Introduction: The Biden Administration is attempting to sell the debt limit deal as a valid compromise that maintains major achievements enacted in the first two years of the Administration. The reality is that many of the most important Biden-era achievements have been or will be phased out and the continued existence of the debt limit will facilitate GOP domination of future fiscal debates including the response to automatic Social Security and Medicare benefit reductions under current law.
Moreover, the decision to schedule the next debt limit decision with the next presidential certification decision gives an additional lever to senators and congressmen who want to challenge the next presidential election result.
Major Aspects of the Debt Limit Deal:
The President of the United States and the Speaker of the House of Representatives have an agreement in principle on a deal that averts a default on the national debt. The major features of the deal are as follows.
- Suspends debt limit until January 1, 2025.
- Flat non-defense discretionary spending in 2024 and 1.0 percent growth in 2025.
- Protects spending on veterans health care and defense.
- Expands work requirements for food stamps.
- Claws back some Covid 19 funds
- Cut funding for Internal Revenue Service contained in the Inflation Reduction Act.
- Restarts student loan payments.
- Maintains climate and clean energy.
- Expedites an energy project in West Virginia and streamlines future energy project approval project.
Comments:
Comment One: The Biden Administration has argued that the suspension of the debt limit until after the election is a win. Wrong! The Republicans would have been foolish to threaten a debt default or government closure prior to the election. The January 1, 2025, deadline in the middle of the certification requirement for the results of the election could provide the Republican an additional tool to overturn an election result. It is difficult to understand why the Biden Administration would agree to time the next debt limit fight with the next presidential election certification decision.
Comment Two: Second-term honeymoons are brief, if they exist. The binding debt limit early in the first term of a second Biden Administration (should the President win reelection) would make it very difficult to achieve any of the President’s priorities. This provision makes President Biden a lame duck in his second term even before his inauguration.
Comment Two: The freeze in non-defense spending and the one-year 1.0 percent increase in non-defense spending is a significant real reduction in the current 5.0 percent annual inflation environment.
Comment Three: An evaluation of the debt limit deal must account for the fact that it is occurring when many of the most important progressive priorities – the expanded earn income tax credit and additional health care subsidies have already been phased out or are in danger of being phased out. The lack of permanent progress on expanding and improving the ACA is especially startling. The American Rescue Plan included a provision for short-term COBRA assistance instead of a major expansion of ACA insurance. The expanded ACA premium tax credit will expire in 2025, when Republicans could demand its elimination in exchange for an increase in the debt limit. The Covid-era Medicaid expansion has already been eliminated. This deal does not include work-requirements for Medicaid and the Biden Administration has eliminated some Trump-era Medicaid work requirement. However, the number of uninsured will likely increase in the next few years and will not return to pre-Trump levels.
Comment Four: The deal does not cut environmental tax credits, many of which benefit affluent households and could be prohibitively expensive. The deal facilitates additional energy projects. The deal also does not eliminate ethanol tax credits, which have, at best, a small positive environmental impact. My view, expressed here, is that government subsidies, like tax credits for EVs, will not have a major environmental impact because these subsidies only impact a small fraction of household spending on energy and products that cause carbon emissions or pollution. A comprehensive environmental policy requires a carbon tax and/or cap and trade regimes, policies that are currently not under consideration.
Comment Five: The continued existence of a debt limit will give the Republicans the upper hand in future fiscal debates including the debates over the future of Social Security and Medicare. The Republicans will be able to extract major concessions on Social Security and Medicare when the debt limit is binding and current law mandates automatic benefit reductions. Go here for a discussion of projected automatic cuts to entitlement programs.
Comment Six: The deal requires the restart of student loan payments but does not overturn the Biden Administration’s student loan discharge proposal. This is a good deal for the Republicans if as expected the Supreme court rules the president rules the student discharge program is unconstitutional. My preferred solution discussed here; the elimination of all interest payments for two years was never considered.