter of default. An actual default would be far more damaging. </p>
<h2>Dollar’s collapse</h2>
<p>Possibly the most serious consequence would be the collapse of the U.S. dollar and its replacement as global trade’s “<a href="https://www.brookings.edu/wp-content/uploads/2019/09/DollarInGlobalFinance.final_.9.20.pdf">unit of account</a>.” That essentially means that it is widely used in global finance and trade.</p>
<p>Day to day, most Americans are likely unaware of the economic and political power that goes with being the world’s unit of account. Currently, <a href="https://www.euronews.com/next/2022/08/03/watch-the-us-dollar-is-the-mightiest-of-all-world-currencies-but-is-its-position-under-thr">more than half of world trade</a> – from oil and gold to cars and smartphones – is in U.S. dollars, with the <a href="https://www.swift.com/news-events/news/new-research-highlights-currency-usage-and-trends-global-payments">euro accounting for around 30%</a> and all other currencies making up the balance.</p>
<p>As a result of this dominance, the U.S. is the only country on the planet that can <a href="https://www.cfr.org/backgrounder/dollar-worlds-currency">pay its foreign debt in its own currency</a>. This gives both the U.S. government and American companies tremendous leeway in international trade and finance. </p>
<p>No matter how much debt the U.S. government owes foreign investors, it can simply print the money needed to pay them back – although for economic reasons, it may not be wise to do so. Other countries <a href="https://www.twincities.com/2022/08/21/real-world-economics-why-other-countries-need-our-dollars/">must buy either the dollar or the euro</a> to pay their foreign debt. And the only way for them to do so is to either to export more than they import or borrow more dollars or euros on the international market.</p>
<p>The U.S. is free from such constraints and can <a href="https://www.epi.org/publication/trade-deficits-consequences-policy-implications/">run up large trade deficits</a> – that is, import more than it exports – for decades without the same consequences.</p>
<p>For American companies, the dominance of the dollar means they’re <a href="https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/">not as subject to the exchange rate risk</a> as are their foreign competitors. Exchange rate risk refers to how changes in the relative value of currencies may affect a company’s profitability.</p>
<p>Since international trade is generally denominated in dollars, U.S. businesses can buy and sell in their own currency, something their foreign competitors cannot do as easily. As simple as this sounds, it gives American companies a tremendous competitive advantage. </p>
<p>If Republicans push the U.S. into default, the dollar would likely <a href="https://theconversation.com/if-the-us-defaults-on-debt-expect-the-dollar-to-fall-and-with-it-americans-standard-of-living-169079">lose its position as the international unit of account</a>, forcing the government and companies to pay their international bills in another currency.</p>
<figure class="align-center ">
<img alt="A mincer shows dollars being inserted in the top and shredded underneath." src="https://images.theconversation.com/files/506839/original/file-20230127-23-j6o3xl.jpg?ixlib=rb-1.1.0&rect=0%2C16%2C3903%2C2872&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506839/original/file-20230127-23-j6o3xl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506839/original/file-20230127-23-j6o3xl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506839/original/file-20230127-23-j6o3xl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506839/original/file-20230127-23-j6o3xl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506839/original/file-20230127-23-j6o3xl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506839/original/file-20230127-23-j6o3xl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A U.S. debt default would mangle the dollar’s international reputation.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/destroying-dollars-with-a-grinder-royalty-free-image/154934035?phrase=dollar%20ripped&adppopup=true">photovideostock/E+ via Getty Images</a></span>
</figcaption>
</figure>
<h2>Loss of political power too</h2>
<p>The dollar’s dominance means trade must go through an American bank at some point. This is one important way it gives the U.S. tremendous political power, especially to punish economic rivals and unfriendly governments.</p>
<p>For example, when former President Donald Trump <a href="https://www.washingtonpost.com/national-security/trump-administration-to-impose-crushing-sanctions-on-iran-in-defiance-of-european-humanitarian-concerns/2020/10/07/f29c052c-08f4-11eb-991c-be6ead8c4018_story.html">imposed economic sanctions on Iran</a>, he <a href="https://www.cambridge.org/core/journals/american-journal-of-international-law/article/dollar-and-the-united-states-exorbitant-power-to-sanction/419F2FDF5BF6E052258DEE592853D6C3">denied the country access to American banks and to the dollar</a>. He also imposed secondary sanctions, which means that non-American companies trading with Iran were also sanctioned. Given a choice of access to the dollar or trading with Iran, <a href="https://www.cnas.org/publications/reports/sanctions-by-the-numbers-u-s-secondary-sanctions">most of the world economies</a> chose access to the dollar and complied with the sanctions. As a result, Iran entered a deep recession, and <a href="https://www.xe.com/currencycharts/?from=USD&to=IRR&view=10Y">its currency plummeted</a> about 30%.</p>
<p>President Joe Biden did something similar <a href="https://www.cnbc.com/2022/02/28/biden-administration-expands-russia-sanctions-cuts-off-us-transactions-with-central-bank.html">against Russia</a> in response to its invasion of Ukraine. Limiting Russia’s access to the dollar has helped <a href="https://www.wilsoncenter.org/blog-post/russias-economy-end-2022-deeper-troubles">push the country into a recession</a> that’s bordering on a depression.</p>
<p>No other country today could unilaterally impose this level of economic pain on another country. And all an American president currently needs is a pen. </p>
<h2>Rivals rewarded</h2>
<p>Another consequence of the dollar’s collapse would be enhancing the position of the U.S.’s top rival for global influence: China.</p>
<p>While the euro would likely replace the dollar as the world’s primary unit of account, the <a href="https://financialpost.com/moneywise/could-chinas-yuan-replace-the-u-s-dollar-as-the-worlds-dominant-currency#:%7E:text=The%20researchers%20argue%20that%20replacing,in%20a%20%E2%80%9Cmultipolar%E2%80%9D%20world.">Chinese yuan</a> would move into second place.</p>
<p>If the yuan were to become a significant international unit of account, this would enhance China’s international position both economically and politically. As it is, China has been working with the other BRIC countries – Brazil, Russia and India – to accept the yuan as a unit of account. With the other three already <a href="https://www.cambridge.org/core/elements/can-brics-dedollarize-the-global-financial-system/0AEF98D2F232072409E9556620AE09B0">resentful of U.S. economic and political dominance</a>, a U.S. default would support that effort. </p>
<p>They may not be alone: Recently, Saudi Arabia suggested it was open to <a href="https://finance.yahoo.com/news/saudi-arabia-just-said-now-213200817.html">trading some of its oil in currencies other than the dollar</a> – something that would change long-standing policy.</p>
<h2>Severe consequences</h2>
<p>Beyond the impact on the dollar and the economic and political clout of the U.S., a default would be profoundly felt in many other ways and by countless people. </p>
<p>In the U.S., tens of millions of Americans and thousands of companies that depend on government support <a href="https://www.whitehouse.gov/cea/written-materials/2021/10/06/life-after-default/">could suffer</a>, and the economy would most likely sink into recession – or worse, given the U.S. is already expected to soon suffer a downturn. In addition, retirees could see the worth of their pensions dwindle.</p>
<p>The truth is, we really don’t know what will happen or how bad it will get. The scale of the damage caused by a U.S. default is hard to calculate in advance because it has never happened before. </p>
<p>But there’s one thing we can be certain of. If Republicans take their threat of default too far, the U.S. and Americans will suffer tremendously.</p>
<p><em>This is an updated version of an article originally published on Jan. 30, 2023</em></p><img src="https://counter.theconversation.com/content/198395/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Humphries does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As President Biden begins meeting with congressional leaders to resolve the debt ceiling showdown, an economist warns the consequences of a default could be dire.Michael Humphries, Deputy Chair of Business Administration, Touro UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1690792021-10-11T12:17:52Z2021-10-11T12:17:52ZIf the US defaults on debt, expect the dollar to fall – and with it, Americans’ standard of living<figure><img src="https://images.theconversation.com/files/425116/original/file-20211006-22-1lr8y3u.jpg?ixlib=rb-1.1.0&rect=6%2C18%2C4037%2C2673&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Would a default mean an end to the dollar's position as the go-to trading currency?</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/MnuchinCurrency/7b012a744f40428c9f55e0df7e331931/photo?Query=printing%20AND%20dollars&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=24&currentItemNo=7">AP Photo/Jacquelyn Martin</a></span></figcaption></figure><p>Congress has seemingly kicked the <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">debt ceiling</a> deadline down the road – but the threat of a future default still exists.</p>
<p>On Oct. 7, 2021, lawmakers in the Senate agreed to <a href="https://www.reuters.com/world/us/us-senate-democrats-republicans-haggle-over-short-term-debt-fix-2021-10-07/">extend the government’s ability to borrow</a> until December. It came after Senate Minority Leader Mitch McConnell <a href="https://www.bloomberg.com/news/articles/2021-10-06/mcconnell-to-offer-short-term-deal-to-raise-u-s-debt-ceiling?srnd=premium&sref=Hjm5biAW">offered a temporary suspension to the debt limit</a>, averting a default until at least December. But at that point, Democrats would have to find a way to raise the debt ceiling on their own – <a href="https://thehill.com/homenews/senate/574455-schumer-dems-cannot-and-will-not-raise-debt-ceiling-through-reconciliation">something they’ve said they won’t do</a>. </p>
<p>This isn’t the first time Republicans <a href="https://www.reuters.com/article/us-usa-fiscal-idUSBRE98N11220131006">have resisted</a> helping a Democratic president raise the debt ceiling. </p>
<p>As <a href="https://tci.touro.edu/academics/faculty/">an economist</a>, I know that this political game of chicken has real-life consequences – even if it doesn’t end with default. In <a href="https://www.reuters.com/article/us-usa-debt-downgrade/united-states-loses-prized-aaa-credit-rating-from-sp-idUSTRE7746VF20110807">August 2011</a>, during the Obama administration, brinkmanship over the debt ceiling led to an unprecedented downgrade of the United States’ credit rating, which <a href="https://www.npr.org/sections/thetwo-way/2011/08/08/139081051/developing-in-wake-of-s-p-downgrade-watching-the-markets">caused markets to plunge</a>. </p>
