Modest Progress on a Debt Bill, But There’s One Huge Obstacle
Author: Greg Valliere
May 12, 2023
YES, THEY’RE TALKING, AND THAT’S A GOOD THING: Some of the brightest budget wonks in Washington are exploring all sorts of options that we detail below. They want to present the rough outlines of a deal to President Biden and party leaders by Tuesday, before Biden leaves on an Asian trip.
BUT THE POLITICAL DYNAMICS are a huge obstacle, because what might be included in a deal is totally unacceptable to House hard-line conservatives, as well as liberal Democrats. Our mantra always is whether a proposal has the votes to prevail, and the deal that’s emerging does not have the votes.
BIDEN IS WAVERING: He has put several options on the table, and a cynic might argue that he has accepted the premise of compromises; now it’s just about the details. Some key issues:
A spending cap: This has become a major element of a deal. Republicans want a cap for ten years, Biden may accept one for two years, if the “cap” raises spending by only a percentage point or two. The two political factions are far apart on the details, but something like a cap (excluding defense) will be a key ingredient in a final deal — and it will keep fiscal policy tight, a headwind for the macro economy.
Immediate spending reductions: Biden apparently is willing to claw back pandemic aid that has not been spent; this almost certainly will be in a final package. But there are several “red lines.” The White House won’t accept any major cuts in clean energy provisions, student loan assistance, or a reversal on higher funding for the Internal Revenue Service.
Energy permitting: Lots of goodies (or “earmarks”) will be in the bill, headed by reforms in “permitting” for fossil fuels projects. This is a major priority for Sen. Joe Manchin, who is actively considering a third party presidential run. To keep him from running, the Democrats will have to give him plenty.
Benefit cuts: It won’t raise much money, but food stamps and other relief will be reduced for individuals who refuse to look for work. Biden will have to accept this; it has strong political support (but the left will howl).
And, no surprise here: Biden is willing to tie all of these issues to an extension of the debt ceiling, which he has adamantly has refused to link to spending cuts. The only issue on the debt ceiling is for how long; House Republicans are reluctant to make the extension for much more than a year.
ALL OF THE POTENTIAL CONCESSIONS LISTED ABOVE are on the table, and liberals are furious. And so are conservatives, who want a far more aggressive spending cap than what the White House will accept. It’s clear why House Speaker Kevin McCarthy is talking tough: he needs to convince his troops that he won’t go soft on a final deal, which could prompt at least two dozen House Republicans to reject any agreement.
BOTTOM LINE: For the financial markets, signs of some progress on a deal will be sufficient to keep alive a scenario that a U.S. default will be avoided. We get that. But the key is reaching a deal that can win ratification in both houses, and that isn’t remotely imminent, despite some modest progress.
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