Trade Cases

Leibowitz: The Debt Ceiling Deal and Trade

Written by Lewis Leibowitz

The debt ceiling deal passed by Congress has averted either an economic catastrophe or a minor headache, depending on who you talk to. It’s more likely that a pretty serious catastrophe was averted. But there was, in my view, never a serious chance that the US would default on its sovereign debt. More likely, some Social Security checks and other government promises would have been delayed. Nevertheless, it is better to be sure about the US paying its bills than worrying about who gets stiffed or has to wait.

IN PROGRESS... Leibowitz:

The US cannot expect to play games with its debt and sustain the world’s largest economy. In the modern world, private business must rely on government to maintain the integrity of the dollar. Since the 1930s, when the US abandoned the gold standard, the promise of payment is all that any of us can rely on. That is why the recent inflationary spiral is so worrisome, and why the US Federal Reserve has been raising interest rates. Inflation seems to be moderating now, but it is nowhere near the 2% annual rate that is the Fed’s target.

The debt ceiling legislation, which President Biden signed on Saturday, has some interesting provisions, including returning the appropriations process to congressional “regular order.” If all goes well, 13 appropriations bills will be passed by Congress before Sept. 30 and will avoid a massive “continuing resolution” at the end of the year, which generally becomes a legislative Christmas tree. 

What are the steps by which the continuing resolution will be avoided? The debt ceiling bill makes things worse if the regular appropriations bill does not pass. The debt ceiling agreement suspends the debt ceiling until Jan. 1, 2025, after the 2024 election, but before the next Congress is sworn in. For that period of 19 months, there will be no debt ceiling. Spending for the next two fiscal years will be capped at 2022 levels for 2023 and 1% above that level for fiscal 2024 (which begins Oct. 1). 

After that, non-defense discretionary spending will be capped but only through the regular appropriations process. Defense spending will be set at $886 billion for fiscal year 2024 and $895 billion for the next year, a 1% increase. For non-defense discretionary spending, the FY 2024 spending will be capped at $703 billion and will increase by 1% for FY 2025.

The deal prohibits the Treasury Department from issuing debt to pad its balances in anticipation of the resumption of the debt ceiling in January 2025. Finally, so-called entitlements spending (primarily Social Security, Medicare, and Medicaid) is not capped. Certain public assistance programs (such as food stamps) will have enhanced work requirements. 

The increased funding for the IRS to deal with tax cheating was rolled back, at least for two years. 

One pipeline project, the Mountain Valley Pipeline running through Virginia and West Virginia will be fast-tracked to approval. 

After that, we will need to do all this over again. But there will be an intervening election, and that could change the bargaining position of the negotiators. This makes the 2024 election enormously important for both parties, and for political independents. That last group, which roundly dislikes both parties, now accounts for about half the electorate in the United States.

The deal attracted opposition from both parties in Congress. The objections from Republicans centered on the amount of spending that would still be allowed. The criticism from Democrats was focused on the work requirements and the fast-tracking of the Mountain Valley Pipeline. The “nos” on the bill were 117 in the House (46 Democrats and 71 Republicans) and 36 in the Senate (four Democrats, one independent, and 31 Republicans). 

Has this deal taught us anything? Will we have another possible Armageddon in January 2025? 

One encouraging sign was the ability of Speaker McCarthy and President Biden to reach an agreement. Only by walking to the cliff’s edge were they able to make the tough calls that produced a workable agreement. Maybe they will both be around in 2025, but maybe not. But another hard negotiation will be in the offing in less than two years. If the makeup of Congress (and the occupant of the White House) shifts in November 2024, the balance of power could dictate a different result. 

In a sense, this agreement was just one more example of “kicking the can down the road.” Hard decisions that we must eventually make (entitlements reform) were not made or even discussed this time. They will have to be discussed next time.

The suspension of the debt ceiling (which has occurred before) prompts some to call for the outright abolition of the debt ceiling. That would be dangerous: the Executive has claimed a lot of authority to spend money (the student loan forgiveness program comes to mind). The debt ceiling may be the only way to rein in that impulse. 

The debt ceiling was first imposed in 1917 at the height of World War I. Before that, Congress passed legislation authorizing bond issues and other borrowing on a case-by-case basis. The World War made that case by case standard impractical. But it’s important to remember that the US never has granted unlimited borrowing authority to the president or any government agency. 

Only two countries (the US and Denmark) have a debt ceiling expressed in a monetary ceiling. Most countries have a ceiling expressed as a percentage of GDP. The European Union’s (nonbinding) debt ceiling is 60% of the gross domestic product of each EU member state. 

The debt ceiling, as imperfect as it is, makes spending caps highly desirable, but not yet desirable enough to actually limit government spending. As the economy grows, more spending will be a necessary byproduct. International relations, including trade, will need to be a part of that mix, along with making sure the dollar does not devalue because of inflation. 

In short, there are few, if any, shortcuts. The deal just made could make other deals possible, in which, to quote President Biden, “No one gets everything they want.”

Lewis Leibowitz 

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Lewis Leibowitz, SMU Contributor

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