<h2>What is national debt?</h2>
<p>Understanding those consequences begins with looking at how the U.S. government finances its spending. The Treasury Department has three sources. </p>
<p>It can use revenue from taxes and fees approved by Congress but collected by the Treasury. </p>
<p>It can also <a href="https://www.forbes.com/sites/williammeehan/2020/10/21/can-the-federal-reserve-print-money-forever-or-how-continuing-to-print-money-to-support-deficit-spending-may-end-badly-with-chinas-help/?sh=6ca3b32358d4">print money</a> through the Federal Reserve.</p>
<p>But when the first two options don’t supply enough cash to pay the bills, the Treasury can borrow the difference by <a href="https://home.treasury.gov/services/treasury-auctions">issuing bonds and selling them</a> on the world’s financial markets. Bondholders lend the government a set amount of money to be paid back with interest over a certain time frame. The amount owed is the national debt, which <a href="https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny">currently stands at US$28.43 trillion</a>. That is above the debt ceiling of $28.4 trillion set by Congress earlier this year. The Treasury had been using “extraordinary measures” to finance government spending in lieu of an extension, but those measures were due to expire within weeks.</p>
<p>Although this includes money due to lenders and investors both overseas and in the U.S., a sizeble chunk is money that the federal government owes itself – the U.S. Treasury <a href="https://www.treasurydirect.gov/govt/charts/principal/principal_govpub.htm">owes money to other parts of the government</a> as part of an accounting procedure. The Fed buys Treasury bonds when it wants to increase the supply of money in the economy and currently owns around one-fifth of the Treasury debt. The Social Security Administration holds around <a href="https://www.pewresearch.org/fact-tank/2019/07/24/facts-about-the-national-debt/">$2.9 trillion in national debt</a>, which is financed with surplus revenue.</p>
<p>Among the largest nonfederal institutions that hold Treasury debt are private pension funds.</p>
<p>Altogether, the Federal Reserve, government and nongovernment pension funds hold about half of U.S. national debt.</p>
<h2>What happens if the U.S. defaults?</h2>
<p>If Congress doesn’t suspend or raise the debt ceiling, the government would not be able to borrow additional funds to meet its obligations, including interest payments to bondholders. That would most likely trigger a default. </p>
<p>The knock-on effect of the <a href="https://www.cnn.com/2021/09/22/politics/debt-ceiling-warnings/index.html">U.S. defaulting would be catastrophic</a>.</p>
<p>Investors such as pension funds and banks holding U.S. debt could fail. Tens of millions of Americans and thousands of companies that depend on government support could suffer. The dollar’s value could collapse, and the U.S. economy would most likely sink back into recession. </p>
<p>And that’s just the start. The U.S. dollar could also lose its unique place in the world as its primary “<a href="https://www.brookings.edu/wp-content/uploads/2019/09/DollarInGlobalFinance.final_.9.20.pdf">unit of account</a>,” which means that it is widely used in global finance and trade. Without this status, Americans simply wouldn’t be able to maintain their current standard of living. </p>
<p>A U.S. default would set off a series of events, including a depreciating dollar and surging inflation, that I believe would likely lead to the abandonment of the U.S. dollar as a global unit of account. </p>
<p>The combination of all this would make it a lot harder for the U.S. to afford all the stuff it imports from abroad, and with it Americans’ standard of living would fall.</p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/169079/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Humphries does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist explains why defaulting on the national debt would result in economic crisis.Michael Humphries, Deputy Chair of Business Administration, Touro UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1649772021-07-23T12:14:38Z2021-07-23T12:14:38ZWhy America has a debt ceiling: 5 questions answered<figure><img src="https://images.theconversation.com/files/412709/original/file-20210722-15-lxzlb9.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4256%2C2828&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The sky's not always the limit. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DomeRestorationTour/4d4de6e58a5e4b9bae9e7573d1ee53bd/photo?Query=capitol%20rotunda%20ceiling&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=24&currentItemNo=12">AP Photo/Susan Walsh</a></span></figcaption></figure><p><em>A tentative deal to raise the debt ceiling may finally end the game of chicken Republicans and Democrats have been playing over the government’s spending limit -– with the nation’s financial stability at stake.</em></p>
<p><em>The deal, announced on May 27, 2023, would raise the <a href="https://www.reuters.com/markets/rates-bonds/us-congress-vote-debt-limit-hike-averting-default-risk-2021-12-14/">US$31.38 trillion ceiling</a> and cap federal spending. It must still be reviewed and approved by the House and the Senate before the U.S. government runs out of cash, which Treasury Secretary Janet Yellen <a href="https://www.npr.org/2023/05/26/1178510391/janet-yellen-treasury-debt-ceiling-limit-default-congress-negotiations">now estimates will happen by June 5</a>.</em></p>
<p><em>The government <a href="https://home.treasury.gov/news/press-releases/jy1196">hit the debt limit back in January</a> and has been using “extraordinary measures” since then to keep paying its bills.</em></p>
<p><em>Economist <a href="https://www.monmouth.edu/directory/profiles/steven-pressman/">Steven Pressman</a> explains what the debt ceiling is and why we have it – and why it may be time to abolish it.</em> </p>
<h2>1. What is the debt ceiling?</h2>
<p>Like the rest of us, governments must borrow when they spend more money than they receive. They do so by issuing bonds, which are IOUs that promise to repay the money in the future and make regular interest payments. <a href="https://fred.stlouisfed.org/series/GFDEBTN">Government debt</a> is the total sum of all this borrowed money. </p>
<p>The <a href="https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit">debt ceiling</a>, which <a href="https://www.google.com/search?client=safari&rls=en&q=congress+creates+debt+ceiling&ie=UTF-8&oe=UTF-8">Congress established</a> a century ago, is the maximum amount the government can borrow. It’s a limit on the national debt. </p>
<h2>2. What’s the national debt?</h2>
<p>The U.S. government debt <a href="https://fsapps.fiscal.treasury.gov/dts/issues">of $31.38 trillion</a> is about 22% more than the <a href="https://fred.stlouisfed.org/series/GDP">value of all goods and services</a> that will be produced in the U.S. economy this year. </p>
<p>Around one-quarter of this money the government actually owes itself. The Social Security Administration has accumulated a surplus and invests the extra money, <a href="https://www.ssa.gov/cgi-bin/investheld.cgi">currently $2.8 trillion</a>, in government bonds. And the Federal Reserve <a href="https://fred.stlouisfed.org/series/TREAST">holds $5.5 trillion</a> in U.S. Treasurys. </p>
<p>The rest is public debt. As of October 2022, <a href="http://ticdata.treasury.gov/Publish/mfh.txt">foreign countries, companies and individuals</a> owned $7.2 trillion of U.S. government debt. Japan and China are the largest holders, with around $1 trillion each. The rest is owed to U.S. citizens and businesses, as well as state and local governments. </p>
<p><iframe id="otin2" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/otin2/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>3. Why is there a borrowing limit?</h2>
<p>Before 1917, Congress would authorize the government to borrow a fixed sum of money for a specified term. When loans were repaid, the government could not borrow again without asking Congress for approval.</p>
<p>The Second Liberty Bond Act of 1917, which <a href="https://www.federalreservehistory.org/essays/liberty_bonds">created the debt ceiling</a>, changed this. It allowed a continual rollover of debt without congressional approval. </p>
<p>Congress enacted this measure to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to $11.5 billion and required legislation for any increase. </p>
<p>The debt ceiling <a href="https://fas.org/sgp/crs/misc/RL31967.pdf">has been increased dozens of times</a> since then and suspended on several occasions. The last change occurred in December 2021, when <a href="https://www.crfb.org/papers/qa-everything-you-should-know-about-debt-ceiling">it was raised</a> to $31.38 trillion.</p>
<p><iframe id="l82Ak" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/l82Ak/8/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>4. What happens when the US hits the ceiling?</h2>
<p>Whenever the U.S. nears its debt limit, the Treasury secretary can use “<a href="https://www.treasury.gov/initiatives/Documents/Description_of_Extraordinary_Measures_2017_03_16.pdf">extraordinary measures</a>” to conserve cash, which she indicated began on Jan. 19. One such measure is <a href="https://www.govexec.com/pay-benefits/2019/03/treasury-stops-investments-delay-debt-ceiling-retirement-programs-could-become-more-generous-and-more/155340/">temporarily not funding retirement programs</a> for government employees. The expectation will be that once the ceiling is raised, the <a href="https://www.govexec.com/pay-benefits/2019/03/treasury-take-extraordinary-measures-us-hits-debt-ceiling-saturday/155244/">government would make up the difference</a>. But this will buy only a small amount of time.</p>
<p>If the debt ceiling isn’t raised before the Treasury Department exhausts its options, decisions will have to be made about who gets paid with daily tax revenues. Further borrowing will not be possible. Government employees or contractors may not be paid in full. Loans to small businesses or college students may stop.</p>
<p>When the government can’t pay all its bills, it is technically in default. <a href="https://www.nytimes.com/2023/01/07/us/politics/speaker-election-debt-limit-republicans.html">Policymakers</a>, <a href="https://www.bloomberg.com/news/articles/2023-01-06/mccarthy-deal-with-rebels-would-heighten-risk-of-debt-standoff?sref=Hjm5biAW">economists and Wall Street</a> are concerned about a calamitous financial and economic crisis. <a href="http://www.pbs.org/newshour/bb/politics-july-dec13-debtceiling_10-03/">Many fear</a> that a government default would have dire economic consequences – soaring interest rates, financial markets in panic and maybe an economic depression.</p>
<p>Under normal circumstances, once markets start panicking, Congress and the president usually act. This <a href="http://www.nytimes.com/2013/10/17/us/congress-budget-debate.html">is what happened</a> in 2013 when Republicans sought to use the debt ceiling to defund the Affordable Care Act. </p>
<p>But we no longer live in normal political times. The major political parties <a href="https://nymag.com/intelligencer/2021/02/a-record-partisan-gap-underlies-bidens-job-approval-rating.html">are more polarized than ever</a>, and the concessions McCarthy gave right-wing Republicans may make it impossible to get a deal on the debt ceiling. </p>
<h2>5. Is there a better way?</h2>
