Morning Wire - Spending Cuts vs Borrowing: Fixing the Debt Limit | Sunday Extra

Episode Date: April 23, 2023

In January of this year the U.S. hit its maximum borrowing limit of 31.4 trillion dollars. Now the White House is demanding that Congress raise the debt ceiling and allow the administration to borrow more money. The GOP House says an agreement must include spending cuts. In this Sunday extra episode of Morning Wire we speak to a bipartisan expert about the importance of the debt limit.   Genucel Skincare: Mother’s Day Sale 70% off Most Popular Package + FREE Shipping at Genucel.com/WIRE   Learn more about your ad choices. Visit podcastchoices.com/adchoices

In January of this year, the U.S. hit its maximum borrowing limit of $31.4 trillion that forced the Treasury Secretary to use emergency borrowing authority to pay the government's bills. Now, the White House is demanding that Congress raised the debt ceiling and allow the administration to borrow more money. House Speaker Kevin McCarthy says an agreement must include spending cuts. In this Sunday extra episode of Morning Wire, we explain the importance of the debt limit. Hey guys, Reagan here, and right now you can save over 70% off GenuCel's most popular package. Just in time for warmer weather, GenuCell is including both their ultra-retinol and Dark Spot Corrector in their most popular package.

All orders are upgraded to free shipping and every subscription order includes a complimentary spring spa box with three free spa essentials. Visit genucel.com slash wire and use code wire at checkout to claim the special offer. That's genucel.com slash wire. joining me to discuss the debt ceiling and where the negotiation stand is Maya McGinnis, president of the bipartisan committee for a responsible federal budget. Maya, thanks so much for coming on. Sure, happy to. Now, House Speaker Kevin McCarthy just unveiled the Republican debt ceiling plan.

What are some of the things that he's asking for? Right. So the speaker is saying that in order for his party to vote to lift the debt ceiling, and I have to point out that we have to lift the debt ceiling, This just needs to be a non-negotiable. But he wants to have a package of savings. And that also makes sense because we have over-indebted ourselves as a country. The kinds of things the speaker is asking for in the package that they've proposed is that,

first and foremost, a cap on discretionary spending. This is one-third of the budget. He would bring that spending back down to 2022 levels, and from there it would grow 1% annually. And that's going to generate above $3 trillion in savings overall. Then the additional things that the Republicans from the House are asking for is that they cancel the student debt plan that the president put in place through executive action, that they repeal the COVID spending at the emergency no longer's exists. So they're saying there's no reason to have that spending still go out the door. They want to repeal the energy credits that came from the Inflation Reduction Act. And they want to put in place work requirements for Medicaid, SNAP, and TANF so that if people meet a number of conditions,

meaning they're able to work, they're not caring for a dependent, they're between a certain age, and they're able to find a job, they would be required to work in order to get benefits. So there's also some additional reforms that would probably take place relating to energy regulations, permitting, that cost is unknown. All told, those savings, including the interest costs that would come along with it, would probably save about $4.5 trillion over the decade. And what's President Biden's position been on this? So President Biden has said from the get-go, he is not negotiating on the debt ceiling. He thinks that it's irresponsible that Republicans are saying they won't lift the debt ceiling

without having a package of savings. And on one hand, he's absolutely right that by even breathing the word default, that is not serving as a responsible steward for the country. But it's also worth pointing out that, again, the fact that they're asking for savings is not only reasonable, it's responsible. But there have been many, many times in the past when we've been. we have, along with lifting the debt ceiling, put in place savings packages. We've done it for putting commissions in place, putting budget rules, spending caps like

the speaker's asking for here or pays you go rules or actual specific savings. So it's not unprecedented that you would make sure that you're bringing some of your borrowing down at the same time that you're lifting the debt ceiling. And conversely, I would point out, and really would have been the worst debt ceiling increases under President Trump, we actually lifted the debt ceiling three times. and included in that negotiated packages, but they actually made the debt worse, not better. And that's kind of the more reckless approach that I could imagine.

Now, we saw a fairly similar scenario play out under the Obama administration. How does that compare to the situation now? Well, it's interesting. So when we saw this before, it was scary and it was the wrong way to approach it because people are actually talking about the fault. And just to clarify, when it comes to the debt ceiling, the debt ceiling is allowing us to borrow money for policies that have already been passed that are going to borrow money.

So you agree to a policy, you put it in law, you didn't pay for the policy, so it's going to require borrowing, and then people come along and say, nope, we're not going to prove the borrowing. That makes no sense. If what you want to do is be kind of fiscal responsible and say, we're borrowing too much, which is something that is true, we are headed to record levels of debt. Just in the next five years, we're going to be spending more in interest payments than we do on defense or Medicaid. Like, there's no question. We need to do something about it. But the way to do it is not to say, I won't lift the debt ceiling. It's to say, I won't pass legislation that adds to the

debt. And on that, both parties have been passing legislation that adds to the debt and a lot. But if we go back to what happened under the Obama era, they did end up negotiating on the debt ceiling. And they put in place some spending caps to the BCA that were actually quite effective. And then they put in place a second part that was a committee called the Super Committee that failed, and that put in place sequester level caps, which were much lower, and those also failed because they were so low that nobody was able to abide by them. And every couple of years, the members of Congress all voted to circumvent those caps. So one of the lessons we've seen from there is it's important if you're putting in policies

