The Dispatch Podcast - Debt Ceiling Countdown: An Explainer

Episode Date: May 26, 2023

Price St. Clair walks us through the ongoing debt ceiling fight in an interview with Ben Ritz, Director of the Center for Funding America's Future at the Progressive Policy Institute. The two discuss the nuances of the issue, including: -Throwbacks to 2011 -Trump "caps" or lack of -Likely (and worst case) scenarios -No paychecks? Show Notes -Watch: Price St. Clair interviews Ben Ritz on The Dispatch Podcasts YouTube channel -Ben Ritz profile at Progressive Policy Institute -Price St. Clair's Explainer for The Dispatch Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the dispatch podcast. I'm your host, Price St. Clair. I'm a domestic policy reporter for the dispatch. And today we've got an explainer podcast on the debt ceiling, what it is, how we got here and where the current negotiations between Speaker McCarthy and President Biden stand. My guest today is Ben Ritz, who is the director of the Center for Funding America's Future at the Center Left Progressive Policy Institute. He's been working on budget issues since 2011, and I have found him to be a helpful guide for all things related to the debt. Ben, thanks for joining us on the Dispatch podcast. Thanks for having me. So I wanted to start, I've written a couple articles on the debt ceiling and you've been a helpful source for me. But for people who are new to this this week, you know, why do we have a debt ceiling? and I know it's a fairly unique thing that not a lot of countries have. So why do we have it?

But then why do other countries not have it? Sure. So historically, it used to be the case that any time the federal government needed to borrow money, Congress would vote on each instance of borrowing. And so they would vote to issue bonds. And as the national needs, you know,

that became more frequent, they changed the law so that instead of them needing to vote every time there was a bond issue, they would say, we've, you know, we passed this amount of spending, this amount of revenue, and the president can borrow, the Treasury can borrow as much money as it needs to fill those needs up to a certain point. That point is the debt ceiling or the debt limit, depending on the source you're reading, but it's the same thing. And the reason that most other countries don't have this is because even though this system makes a little

more sense than what we had originally, it still doesn't make a whole lot of sense. If Congress is going to pass a series of spending bills and then a series of revenue bills and the revenue they raise does not cover the amount they want to spend, then it makes sense that the federal government needs to borrow the money to fill the difference. Having a separate vote for whether you are going to actually do that borrowing or whether you're going to pay the bills that you've already passed doesn't make a whole lot of sense. Right. And it can lead to this situation we're in this week where if we were to go across the ex-state, which I'll ask you about in a moment, and to actually go into default on the national debt,

you know, no one really knows what would happen, but the president would be forced to break at least some laws because he's either breaking the debt limit law or the law that says you have to spend this money that Congress has appropriated. Exactly. So yeah, with that in mind, Republicans and Democrats have been having these negotiations for a couple of weeks now, trying to avoid the so-called X-date, which the Treasury Secretary Janet Yellen has said it could be as early as June 1st. So we know what the debt limit is, but what is the X date and why is it sort of fuzzy and hard to predict with certainty at this point? Sure. So the important thing to keep in mind is that June 1st is not the date, is not the date we hit the debt

ceiling. We actually hit the debt ceiling earlier this year. But what happens when we hit the debt ceiling is that instead of continuing to just issue new debt, what the Treasury will do is what's called extraordinary measures, which is a way of saying that they're doing accounting changes by postponing payments into certain funds and reallocating money that allows them to continue paying the bills without missing payments and without incurring more debt subject to the limit. But the problem is that those only work for a certain amount of time and then you run out of money in those more flexible accounts.

And we don't actually know the exact date we run out of that money because it is heavily determined by cash flows. If a payment comes in on a certain date, are our tax payments coming in faster or higher than in previous years or slower and lower? And so we get a little more clarity as we get closer to the date, but we don't actually know, is this going to be the date? where we don't have enough money because if you get enough tax payments and bills come in late enough, you might skirt it for another day, but eventually you do run out of that room.

Right. And I want to come back to some of that uncertainty in a moment. But for now, can you give us a brief history of what's been going on with political conflict over the debt ceiling since 2011? I remember that as being... a really big deal. And the U.S. credit rating was downgraded by at least one of the firms that does those sort of things. So what happened in 2011 and sort of how does what we're

going through now compare and contrast with that? Sure. So up until 2011, raising the debt ceiling was very, was not really a big issue. It was, it was sort of a pro forma opportunity for budget negotiations, but nobody ever really held it hostage. You would, you would, you might pair some spending reforms or tax changes to a debt ceiling vote, but it was all very superficial. 2011 was the first time where one party said, we will not vote to raise the debt ceiling unless you accede to policy demands. At the time, those demands were one dollar of spending cut for every dollar of debt ceiling increase. And we came within about a week of not raising the debt ceiling and defaulting. And so that was the first time the U.S. actually came pretty close to truly defaulting.