<p>One possible solution is a <a href="https://archive.nytimes.com/krugman.blogs.nytimes.com/2013/01/07/be-ready-to-mint-that-coin/">legal loophole allowing the U.S. Treasury to mint platinum coins of any denomination</a>. If the U.S. Treasury were to mint a $1 trillion coin and deposit it into its bank account at the Federal Reserve, the money could be used to pay for government programs or repay government bondholders. This could even be justified by appealing to <a href="https://constitution.congress.gov/browse/essay/amdt14-S4-1/ALDE_00000849">Section 4 of the 14th Amendment</a> to the U.S. Constitution: “The validity of the public debt of the United States … shall not be questioned.”</p>
<p><a href="https://theworld.org/stories/2013-10-16/quick-can-you-name-another-country-debt-ceiling-its-hard">Few countries even have a debt ceiling</a>. Other governments operate effectively without it. America could too. A debt ceiling is dysfunctional and periodically puts the U.S. economy in jeopardy because of political grandstanding.</p>
<p>The best solution would be to scrap the debt ceiling altogether. Congress already approved the spending and the tax laws that require more debt. Why should it also have to approve the additional borrowing? </p>
<p>It should be remembered that the original debt ceiling was put in place because Congress couldn’t meet quickly and approve needed spending to fight a war. In 1917 cross-country travel was by rail, requiring days to get to Washington. This made some sense then. Today, when Congress can vote online from home, this is no longer the case.</p>
<p><em>This story has been updated to reflect the draft deal announced on the evening of May 27, 2023.</em></p><img src="https://counter.theconversation.com/content/164977/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Republicans and Democrats have negotiated a draft deal that may avert a financial crisis, but why does the US have a debt ceiling in the first place?Steven Pressman, Part-Time Professor of Economics, The New SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/796372017-07-19T06:43:57Z2017-07-19T06:43:57ZWhat’s the deal with the debt ceiling? 5 questions answered<figure><img src="https://images.theconversation.com/files/178736/original/file-20170718-20055-g52qx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ceilings are overrated. </span> <span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span></figcaption></figure><p><em>Editor’s note: The U.S. government <a href="http://www.cnbc.com/2017/03/27/there-is-no-debt-ceiling-crisis-at-least-for-now.html">maxed out</a> its credit card in March and has been moving money around ever since to avoid running out of cash. But very soon we will reach the limits of this financial sleight of hand, and Congress will have to either raise the <a href="https://www.treasury.gov/initiatives/Pages/debtlimit.aspx">debt ceiling</a> – currently about US$19.8 trillion – or suffer the consequences. Economist Steve Pressman explains why we have a ceiling and why it’s time to get rid of it.</em> </p>
<h2>1. What is the debt ceiling?</h2>
<p>Just like the rest of us, governments must borrow when they spend more money than they receive. They do so by issuing a bond or IOU with a promise to repay and make regular interest payments. Government debt is the total sum of all this borrowed money.</p>
<p>The debt ceiling, which <a href="https://www.senate.gov/CRSpubs/d2c8f833-9796-4b3e-9462-6b1755ef463d.pdf">Congress established</a> a century ago, is the maximum amount the government can borrow. In other words, it’s the limit on the national credit card. </p>
<h2>2. How much has the US government borrowed and from whom?</h2>
<p>Currently, <a href="https://fred.stlouisfed.org/series/GFDEBTN">U.S. government debt</a> is $19.8 trillion, a tad more than the <a href="https://fred.stlouisfed.org/series/GDP">size of our economy</a>. </p>
<p>Around one-third of this money the government actually owes itself. The Social Security Administration, which has accumulated a surplus since it was first set up in the 1930s, has invested all of this extra money in government bonds and <a href="https://www.ssa.gov/cgi-bin/investheld.cgi">currently owns $5 trillion worth</a>. Separately, the Federal Reserve <a href="https://fred.stlouisfed.org/series/TREAST">holds about $2.5 trillion</a> in U.S. Treasuries. </p>
<p>The rest is considered public debt. As of March, <a href="http://ticdata.treasury.gov/Publish/mfh.txt">foreign countries, companies and individuals</a> own $6 trillion of U.S. government debt. Japan and China are the largest holders with $1.1 trillion each. The rest is owed to U.S. citizens and businesses, as well as state and local governments. </p>
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<h2>3. Why is there a debt ceiling?</h2>
<p>Before 1917, Congress would authorize the government to borrow a fixed sum of money for a specified term. When each loan expired, the government could not borrow again until authorized to do so.</p>
<p>That changed with the Second Liberty Bond Act of 1917, which <a href="https://www.federalreservehistory.org/essays/liberty_bonds">created the debt ceiling</a>. This allowed for a continual rollover of debt without congressional approval of every loan. </p>
<p>Congress approved this measure because it enabled then-President Woodrow Wilson to spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to $11.5 billion, requiring legislation for any increase. </p>
<p>During the subsequent century, the debt ceiling <a href="https://fas.org/sgp/crs/misc/RL31967.pdf">has been increased many times</a>, including 78 <a href="https://www.treasury.gov/initiatives/Pages/debtlimit.aspx">since 1960 alone</a>. The last change occurred in March 2015, when Congress decided to suspend the limit for two years. When that <a href="http://wric.com/2017/03/19/debt-limit-goes-back-into-effect-at-level-near-20-trillion/">legislation expired</a> on March 16, 2017, U.S. debt stood at $19.8 trillion, which became the new limit. </p>
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<h2>4. How has the government paid its bills since then without incurring new debt?</h2>
<p>The U.S. government generally spends more than it takes in (<a href="https://www.thebalance.com/current-u-s-federal-budget-deficit-3305783">$440 billion more in fiscal year 2017</a>), yet since March 16 it can no longer borrow more money to make up the difference. It can spend only cash on hand. As a result, Treasury Secretary Steven Mnuchin has used “<a href="https://www.budget.senate.gov/imo/media/doc/Debt-Limit%20Extraordinary%20Measures%20BB030917.pdf">extraordinary measures</a>” to conserve cash.</p>
<p>For example, he <a href="https://www.treasury.gov/initiatives/Documents/Description_of_Extraordinary_Measures_2017_03_16.pdf">stopped funding retirement programs</a> for government employees so the money can be used to meet other obligations without breaching the debt limit. The expectation is that once the debt ceiling is raised, the government will make up for underfunding employees’ plans.</p>
<p>These measures, along with the annual surge in tax payments in April that gave the federal government a <a href="https://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/mts0417.pdf">$182 billion surplus</a> for that month, have enabled the government to pay its other bills. As of July 17, the Treasury <a href="https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=17071700.txt">had $201.4 billion in cash</a>. </p>
<p>But it is not clear how long this money will last. Expenditures and revenues fluctuate considerably, and $200 billion can disappear in weeks.</p>
<p>The <a href="https://bipartisanpolicy.org/blog/bpc-narrows-x-date-forecast-to-early-to-mid-october/">Bipartisan Policy Center</a> and the <a href="https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52837-debtlimit.pdf">Congressional Budget Office</a> estimate that the U.S. will run out during the first two weeks of October, although they warn the country’s coffers could be empty earlier. With Congress scheduled to take a <a href="https://www.senate.gov/artandhistory/history/common/generic/News_August_Recess.htm">recess in August through Labor Day</a>, something must be done soon.</p>
<p>When the cash is gone, decisions will have to be made about who gets paid and who doesn’t. Government employees or contractors may not get paid in full. Loans to small businesses, exporters or college students may stop. These actions will all lower spending and slow economic growth.</p>
<p>One difficult choice would be whether to prioritize foreign owners of our debt or first honor domestic obligations (including American bondholders). <a href="http://www.nationalreview.com/article/271329/constitutional-nonsense-debt-john-berlau">Some argue</a> we’re legally obligated to pay all debt holders first, or that doing this <a href="http://thehill.com/blogs/floor-action/house/298767-house-approves-debt-ceiling-contingency-plan">is more important</a> than paying other bills, but <a href="http://www.dorfonlaw.org/2011/07/obligation-is-debt-that-must-be-paid.html">most</a> <a href="http://www.npr.org/2013/10/07/229856550/in-a-debt-crisis-u-s-may-have-to-decide-payment-priorities">people</a> contend that all creditors need to be treated equally. </p>
<p><a href="http://www.pbs.org/newshour/bb/politics-july-dec13-debtceiling_10-03/">Some pundits</a> have claimed that a government default would have dire economic consequences – soaring interest rates, markets in panic and an economic depression. But such fears are overblown, not because an actual default wouldn’t be catastrophic, but because once markets start panicking, Congress would likely end the game of chicken they are playing with the debt ceiling – just as <a href="http://www.nytimes.com/2013/10/17/us/congress-budget-debate.html">it did in 2013</a>. And even if it technically defaulted, the immediate turmoil would be so severe that Congress would swiftly act to reverse the damage. </p>
<p>Mnuchin <a href="https://www.washingtonpost.com/news/wonk/wp/2017/06/09/u-s-readying-plans-and-backup-plans-if-debt-ceiling-isnt-raised-soon-mnuchin-says/?utm_term=.a8819c467d5f">has said</a> he has “plans and backup plans” to find cash and enable the government to pay its bills, for at least a little while longer. For example, the U.S. could sell off some of its <a href="https://www.fiscal.treasury.gov/fsreports/rpt/goldRpt/current_report.htm">$11 billion in gold</a> or even shut down temporarily, which it also did in 2013.</p>
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<img alt="" src="https://images.theconversation.com/files/178733/original/file-20170718-1523-jfnls6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/178733/original/file-20170718-1523-jfnls6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/178733/original/file-20170718-1523-jfnls6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/178733/original/file-20170718-1523-jfnls6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/178733/original/file-20170718-1523-jfnls6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/178733/original/file-20170718-1523-jfnls6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/178733/original/file-20170718-1523-jfnls6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">We could always sell some of the gold at Fort Knox, though $11 billion wouldn’t get us very far.</span>
<span class="attribution"><span class="source">AP Photo/Barry Thumma</span></span>