to help control your growth of spending that you put in reasonable levels, not aggressive, overly aggressive, which nobody can stand by, but actually sort of something that makes sense and will help control the level of borrowing, but not be so unreasonable that members of Congress will find ways to get around it. What's the difference between public debt versus foreign debt and how much of each of those do we have? Yep, great question. So most of our borrowing, we borrow domestically, but much of our borrowing, we borrow from abroad. And so a little bit more than 30% right now of our debt is owned foreignly. The largest lenders are Japan and China. And what it means when you're borrowing from abroad is that the repayments, interest payments,

are leaving our economy. And that's one of the reasons that when you borrow too much and you borrow a lot from overseas, your standard of living, your wages, your job creation, all of those parts of the economy grow more slowly because some of that money is leaving our economy. And that's happening with us because we do borrow a lot from abroad. The reason is, it's a good reason. A lot of people want U.S. debt. Our Treasury, bills, bonds, and notes have always been the safest that there are in the world, and we're the reserve currency. They are kind of the backbone of the global economy. Yet another reason that we shouldn't even be whispering about default is we could squander that position where people didn't want our treasuries. So it's a nice position to

have that we can win abroad, but it's not something that you want to abuse by borrowing. too much, and by any account right now, we are in that borrowing too much zone. So let's just say we did default. What would that actually look like? You know, nobody knows exactly what it would look like, but I think we all agree it would be really bad. If a country defaults, it's not paying payments on its debt, it's not paying interest payments, and that means there's going to be a spike in those interest rates because nobody is going to trust U.S. Treasuries. They've always been considered super safe. They would then be considered just the opposite, super risky. And people who will lend money to the U.S. and the U.S.

still needs to borrow. We borrow between one and two trillion dollars every year for the next 10 years unless we get our savings under control. That borrowing would cost much, much more money because nobody would want to lend to the U.S. They would be worried about default. That means our interest payments go up. They're already over $600 billion a year. They would go up to way above that and that would squeeze out room in our budget for spending and or tax cuts for those who want either of those. But overall, the situation of interest rates going up abruptly and quickly would most likely lead to recession here and quite possibly around the world.

Now, what's the timeline for getting this settled? You know, it's interesting because it really depends on how much money comes into the government and so it was just tax day. Did people write checks? There's going to be a lot of money that's coming in where tax is going to be delayed. late or taxes below what we are expecting, above what they're expecting. We will find out in the next few weeks whether we are going to hit what's called the X date, maybe sometime early in June, perhaps as late as August or September. So this makes the fact that our lawmakers don't seem

able to get anything done in a timely manner and always wait to the last minute, even more risky, because we don't actually know what the last minute here is. And just like for all of us who procrastinate our daily lives, but with much higher state, This is one of those moments they shouldn't even be thinking about way into the last month. And frankly, we should have lifted the debt ceiling in January or last year before we even hit these extraordinary measures, which we have right now where we're borrowing from some government trust funds just to keep the government able to pay its debt. We shouldn't be at this point.

We should have done this months ago. Is there a solution to ending the cycle of constantly spending more and then raising the debt ceiling? Yeah. I mean, first off, let me clarify, sometimes borrowing is the right. thing to do. It was the right thing to do during COVID. It was the right thing to do during the great recession. When your economy is tanking or there's suddenly an urgent emergency and you don't have time to figure out how to pay for something, that's when you borrow. But the problem is

we borrow for everything. Everything. Almost all of the bills that have been passed in the past decade, the one that didn't rely on borrowing was the Inflation Reduction Act. And now it looks like the numbers won't even save as much as we've been hoping because the administration is sort of expanding the purviews of that policy. But basically, nothing is fully paid for these days. And we need to change that. We have in place something called pay-as-you-go, and it requires that if you cut taxes or grow mandatory spending programs, those policies need to be offset. The problem is, every time they pass that bill, members of Congress bypass the pay-as-you-go rules. And we should change that, and we should strictly enforce them. Same as we should strictly have reasonable caps on

discretionary spending. We aren't growing every year, but by a reasonable amount, not huge amounts like we've seen in the past years. And then, even then, so if we're not adding to our debt, which would be a fantastic first start, we then need some kind of a deal, whether it's a commission or a deal that they can negotiate. We need savings of as much as $8 trillion just to keep our debt not growing relative to the economy. And we need more than that to start to bring it down. I think at this point we have so much fixing to do. The best thing would be to do is kind of start in small bites and get Congress used to doing the hard work of budgeting. They barely pass budgets anymore.

But come up with a reasonable but smaller package of savings, $2 trillion, $3 trillion, $4 trillion. That would be a fantastic start. But then put in place small packages of savings every year until we get to a more responsible place. And really what you want to make sure is, again, that your debt isn't growing faster than your economy. Right now, we are headed to where our debt as a share of the economy will be the highest. It's ever been in the history of this country in the next few years. If we don't change course, last time that happened was right after World War II. This, of course, would be without a world war.

So what we really need is for politicians to stop, I'll just say pandering, and pretending you can spend a lot without paying for it or cut taxes without paying for it or not fix our two biggest programs, Social Security and Medicare, both of which have trust funds that are headed towards insolvency, and we need to make changes so they don't have abrupt, across the board, benefit cuts. But politics right now is so polarized, and the two parties treat each other like enemies, which I just have to editorialize is doing real damage to our country,

they have to stop and they have to start working on solving these problems because it's going to hurt the economy and it's going to hurt our national security and our ability to respond to future emergencies if we don't get this fiscal situation under control. All right. Well, Maya, thanks so much for coming on today. Thank you so much for having me. That was Maya McGinnis, president of the Bipartisan Committee for a Responsible Federal Budget. And this has been a Sunday extra edition of Morning Wire.