Vulcan Insight | Negotiations on Raising the US Debt Ceiling Ongoing

The Biden administration remains locked in a standoff with congressional Republicans over raising the federal debt ceiling. The US government hit its congressionally imposed $31.4 trillion borrowing limit in January, and Treasury Secretary Janet Yellen has warned that the country could run out of money as early as June 1 if Democratic President Joe Biden and Republican House Speaker Kevin McCarthy are unable to hammer out a deal.

The latest round of talks have been described by both sides as “productive” but there is still considerable daylight between them. Democrats want to freeze spending for the 2024 fiscal year that begins in October at the levels adopted in 2023, arguing that would represent a spending cut because agency budgets won’t match inflation. This idea was rejected by Republicans, with McCarthy indicating his unwillingness to accept any agreement that did not reduce government expenditure outright compared to last year.

Work Requirements

The imposition of additional work requirements for public assistance programs – including Medicaid and food stamps – has emerged as a red line for McCarthy in the talks. The proposal to tie such requirements to the receipt of Medicaid has attracted particular criticism. Democratic Representative Pramila Jayapal, who chairs the 101-member Congressional Progressive Caucus, said “the vast majority” of the group’s members would oppose any deal that included new work requirements for federal benefit programs for low-income Americans. President Biden has attempted to chart a middle course on the matter, telling reporters that “I voted for tougher aid programs. That’s in the law now, but for Medicaid it’s a different story”.

Contrary to the stated aims of congressional Republicans, the evidence suggests that imposing work requirements for Medicaid is not an effective means of encouraging workforce participation. According to the Kaiser Family Foundation, 93% of Medicaid beneficiaries ages 19 to 64 are either working, attending school, caregiving, or suffering from a disabling ailment. Furthermore, when work requirements were imposed in Arkansas, nearly 16,000 low-income Arkansans lost their health coverage, out of which only 1,232 of those individuals were actually nonworking. Ultimately, the requirements not only failed in their purported objective of increasing employment, but also cost the state and federal government $26.1 million because of the administrative burdens associated with implementing the new requirements.

More of the Same or Unchartered Territory?

This is by no means the first time that the approval for raising the debt ceiling has given rise to acts of political brinksmanship. The most obvious parallels are between the current predicament and the debt ceiling crisis of 2011, when the US came within 72 hours of defaulting on its debts. In that case, the Republicans and the Democrats eventually agreed on a bill that raised the debt ceiling by $900bn and cut spending by nearly the same amount. It is not a foregone conclusion, however, that the current talks will follow a similar pattern. House Republicans have already demonstrated that they are willing to disband with well-established norms of political behaviour. This was illustrated by a majority of their cohort – 147 to be exact – voting against the certification of the 2020 election results.

David Kamin, a New York University law professor who served as an economic adviser to the Obama and Biden administrations, including during the 2011 crisis, has made the point that the debt ceiling was raised three times during the Trump presidency with minimal fuss. This is compelling evidence that the Republicans are more concerned with political jockeying than with sincere appeals to fiscal probity.

Implications of Default

If a deal is not reached, the consensus is that the consequences for the US and global markets would be catastrophic. Mark Zandi, chief economist at Moody’s Analytics, has concluded that even if the debt limit were breached for no more than week, roughly 1.5 million jobs would be wiped out. The repercussions would also be felt in all corners of the world, with the dollar no longer capable of being regarded as a safe hedge against volatile local currencies.

The Biden administration has made it clear that they are exploring a number of contingency options in the event that a bipartisan consensus is not reached in time. The most palatable of the alternatives – that would not require a concession from at least some House Republicans – appears to be temporarily using money from the $2.8 trillion Social Security trust fund. The nonpartisan Concord Coalition has pointed out that that these reserves can be employed during a debt limit standoff to pay Social Security recipients. Given that there is a large Social Security payment due on June 2, this option could make sufficient inroads into the current debt to avoid immediate default. This would likely allow the Treasury Department to stay afloat until June 15, on which date businesses will be paying their quarterly taxes.

Compliments of Vulcan Consulting – a member of the EACCNY.