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<p>This would buy Congress a little more time to act – or react to the plunging stock market that results. That’s what happened in August 2011 when <a href="http://money.cnn.com/2011/08/05/news/economy/downgrade_rumors/index.htm">Standard & Poor’s downgraded Uncle Sam’s AAA credit rating</a> for the first time ever after brinkmanship over the debt ceiling. Congress quickly caved and raised it. </p>
<p>I expect the same to happen this year. Some Republicans will want to hold the line on spending, while Democrats (required to overcome a filibuster in the Senate) will likely push for more. In the end, they’ll do what they always do – perhaps after Wall Street gives them a push – and kick the can a few more miles down the road. </p>
<h2>5. Is there a better way to deal with our debt?</h2>
<p>The U.S. is one of <a href="https://www.investmentfrontier.com/2013/10/08/7-countries-with-debt-ceilings-or-limits">very few countries with a debt ceiling</a>. Other governments operate effectively without it. </p>
<p>We can too. Having a debt ceiling is actually dysfunctional. It makes it harder for the Treasury to pay bills when they come due.</p>
<p>The best solution would be to just scrap the ceiling. Congress already approved the spending and the tax laws that require more debt; it shouldn’t have to approve the additional borrowing as well. </p>
<p>It is also worth remembering that the original debt ceiling was put in place because Congress could not meet quickly and approve any needed spending to fight a war. In 1917, when cross-country travel was by rail, requiring days to get to Washington, this made some sense. Today, not so much.</p><img src="https://counter.theconversation.com/content/79637/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US government reached the limits of its borrowing capacity in March and is fast approaching the point at which it will no longer be able to pay all its bills. What’s the big deal?Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/496332015-10-27T10:09:57Z2015-10-27T10:09:57ZExplainer: what’s the debt ceiling and why it’s an obsolete way to control spending<figure><img src="https://images.theconversation.com/files/99701/original/image-20151026-18426-92c0cv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sometimes it's not a good thing to have a roof over our heads. </span> <span class="attribution"><span class="source">Dollar ceiling via www.shutterstock.com</span></span></figcaption></figure><p>The US is once again on the precipice of default on its national debt – not because of a fundamental inability to generate and collect tax revenues (<em>a la</em> Greece), but because of political shenanigans over the country’s <a href="http://www.treasury.gov/initiatives/Pages/debtlimit.aspx">debt ceiling</a>. </p>
<p>The Treasury Department <a href="http://www.treasury.gov/connect/blog/Pages/October-2015-Debt-Limit-Letter.aspx">projects</a> that after November 3, the federal government will not have enough cash on hand to pay its bills and obligations without borrowing in excess of the current federal debt limit, currently US$18.1 trillion. If Congress does not act by then, the Treasury would have no option but to renege on its promises, an action that could have serious consequences for the nation’s economy – and well beyond. </p>
<p>It’s uncertain if we’ll see more political shenanigans this week – such as the <a href="http://thehill.com/blogs/floor-action/scheduling/257976-this-week-debt-drama-as-gop-elects-new-speaker">attachment of amendments</a> that may pose a problem for quick passage – as Congress considers whether and how much to raise the debt ceiling. The <a href="http://www.wsj.com/articles/budget-talks-between-white-house-and-boehner-heat-up-1445883158">latest reports</a> suggest House Speaker John Boehner and the White House are negotiating a two-year deal that would suspend the debt ceiling until 2017. </p>
<p>That would be a welcome development, but going through this dangerous drama every year or two (or multiple times in a single year) begs an important question: why have such a limit when the spending it seeks to constrain has already been approved by Congress, and when the consequences of not raising it could be so dire? </p>
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<h2>Origins of the debt ceiling</h2>
<p>First, a quick primer on government finance. When annual outlays (spending and transfers) exceed tax revenues, the government runs a <a href="http://www.usgovernmentspending.com/federal_deficit_chart.html">budget deficit</a> and must then borrow funds to make up the difference. The government does so by selling Treasury securities to the public in exchange for cash. </p>
<p>Treasury securities are debt instruments, which are, essentially, promises to repay the face value (the dollar amount borrowed) plus interest at an agreed-upon date. These securities are ultimately backed by the Treasury’s ability to collect future taxes to cover these payments. The <a href="http://usdebtclock.org/index.html">total face value</a> of the federal government’s outstanding debt – the amount it currently owes its bond-holding creditors – is equal to the accumulation of all past annual deficits. </p>
<p>The statutory ceiling on US debt places a legal upper bound on the size of this outstanding debt; that is, on how much the federal government can borrow.</p>
<p>The ceiling has been around since 1917, when Congress adopted it to strengthen the legislative branch’s control over spending and taxes, then primarily determined by the president. Besides the US, <a href="http://www.usnews.com/news/articles/2013/10/11/why-do-only-us-and-denmark-have-a-debt-ceiling">only Denmark</a> has a statutory debt limit (although in Denmark the limit is much less amenable to political mischief than here). </p>
<h2>The ceiling’s weak rationale</h2>
<p>The economic arguments for having a debt ceiling are exceedingly weak. </p>
<p>First, the original rationale for the statute – to provide a better balance of power between lawmakers and the president over who controls fiscal policy – is obsolete. The <a href="http://www.gpo.gov/fdsys/pkg/GPO-RIDDICK-1992/pdf/GPO-RIDDICK-1992-34.pdf">Congressional Budget Act of 1974</a> now specifically lays out procedures for how Congress is to participate in the annual budget process. The ceiling is, at best, redundant in light of its initial purpose.</p>
<p>Second, the specific limit set by the law – <a href="http://www.theatlantic.com/business/archive/2011/04/the-us-debt-ceiling-a-historical-look/238061/">initially</a> around $12 billion and now at its current level after having been raised 78 times since 1960 – is completely arbitrary and not linked in any meaningful way to the scale of the economy. </p>
<p>Were a debt limit deemed to be a useful policy tool, the limit would need to account for inflation. Otherwise, generally rising prices, even at current low inflation rates, would eventually push nominal borrowing beyond the fixed limit anyway, even if there were no changes in real (inflation-adjusted) spending and borrowing.</p>
<p>One option would be to index the nominal limit to a measure of inflation, like changes in the consumer price index. Another would be to impose the limit on debt as a proportion of the nation’s total output. The latter alternative would at least have the advantage of tying the ceiling to the resources available for paying off the debt.</p>
<p>Third, even if we grant the one potentially sound argument for maintaining a limit – that it disciplines fiscal policy – there are better ways to achieve this goal. </p>
<p>The current setup is completely divorced from the annual budget process, and is thus inefficient and inconsistent. And the <a href="https://www.fas.org/sgp/crs/misc/RL31967.pdf">consequences</a> of not raising the limit are extreme and potentially harmful to the overall economy. </p>
<p>Indeed, the mere <em>anticipation</em> of government default heightens uncertainty, damages the government’s reputation and authority and increases borrowing costs (ultimately borne by taxpayers). For example, a major scare over raising the ceiling in 2011 led to the loss of the national government’s AAA credit rating at Standard & Poor’s, which <a href="http://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit-rating/2011/08/05/gIQAqKeIxI_story.html">blamed</a> political brinkmanship over both the ceiling and broader debt debate for the downgrade. </p>
<p>And given the importance of US debt as an international financial asset, a US default could lead to yet another global financial crisis, among other unintended consequences. </p>
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<h2>A better way to control spending</h2>
<p>Here is a better way to limit the role of federal in the economy and promote fiscal discipline: rescind the current debt ceiling but impose a statutory limit on the annual outlays of the federal government as a proportion of the nation’s income. </p>
<p>Such a ceiling would discipline federal spending through the established annual budget process. It would force the American people, through their political representatives, to determine how much of the nation’s productive capacity should be controlled by the federal government, and how those limited resources should be allocated across alternative uses. </p>
<p>And a ceiling on outlays is better than a ceiling on the debt-to-GDP ratio or even a balanced budget amendment, since neither of those alternatives necessarily limits the overall size of the government sector. I don’t consider a country in which the government always has a balanced budget – but that controls, say, 50% of the nation’s GDP – a country with a lot of federal fiscal discipline. </p>
<p>Yes, there are always the opportunities for political mischief, and a ceiling on spending might have its own unintended consequences. There are surely many beneficial refinements to consider, such as a spending limit that varies with the state of the business cycle (rising during recessions and falling with expansions). </p>
<p>But I would predict that such a plan would rein in spending and limit the government’s role in the economy more effectively, with less uncertainty and fewer harmful side effects, than the ill-advised, counterproductive and unnecessary debt ceiling we now have.</p><img src="https://counter.theconversation.com/content/49633/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William D. Lastrapes does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The consequences if lawmakers don’t raise the debt ceiling in the coming days are unknown but potentially devastating for the US and global economy.William D. Lastrapes, Professor of Economics, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/387752015-03-19T09:35:18Z2015-03-19T09:35:18ZWhy the national debt doesn’t matter – or how I learned to stop worrying and love Treasuries<figure><img src="https://images.theconversation.com/files/75274/original/image-20150318-2502-aloopm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A friendly reminder. </span> <span class="attribution"><span class="source">IOU from www.shutterstock.com</span></span></figcaption></figure><p>The rate of growth of the US federal government’s debt load has slowed of late, but its level remains high.</p>
<p>As of the end of 2014, <a href="http://www.treasurydirect.gov/NP/debt/current">total US Treasury obligations</a> stood at US$18 trillion, more than 100% of current US output, or $56,500 for every one of us. This hefty sum is a reflection of the large annual budget deficits that the federal government has run, pretty much continuously, since 1931. (Prior to that, surpluses were much more common, apart from the years following the Civil War.) </p>
<p>But as another round of anxiety-causing debt-ceiling debates is likely to return, it is worth asking whether we should even care about the government’s debt. Is it a good measure of the federal government’s role in the economy or even a good indicator of the fiscal burden on US taxpayers? Does the size of our nation’s debt matter?</p>
<h2>Why it’s irrelevant</h2>
<p>To be sure, $18 trillion is a large number. But that number is essentially irrelevant to proper thinking about the economic role of the US government, or about responsible fiscal policy. </p>
<p>Government debt simply reflects the <em>timing</em> of taxes. The face value of debt will be large if, for given past and future levels of government spending, taxes are collected later rather than sooner. </p>
<p>But regardless of when taxes are collected, what ultimately matters is the quantity of the economy’s scarce resources the federal government commands and controls, which mostly depends on the level and path of government spending. </p>
<p>Government debt is not necessarily a good indicator of such control – the government can be wildly intrusive in the economy even if it never borrows, or it can be fiscally effective and efficient with high levels of debt. </p>
<h2>Default isn’t imminent</h2>
<p>Current debt levels in the US also do not indicate imminent default. As long as the federal government remains an “ongoing concern” – fiscal institutions remain strong and effective, taxing authority is maintained, and the long-run productive capacity of the nation’s economy is secure – there is no economic reason to fear default on the nation’s debt (only political reasons, such as debt-ceiling mischief). </p>
<p>To remain solvent and ultimately pay what it owes, the Treasury needs only to balance its budget over the long run, not over an arbitrary unit of time like a year. <a href="http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx">Near-record low interest rates</a> on government debt suggest that bond market participants agree with this view, and are not afraid of sovereign debt default in the US. </p>
<p>If excessive government debt-burdens on future generations keep you up at night, buy Treasury securities with the money saved from low current taxes and bequeath those securities to your kids. They can use the principal and interest to pay off high future taxes, with no ultimate effect on their net wealth or well-being. </p>
<p>In other words, taxpayers can use capital markets to offset transfers of their wealth (taxes) to bondholders by becoming bondholders themselves. It’s almost like a hedge. In aggregate, if private savings rise along with levels of government debt, then the latter need not crowd out borrowing for productive activity by the private sector. There would still be plenty of lending capacity to go around. This argument holds even if all US debt were to be held by the People’s Bank of China.</p>
<h2>The real burden to worry about</h2>
<p>Assuming that the US government will always pay its bills and never default, the fiscal burden on the private sector ultimately depends on the path – past and future – of government outlays and expenditures. And here is where the $18 trillion “on-balance-sheet” debt is likely to woefully underestimate the federal government’s true liabilities and their potential demand on the economy’s resources. </p>
<p>Treasury debt is the government’s formal commitment to repay its creditors, but Uncle Sam has many other commitments for future spending that are not on the books, so-called “off-balance-sheet” liabilities. Such liabilities do not show up in standard debt measures. While these commitments are different in nature from the promise to pay back previously borrowed funds, they are nonetheless a potentially large burden on taxpayers, and surely governmental imposition on the economy.</p>
<p>These commitments arise from implicit and explicit federal loan guarantees that support housing and education policy, from deposit insurance and Federal Reserve actions that attempt to promote a stable financial system, and from commitments to the elderly and poor through social security, pension guarantees, and Medicare/Medicaid. </p>
<p>Economist Jim Hamilton has recently estimated that such off-balance-sheet liabilities could <a href="http://www.nber.org/papers/w19253">exceed $70 trillion</a>, more than three times the the current value of outstanding treasury securities. The biggest share of that, or about a third, is Medicare. </p>
<p>So OK, worry about the debt, but pick the right measure to worry about.</p>
<h2>Forget about the debt, focus on future spending</h2>
<p>We should think less about the timing of taxes (which determines debt) and more about how much the government spends now and in the future, what that spending is for and how to best collect taxes to pay for that spending (which are independent of debt). </p>
<p>Tops on my list of fiscal issues worthy of serious consideration are:</p>
<ol>
<li><p>corporate and income tax reform to eliminate complexity and reduce incomprehensible and costly economic distortions, regardless of the effect on debt</p></li>
<li><p>elimination of regulatory and policy uncertainty (get rid of the unnecessary and economically illogical debt ceiling!), and</p></li>
<li><p>establishment of systematic cost-benefit analyses of government spending programs to help properly define the role of the federal government in the economy. </p></li>
</ol>
<p>These issues are more important than the irrelevant magnitude of the national debt.</p><img src="https://counter.theconversation.com/content/38775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William D. Lastrapes does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite its tendency to provoke anxiety-inducing debates in Congress and government shutdowns, the high level of US IOUs isn’t a big deal.William D. Lastrapes, Professor of Economics, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/216792013-12-22T20:33:11Z2013-12-22T20:33:11Z2013, the year that was: Business and Economy<figure><img src="https://images.theconversation.com/files/38350/original/fs8yf5hj-1387499909.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Debt; dollar; deficit - the mantra for this year, amid a turbulent political period.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Debt. Dollar. Deficits. Three little words so close to the hearts of our contributors in a year dominated by a critical federal election, a waning mining boom and continuing international turbulence. </p>
<p>The September 7 election returned the public debate to its traditional default - the strength of Australia’s economy. As Bill Clinton’s strategist James Carville said, it’s the economy, stupid. And talk we did. During the campaign, various <a href="https://theconversation.com/electoral-promises-of-both-parties-hang-on-precarious-pefo-forecasts-17639">forecasts</a> were presented, then reformulated, budget emergencies were declared and denied and we were apparently awash with debt. </p>
<p>Amid these claims, the Conversation’s <a href="https://theconversation.com/au/factcheck">FactCheck</a> - launched especially to coincide with the election - delved into the evidence to present the facts on how <a href="https://theconversation.com/factcheck-how-strong-is-australias-economy-16716">strong our economy actually was</a>; whether our <a href="https://theconversation.com/factcheck-is-our-debt-and-deficit-going-the-way-of-the-disasters-in-europe-16710">debt was heading towards European levels</a>; how our <a href="https://theconversation.com/factcheck-do-other-countries-subsidise-their-car-industry-more-than-we-do-16308">car industry subsidies</a> stacked up against other countries (although it appears treasurer Joe Hockey may have missed this one); the <a href="https://theconversation.com/factcheck-is-australia-losing-one-manufacturing-job-every-19-minutes-15917">real rate of job attrition</a> in manufacturing; <a href="https://theconversation.com/factcheck-do-many-other-countries-restrict-foreign-investment-in-agricultural-land-17691">foreign investment restrictions</a> on agricultural land; and the Coalition’s <a href="https://theconversation.com/factcheck-is-the-coalitions-paid-parental-leave-policy-similar-to-overseas-schemes-17302">paid parental leave</a> scheme, amid many other topics. </p>
<p>This was the year everyone got sober, as the mining boom party ended and it became apparent Australia is now facing a <a href="https://theconversation.com/australian-governments-face-a-decade-of-budget-deficits-13616">decade of deficits</a>. While many of our writers this year debated <a href="https://theconversation.com/debts-and-deficits-why-a-string-of-deficits-does-not-necessarily-spell-the-end-of-the-world-13987">the merits</a> or <a href="https://theconversation.com/why-deficits-leave-us-ill-prepared-for-future-shocks-13753">otherwise</a> of running deficits, next year’s debate will centre on what policy levers will be used to balance Australia’s budget. The Abbott government have already indicated expenditure cuts, but what of the need for <a href="https://theconversation.com/meaningful-tax-reform-only-if-everything-is-on-the-table-13575">tax reform</a> to address Australia’s <a href="https://theconversation.com/federal-budget-2013-why-our-unsustainable-structural-deficit-must-be-tackled-13723">structural deficit</a>? Will there be the courage to <a href="https://theconversation.com/the-gst-debate-is-reform-necessary-13888">grasp the GST nettle</a>, for instance? </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/38338/original/v8n2fw9v-1387497199.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/38338/original/v8n2fw9v-1387497199.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=455&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38338/original/v8n2fw9v-1387497199.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=455&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38338/original/v8n2fw9v-1387497199.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=455&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38338/original/v8n2fw9v-1387497199.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=572&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38338/original/v8n2fw9v-1387497199.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=572&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38338/original/v8n2fw9v-1387497199.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=572&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Will treasurer Joe Hockey be able to bear a decade of deficits?</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>The looming structural changes and <a href="https://theconversation.com/topics/disruptive-forces">disruptive forces</a> sweeping through the economy finally became something we couldn’t ignore. In sectors such as manufacturing, announcements from first <a href="https://theconversation.com/ford-to-pull-out-of-car-production-in-australia-expert-reaction-14584">Ford</a>, and now recently <a href="https://theconversation.com/holden-to-cease-making-cars-in-australia-by-2017-experts-react-21369">Holden</a>, to cease making cars in Australia by 2017 reveal an <a href="https://theconversation.com/last-man-standing-what-now-for-toyota-in-australia-21468">uncertain future for the sector</a>. Some of our contributors were <a href="https://theconversation.com/fords-exit-spells-the-end-of-the-road-for-manufacturing-14594">bleak</a>: others see <a href="https://theconversation.com/a-view-on-australias-manufacturing-industry-13868">opportunities</a>. </p>
<p>This sector’s fortunes were inextricably linked to the strength of the Australian dollar - great for travellers who at times enjoyed an above-parity exchange rate and prospective home owners making the most of Australia’s <a href="https://theconversation.com/rba-cuts-interest-rates-to-2-75-the-experts-respond-14000">historically low interest rates</a>, but also troubling for currency-exposed businesses, including <a href="https://theconversation.com/cost-heavy-qantas-must-look-beyond-government-bailout-21206">Qantas</a>. </p>
<p>Amid the domestic focus, a number of international events dominated. In the debacle of the US government shutdown, our writers <a href="https://theconversation.com/explainer-why-the-us-government-is-facing-another-shutdown-18587">reminded us</a> there have actually been 18 shutdowns since 1976. In the fallout of the shutdown, the American dream may have <a href="https://theconversation.com/american-dream-retains-appeal-despite-tarnished-reputation-19704">retained</a> its appeal, but the Tea Party reached <a href="https://theconversation.com/us-debt-crisis-heralds-the-return-of-the-tea-party-19371">new levels of unpopularity</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/38351/original/w8rsmspg-1387500010.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/38351/original/w8rsmspg-1387500010.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38351/original/w8rsmspg-1387500010.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38351/original/w8rsmspg-1387500010.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38351/original/w8rsmspg-1387500010.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38351/original/w8rsmspg-1387500010.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38351/original/w8rsmspg-1387500010.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The US shutdown has been kicked down the road.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>The crisis is over for now, but legislators have just kicked the can down the road – the dysfunction is <a href="https://theconversation.com/a-culture-of-dysfunction-is-washington-headed-for-groundhog-day-19417">here to stay</a>. But while the US style may have been awful, its policy substance is sound – and should be <a href="https://theconversation.com/us-economic-policy-the-right-settings-disastrous-process-19388">broadly continued</a>.</p>
<p>So what else for next year? The Abbott government has announced a <a href="https://theconversation.com/topics/commission-of-audit">Commission of Audit</a>, a <a href="https://theconversation.com/beware-the-veil-of-independence-in-government-reviews-21322">plethora of reviews</a> and far-reaching financial services reforms, as it moves to fulfil its pledge to cut red tape and streamline government services. From the looks of the <a href="https://theconversation.com/all-options-on-the-table-hockey-unveils-myefo-experts-react-21575">Mid Year Economic and Fiscal Outlook</a>, we can expect the Budget to End All Budgets in May. The new version of the NBN, complete with a new CEO and unburdened by previous promises of reach and speed, promises to take shape. </p>
<p>The veracity of Australia’s claim to be open for business - already tested with the <a href="https://theconversation.com/hockey-kills-graincorp-takeover-by-adm-experts-react-20941">GrainCorp takeover</a> - will come under further scrutiny with a number of <a href="https://theconversation.com/multilateral-regional-bilateral-which-agreement-is-best-19664">pending free trade agreements</a>, including the <a href="https://theconversation.com/topics/trans-pacific-partnership">Trans-Pacific Partnership</a> and bilateral trade negotiations with our largest trading partner, China.</p>
<p>Meanwhile, Australia will take to the international stage to host the <a href="https://theconversation.com/what-does-the-g20-actually-do-17464">G20</a> from Brisbane. We’ll see you there for all of it next year.</p>
<hr>
<p>Top five stories of 2013:</p>
<p><a href="https://theconversation.com/explainer-why-the-us-government-is-facing-another-shutdown-18587">Explainer: why the US government is facing (another) shutdown</a></p>
<p><a href="https://theconversation.com/the-truth-about-fbt-on-cars-meaningful-tax-reform-is-hard-16235">The truth about FBT on cars: meaningful tax reform is hard</a></p>
<p><a href="https://theconversation.com/making-cents-of-a-falling-australian-dollar-15846">Making cents of a falling Australian dollar</a></p>
<p><a href="https://theconversation.com/factcheck-is-australia-losing-one-manufacturing-job-every-19-minutes-15917">FactCheck: is Australia losing one manufacturing job every 19 minutes?</a></p>
<p><a href="https://theconversation.com/the-coalitions-nbn-policy-is-a-triumph-of-short-termism-over-long-term-vision-13333">The Coalition’s NBN policy is a triumph of short-termism over long-term vision</a></p><img src="https://counter.theconversation.com/content/21679/count.gif" alt="The Conversation" width="1" height="1" />
Debt. Dollar. Deficits. Three little words so close to the hearts of our contributors in a year dominated by a critical federal election, a waning mining boom and continuing international turbulence. The…Helen Westerman, Business + Economy EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/196312013-10-29T06:24:57Z2013-10-29T06:24:57ZIndia must clean up its act to benefit from US shutdown<figure><img src="https://images.theconversation.com/files/33934/original/yhx79pmd-1382976961.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A weak rupee is just one of India's woes.</span> <span class="attribution"><span class="source">Ravindraboopathi</span></span></figcaption></figure><p><em>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global implications.</em></p>
<hr>
<p>At first glance, it might seem that the US’s big rivals in the emerging world — especially its ideological rivals China and Russia — would have taken pleasure in watching the US tie itself up in knots over the past few weeks. </p>
<p>It is very likely, however, that any such pleasure these rivals feel will be short-lived. The world is too interconnected and countries’ fates too intertwined for the negative fallout of government gridlock to stay local to the US alone. Countries such as China that depend heavily on trade, and especially trade with the US, will always experience the direct effect of any slowdown in the US economy.</p>
<p>The effect is less clear, however, on other emerging economies such as India that are less export-led but rely heavily on foreign direct and institutional investment for their growth. In fact, it is possible India could stand to gain from uncertainty in the US.</p>
<p>The past few months have been rough on India. Facing policy paralysis of its own, and a huge crisis in confidence among domestic and foreign investors on account of corruption scandals and bureaucratic caution in the face of <a href="http://rti.gov.in/">Right to Information</a> laws, the country’s growth has <a href="http://www.thehindubusinessline.com/economy/moodys-cuts-201314-gdp-growth-forecast-to-45/article5160930.ece">slowed to 4.5%</a> from more than 7% in the last year or so. India has had such slowdowns in the past; however, <a href="http://www.economist.com/node/21556576">analysts fear</a> this latest may not be temporary. Rather, the concern is that the slowdown is driven both by structural impediments within the Indian economy as well as the economic situation in developed countries, especially the US.</p>
<h2>The trouble with India</h2>
<p>India faces three major structural impediments. First, the country has been plagued by coalition politics at the centre for some time. The current coalition, led by the Congress party, contains within it several regional parties with bases in Indian states such as West Bengal and Tamil Nadu. These regional parties, despite being minority members of the coalition, have been able to hold the majority party (the Congress) to ransom on several occasions over the last five years. </p>
<p>For instance, in November 2011 when the Congress dominated cabinet tried to push through a law allowing foreign multinationals to own a majority stake in multi-brand retail chains, the minority party from West Bengal threatened to pull out of the government in protest. Despite efforts to bring them on board, the cabinet blinked first and the ordinance was repealed, in the process thwarting the corporate investment that the government was hoping to stimulate. </p>
<p>Over the past five years, India has also been plagued by several high profile corruption scandals involving the auction of <a href="http://www.ndtv.com/article/india/what-is-2g-spectrum-scam-66418">2G cellphone spectrum licenses</a>, the <a href="http://example.com/">Commonwealth Games</a>, and other large infrastructure projects. In the case of the 2G scandal, for instance, the Supreme Court annulled the results of the auction and required the whole process to start again. While this righted many wrongs, it proved costly and disruptive to the business of many telecommunications companies. And the whole episode served only to sow further uncertainty in the minds of investors and Indian and foreign companies alike. </p>
<p>Finally, the government has faced several major macroeconomic challenges: a large and growing <a href="http://economictimes.indiatimes.com/news/economy/indicators/hsbc-lowers-indias-fy14-current-account-deficit-forecast-to-3-4/articleshow/24694056.cms">current account deficit</a> (India imports much of its oil and faces a huge energy bill), a large and growing <a href="http://www.moneycontrol.com/news/economy/gdp-at-49-worst-case-see-fiscal-deficit-at-52-expert_974966.html">fiscal deficit</a> (thanks to liberal food and fuel subsidies), increasing inflation (and related high food prices), and finally, most recently, a <a href="https://theconversation.com/gold-flows-from-west-to-east-and-india-is-running-out-of-cash-19113">fast weakening rupee</a>. </p>
<p>All these problems seem to have come to a head in the past few months. While they may have been brewing earlier, these issues were somehow mitigated by the aftermath of the financial crisis in the west and the resulting policy of quantitative easing in the US and western Europe. The financial crisis meant that emerging economies such as India had looked like good investment destinations in 2009 to 2012. And quantitative easing meant that Western institutional investors had liquid assets that they were looking to invest, and emerging markets like India seemed like a good place to do so.</p>
<h2>The future is uncertain</h2>
<p>But as the US began to climb out of recession earlier this year, there were increasing signs from the Federal Reserve that it would begin to taper its earlier policy of quantitative easing. The resulting lack of liquidity in American financial institutions would mean these institutions had less money to invest in emerging markets, leading them to pull out of places like India. Signs of a recovery in the US and Europe also meant Western investors had less reason to invest in emerging economies and had already begun to move their investments back west.</p>
<p>For India, therefore, the recent political crisis in the US over the debt ceiling, and the uncertainty that it caused could have potential benefits. The Federal Reserve may decide to continue its policy of quantitative easing, and setbacks in the US economy would make emerging markets attractive destinations again. Which could be good news for emerging markets such as India. Indeed, in the past week or so the <a href="http://www.hindustantimes.com/comment/editorials/stock-market-may-be-peaking-but-economy-is-still-unstable/article1-1137809.aspx">Indian stock market has surged</a>. So the effects of political uncertainty in the US have already begun to pay some positive dividends for India, at least for now.</p>
<p>In the long run, however, it is much harder to say what the effects on India might be. Continued uncertainty in the US might help India. Or the US government might really get its act together and India, with its endemic problems of corruption and own policy gridlock, might lose its shine again. The future, it would seem, is shot through with uncertainty, for the US and emerging economies like India alike.</p><img src="https://counter.theconversation.com/content/19631/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jaideep Prabhu does not currently receive funding from any organisation.</span></em></p>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global…Jaideep Prabhu, Director, Centre for India & Global Business, Cambridge Judge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/195032013-10-28T06:34:36Z2013-10-28T06:34:36ZUS politics and the health of a nation<figure><img src="https://images.theconversation.com/files/33817/original/sf6wg3tg-1382717627.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hurry up Washington, the world it waiting.</span> <span class="attribution"><span class="source">NASA Earth Observatory</span></span></figcaption></figure><p><em>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global implications.</em></p>
<hr>
<p>Some semblance of calm has descended over Washington after the farce of the government shutdown. But it would be a stretch to say that things have returned to normal and the full extent of the economic damage will not be known for some time.</p>
<p>Initial estimates suggest that the reduction in government services is likely to have directly reduced US GDP by between 0.3 and 0.6% of GDP. But the precise impact may never be known as the collection of economic data was one of the casualties of the shutdown.</p>
<p>The indirect damage is likely to be greater and more sustained. First, the deal is only temporary and the failure to come up with a long-term solution will add to global instability. Uncertainty in financial markets spreads like a virus and destabilises economies. Second, the shutdown has caused <a href="http://www.theguardian.com/commentisfree/2013/oct/18/republicans-antiscience-shutdown-cost?CMP=twt_gu">damage to many scientific programmes</a> – and this is likely to harm economic growth in the future.</p>
<p>The economic mismanagement of the world’s most powerful economy does not bode well for a sustained recovery of the world economy. Of course, economic mismanagement is not confined to the US; the European economy is still in a state of torpor following the failure to deal with the Euro crisis. Policymakers on both sides of the Atlantic have shown a failure to grasp the long-term structural problems facing advanced economies and instead have resorted to sticking plaster policies. </p>
<p>The challenge is to clearly identify the role and boundaries of the state in advanced countries. Some liberal market economies such as the US - as well as Australia and the United Kingdom - emphasise the power of the free market and have relatively small government sectors compared to other countries. Other advanced economies such as the Nordic countries and Germany have relatively larger government sectors. </p>
<p>But a common trend in all advanced countries, from 1960 to the onset of the financial crisis, was for the relative size of the state (as a share of GDP) to increase. For free market zealots, this reflected the rise of big government and the erosion of individual freedom. The reality is somewhat different: public expenditure has increased to provide health, education and pensions. Simply, as prosperity increased in the advanced countries, individual citizens wanted a longer and better quality of life: and the state is an important provider in these areas. </p>
<p>For the US, the focus of debate is healthcare. The demand for healthcare will increase as people live longer and as chronic disease becomes more widespread in later life. It is a curse of prosperity – but most people would welcome a longer lifespan. The issue is who is going to supply the healthcare, and who is going to pay for it? </p>
<p>Of course, ultimately, citizens pay for their health care – directly, or through insurance contributions, or by taxation. The method of payment is a political decision – and the current debate about Obamacare reflects political divisions in the US. But some evidence should inform the debate. In particular, the current US health system is expensive and inefficient – as well as being highly inequitable. And many health systems which are controlled or financed by the state are more efficient and provide better healthcare for their citizens. </p>
<p>From a British perspective some of the discussion about healthcare is both bizarre and distorted. Some US commentators seem to suggest that Britain is some sort of tyrannical Marxist dystopia with the National Health Service presiding over death panels and with <a href="http://www.foxnews.com/opinion/2013/07/15/scary-lessons-for-americans-and-obamacare-from-britains-national-health-service/">patients starving to death</a>. These are myths. What the <a href="http://www.bloomberg.com/visual-data/best-and-worst/most-efficient-health-care-countries">data</a> show is that the UK has the 14th most efficient healthcare system in the world whereas the US has the 46th. </p>
<p>The US will eventually choose the healthcare system it wants. But the longer the prevarication and posturing continues the more damage that will be caused to both the US and the world economy. When the future path of government policy is uncertain, businesses and individuals become more cautious and delay spending and investment. That is the last thing we need now as the world is struggling to recover from the financial crisis. And if economic growth does eventually return to “normal” the demand for more health and education by an ageing population will continue to expand.</p><img src="https://counter.theconversation.com/content/19503/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Kitson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global…Michael Kitson, University Senior Lecturer in International Macroeconomics, Cambridge Judge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/194172013-10-27T19:13:38Z2013-10-27T19:13:38ZA culture of dysfunction: is Washington headed for Groundhog Day?<figure><img src="https://images.theconversation.com/files/33826/original/45whg8w8-1382794506.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A house divided: the shutdown and debt ceiling crisis may be over, but partisan gridlock has brought politics in Washington to a standstill.</span> <span class="attribution"><span class="source">EPA/Michael Reynolds</span></span></figcaption></figure><p><em>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global implications.</em></p>
<hr>
<p>The dysfunctions of Washington were on full display earlier this month as America’s shuttered government careened toward default. Both the shutdown and the debt ceiling crisis ended on October 16, but the dysfunction? That’s here to stay.</p>
<p>It’s here to stay, because despite the <a href="http://www.politico.com/story/2013/10/congress-approval-rating-government-shutdown-98657.html">major losses</a> Republicans suffered this month, their goals haven’t changed. The Republican Party continues to believe it is better to have no government than to allow the current government to function. And without extensive reform, there are plenty of ways for them to fulfil that goal.</p>
<p>Don’t expect it to take the form of another default crisis or government shutdown, though. At least not any time soon. The Republicans’ recent defeat has – for the moment – given leverage to members of the party who opposed the shutdown. Besides, shutdowns and debt ceiling crises are off-year tactics, due to their negative effect on polls. There’s a reason the last one was in 2011, not 2012.</p>
<p>But that is little comfort for those who would like to see the US get on with the business of governing. When it comes to obstructionism, the Republican Party has proven where there’s a will, there’s a way. And there is plenty of Republican will, particularly for the central issue of cutting the federal budget.</p>
<p>Despite the <a href="http://www.huffingtonpost.com/2013/10/01/government-shutdown-congress_n_4022046.html">health care detour</a> that defined the recent debacle, the principle fight has always been about the budget. It is a fight that, though they control only one half of the legislature, Republicans have been winning.</p>
<p>Budgets are made up of revenue and spending. In the most simplistic terms, Democrats want to increase revenue and Republicans want to decrease spending. The Democrats have repeatedly moved to compromise: raise more revenue through tax increases and reform, and we’ll agree to cut spending. </p>
<p>Slash spending, actually: president Obama’s 2013 budget <a href="http://jeffsachs.org/2013/04/obamas-budget-signals-the-retreat-of-us-government/">planned</a> to shrink discretionary spending to 4.9% of GDP in ten years. For comparison, in 2008, discretionary spending (for things like education, research, nutritional support, and infrastructure) was 7.9% of GDP.</p>
<p>The Democratic compromise has run aground on the shoals of Republican anti-tax orthodoxy. <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/04/fool-me-with-a-budget-commission-once-shame-on-you-fool-me-eight-times/">Eight times</a> since 2010 the two parties have assembled budget commissions; eight times they have failed to come up with a budget. Nor do the Democrats have any leverage to make the Republicans meet them halfway.</p>
<p>Part of this is because of a deal the Democrats made in 2011 known as sequestration. Sequestration is an austerity program comprised solely of spending cuts.</p>
<p>Democrats agreed to this cuts-only program for two reasons. First, the cuts sliced deeply into the military budget, making them anathema to Republicans. Second, sequestration was never supposed to happen. It was devised as a sword of Damocles dangling over both sides to get them to come to a deal. </p>
<p>But in believing military funding meant more to Republicans than their opposition to taxes, Democrats miscalculated. The Republican Party has embraced sequester, demonstrating there is little on their agenda that they will not sacrifice in order to keep taxes from going up.</p>
<p>With the <a href="http://thehill.com/homenews/news/301199-here-comes-sequester-part-2">second round</a> of sequestration about to kick in – delivering even deeper spending cuts – Democrats are on the back foot. So much for their October victories.</p>
<p>Ultimately, as economics wonk Ezra Klein has <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/17/higher-taxes-shouldnt-be-the-democratic-partys-top-priority/">argued</a>, Democrats are going to have to fight on ground other than taxation, which means capitulating (and thus ratifying) the Republican dogma on taxes. Klein argues:</p>
<blockquote>
<p>At this point, the Republican opposition to taxes has nothing to do with policy. It has nothing to do with the economy. It’s religion. It’s dogma. It’s identity. Refusing to raise taxes is what it means to be a Republican in this day and age.</p>
</blockquote>
<p>This is how a minority manoeuvres to take the reins of power from the majority.</p>
<p>It is not, however, how the US political system was designed to work. Republicans have transformed the tools of compromise and deliberation into wrecking balls. The infrastructure of American governance was built on a foundation of republican virtue: the belief that, at the end of the day, officeholders agreed that government should function and the nation should not be harmed.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/33827/original/xwrqsskv-1382795310.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/33827/original/xwrqsskv-1382795310.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/33827/original/xwrqsskv-1382795310.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/33827/original/xwrqsskv-1382795310.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/33827/original/xwrqsskv-1382795310.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/33827/original/xwrqsskv-1382795310.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/33827/original/xwrqsskv-1382795310.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Republican House Speaker John Boehner’s refusal to bring a vote on bipartisan immigration reform legislation highlights Washington’s dysfunction.</span>
<span class="attribution"><span class="source">EPA/Michael Reynolds</span></span>
</figcaption>
</figure>
<p>The debt ceiling worked for 94 years because politicians never threatened to breach it. Senators managed for centuries to use the filibuster without grinding the Senate to a halt because it was considered <a href="http://www.theatlantic.com/national/archive/2012/12/how-the-senate-filibuster-went-out-of-control-and-who-can-rein-it-in/266645/">a rare, not rote</a>, form of protest.</p>
<p>This is not to make an idol out of compromise. Compromise kept Congress from taking up black civil rights for over eight decades. It kept slavery legal in the United States for seventy years following the ratification of the Constitution.</p>
<p>But the US needs a functioning government, one that does more than bounce from crisis to self-inflicted crisis. Two sets of reforms would help ease (though not end) crisis-governance.</p>
<p>Filibuster reform, the more likely of the two, would uncork the Senate bottleneck. Yet it is more likely to pass in part because it doesn’t involve the most problematic part of the federal government, the Republican-controlled House. Even when the Senate manages to pass legislation, as it did in June when it won <a href="http://www.nytimes.com/2013/06/28/us/politics/immigration-bill-clears-final-hurdle-to-senate-approval.html">bipartisan support</a> for comprehensive immigration reform, House Speaker John Boehner <a href="http://blogs.rollcall.com/218/boehner-wont-bring-up-senate-immigration-bill/">refuses</a> to bring the bills to the floor for a vote.</p>
<p>Automating the debt ceiling and continuing resolutions would also move the government onto more solid footing by taking away the threats of default and shutdowns. Republicans, however, would be loathe to give up the leverage those confer.</p>
<p>Ultimately, the answer rests with voters in districts represented by obstructionists. Until these voters punish obstructionism at the polls, Republican politicians will continue to practice it with abandon. Defaults and shutdowns may not be the means, but deadlock and dysfunction will be the ends.</p>
<hr>
<p><em>This is the fourth part in our series. Read the other parts below.</em></p>
<p><a href="https://theconversation.com/us-debt-crisis-heralds-the-return-of-the-tea-party-19371">US debt crisis heralds the return of the Tea Party</a></p>
<p><a href="https://theconversation.com/obamacare-cant-make-sense-in-a-divided-america-19312">Obamacare can’t make sense in a divided economy
</a></p>
<p><a href="https://theconversation.com/us-economic-policy-the-right-settings-disastrous-process-19388">US economic policy: the right settings, disastrous process</a></p><img src="https://counter.theconversation.com/content/19417/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicole Hemmer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global…Nicole Hemmer, Visiting Assistant Professor at University of Miami & Research Associate, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/193122013-10-25T05:27:21Z2013-10-25T05:27:21ZObamacare can’t make sense in a divided America<figure><img src="https://images.theconversation.com/files/33714/original/xf7pb4s6-1382628870.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Reading the fine print of the Affordable Care Act.</span> <span class="attribution"><span class="source">US government</span></span></figcaption></figure><p><em>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global implications.</em></p>
<hr>
<p>To people in other nations, the US debate over healthcare reform, including the recent federal government “shut down”, must have been bewildering. Such dismay is augmented by reports that the Obamacare website, <a href="https://www.healthcare.gov/">Healthcare.gov</a>, has experienced a <a href="http://edition.cnn.com/2013/10/21/politics/obamacare-what-works/">very traumatic birth</a>, with <a href="http://blogs.marketwatch.com/health-exchange/2013/10/17/less-than-1-of-healthcare-gov-registrants-finish-enrollment-report/">fewer than 1 in 100</a> people who visit it actually managing to enrol in the new programs. The government is responding with a “<a href="http://www.slate.com/blogs/the_slatest/2013/10/20/white_house_orders_tech_surge_to_fix_obamacare_website.html">tech surge</a>”.</p>
<p>Some consequences of Obamacare are more local. My university <a href="http://collegeinsurrection.com/2013/10/indiana-university-latest-victim-of-obamacare/">just terminated 50 employees</a> to avoid costs associated with the new law. Those who lost their jobs were maintenance and custodial workers, for who the university would have been obliged to provide health insurance or face fines that can range up to US$3,000 per worker. As is so often the case, federal legislation intended to help the less fortunate has turned out to harm some of those it sought to aid. Yet more dismay.</p>
<p>Part of the explanation for these problems is the extraordinary complexity of the law, which is often poorly understood even by those who are attempting to implement it. Signed into law as the <a href="http://housedocs.house.gov/energycommerce/ppacacon.pdf">Affordable Care Act</a> in March 2010, Obamacare represents the most sweeping US healthcare legislation since the creation of Medicare and Medicaid, which fund care for the elderly and the poor, in 1965. In total, the Affordable Care Act runs to more than 10,500 pages.</p>
<h2>Patchwork healthcare</h2>
<p>Why is Obamacare so complex? Proponents point out that short of creating a new federal healthcare system, any US attempt to insure the uninsured would inevitably prove highly complicated. Unlike most other industrialised nations, the US healthcare system relies primarily on employer-based insurance, instead of a government-financed system. And insurance is regulated by the 50 states. So Obamacare inevitably represents the application of a new patch to an already complex patchwork.</p>
<p>The law actually has three primary purposes: to lower the numbers of uninsured, make care more affordable to those who need it, and reduce healthcare costs. Such objectives are difficult to argue with, particularly in a nation that leads the industrialised world in the percentage of its citizens who cannot afford care, yet which spends far more per capita on healthcare than any other nation - <a href="http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS">18% of GDP</a>, while for other comparable nations the number is less than 12%.</p>
<h2>A nation split</h2>
<p>But the controversy and fierce antagonism surrounding Obamacare are nothing new in the United States. In the US system, the legislative branch makes and funds laws, while the executive branch bears the responsibility of implementing them. The founders of the US system of government, men such as Alexander Hamilton and James Madison, envisioned a system of checks and balances, in which each of the three branches of government (judiciary included) would impede the will of the other.</p>
<p>Some Americans look around the country and see many disadvantaged people unable to obtain and pay for adequate medical care. Moved by the suffering of their neighbours, they naturally think there ought to be a law ensuring that everyone has access to care. Others see vast inefficiencies in healthcare, and believe steps must be taken to reign in the huge increases in healthcare costs that the US traditionally experiences each year. Such people are likely to support Obamacare.</p>
<p>But other Americans look around and see a bloated federal government choking the US economy and infringing on economic and political liberties. They believe Washington has become too influential already, and federal programs such as Obamacare only increase the reach of an already intrusive government. They worry the US is becoming a “nanny state”, where people look to the government to solve their problems.</p>
<p>If you want a federal government that is united, efficient, and nimble, then the US Constitution makes no sense. On the other hand, if you believe social good cannot or should not be provided by the federal government, and that far from maximizing the government’s ability to provide benefits the most important function of the Constitution is to prevent government’s excessive expansion, the current political climate may seem less perverse.</p>
<p>Those who expect the government to do more to help those in need look on the current Washington political climate as dysfunctional, heaping blame on those obstructing the compassionate will of the people to do more to help the disadvantaged. Those who believe that the government is doing too much already and instead needs to be trimmed back regard the same impasses with satisfaction, believing that they further tarnish an overweening government’s reputation.</p>
<p>In short, the bewildering US healthcare debate, including the government shut down, isn’t quite as incomprehensible as it first appears. Americans are not united in a desire for more and better government, including federally mandated healthcare. Many Americans actually want less government, and they are willing to use whatever means they have at their disposal to thwart what they see as an un-Constitutional and even un-American expansion of government’s reach. Healthcare is just the latest issue to get in the middle of a centuries-old argument.</p><img src="https://counter.theconversation.com/content/19312/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Gunderman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US debt crisis is over for now, but legislators have just kicked the can down the road. In this series on the US debt ceiling, academics from Australia, the UK and the US assess the lingering global…Richard Gunderman, Professor of Medicine, Liberal Arts, and Philanthropy, IUPUILicensed as Creative Commons – attribution, no derivatives.