and since then Democrats have said we're never doing this again we should just always raise the debt ceiling and we should never have to negotiate for it and largely have been successful in that up until now which is kind of the first big debt ceiling standoff since 2011 and why is this the first big debt ceiling standoff since 2011

what were Democrats able to do successfully in the time since 2011 that they may be having trouble with now or maybe Republicans have changed. What's been the change? So I think the big change is, well, I mean, there's a few things. So first of all, under President Trump,

when they're, you know, Republicans, when they had unified control of government, didn't want to threaten Donald Trump with destroying the economy because that would not be good for any of them politically. So it was much easier for them. And when Democrats held Congress, they do not want to do the same debt limit

ranksmanship for the most part that Republicans are willing to do, We would never have Nancy Pelosi saying, or even far-left Democrats saying, well, maybe we just shouldn't raise the debt limit. So that's really how we got through the last few years. This is now the first time where we have a Republican Congress and a Democratic president since the Obama administration. Now, as far as why we didn't have it again after the Obama administration, I think the Obama administration was pretty clear we're not going to negotiate over the debt limit anymore after 2011. But I think also, 2011, part of the 2011 deal was that we put in place spending caps on discretionary spending.

And those were in place throughout the remainder of the Obama administration. And so, you know, they would debate what the level of those caps would be, but they would do that in the context of each annual budget. They didn't have sort of this existential big budget battle in the same way. Whereas now we got rid of those caps under Trump and the new Republican. in Congress, I think, is sort of itching to bring something to that back. So why did we get rid of the caps under Trump is the first question? And then secondly,

how did the caps actually work and get enforced? Sure. So why we got rid of the caps under Trump? Because the Trump administration was not a paragon of fiscal responsibility. Donald Trump ran as the king

of debt in 2016, and he did a great job living up to that in the presidency. And when he was able, to say, you know, I gave Democrats this and I got this, he didn't really care about putting that on the national credit card. And Democrats in Congress weren't particularly eager to fight on that either, as long as they could get big increases in domestic discretionary spending. They were willing to sign off on quite a lot on the defense and the Republican priorities. So I think it really just the governor on the engine really fell off at that point. But the caps were there from 20.

2011, that was the Budget Control Act that ended that standoff. Fill me in more in detail on how those caps actually worked on a year-to-year basis for the rest of the Obama administration. Because, I don't know, the way I tend to think about it is Congress has the power of the purse and they, you know, what they're supposed to do is each year they pass a budget. And so it's hard for me to see how these caps are like binding Congress's future action when they could just change their minds. And apparently in the Trump administration, they did. So do the caps even work? Yeah. So you're right. Congress can change the caps in any moment with a vote. The way they're set up mechanically is that if Congress appropriates above the cap, then there

was an automatic across the board cut to the overage. And so typically what Congress did when it wanted to appropriate above the cap is they would both do the appropriation and they would raise the cap. There were, but I think the cap presented an important anchoring point. That was the starting point instead of kind of starting from scratch with a number. They were kind of working off this shared assumption of, okay, this is what we agreed to in the past. How much are we going to deviate from that as opposed to kind of trying to pick up the number? Not out of thin air because we look to last year's spending levels to guide next year's spending levels. But it provided more of an anchoring point. The other thing to keep in mind,

about the caps is that they were somewhat adjustable. So, for example, the original budget control act, the one in the past in 2011, set the caps at a certain level, but also included a provision requiring the president in Congress to agree to additional deficit reduction through non-discretionary spending changes and tax increases. And then when they failed to do that, the caps automatically lowered to achieve that level of deficit reduction. That was what was known as the sequester. and Congress and a lot of the remainder of the Obama administration was basically a back-and-forth debate about where the final cap should be between the original level and the sequester level. So actually, let's take a step back. In 2011, you said this was a relatively new phenomenon of

one side of this negotiation saying, we have these policy demands, we're not going to agree to raise the limit unless you agree to these demands. What, you know, what was it, that Republicans wanted at the time and what is it that they are asking for now? I mean, my sense is now, like the Biden administration has been saying since January, like, we just want a clean increase,

which was always sort of a, you know, that was going to be a pipe dream because Republicans knew they could get some concessions. But the Democratic position has tended to be like they just want the clean increase. What are Republicans asking for? Rather, what were they asking

for in 2011 and what are they asking for now. And if there's a deal that McCarthy and Biden reach, how similar is it going to be to what you were just talking about with the 2011 Budget Control Act? So I think the deal they reach is likely to be pretty similar to the one they did in 2011, but the starting points are very different. So in 2011, this was the Romney Ryan Bainer Republican Party. They were very focused on long-term budget. And they wanted to make structural changes to entitlement programs. Social Security and Medicare. Kevin McCarthy immediately took that off the table. And so what the Republicans this time are pursuing is a combination of some discretionary spending caps,

which the Republicans then did too. But in lieu of entitlement reform, they are pursuing some regulatory changes. Really, the Republican negotiating position is the Limitsave Grow Act that the House passed in May, or maybe it was late April. But it was a few weeks ago, and this is a combination of deep cuts to domestic discretionary spending, increases in defense spending, no real changes to Social Security and Medicare or taxes, except for repealing some tax credits from last year's Inflation Reduction Act, overturning President Biden's recent executive actions on student debt cancellation, and permitting reforms for infrastructure and energy projects.

and then also some work requirements on a few welfare programs. These regulatory things that the Republicans want, I know permitting reform is part of the conversation. How's that stuff going to save the government money or decrease spending? Sure. So, I mean, I think there are certain parts of the Republican plan that are actually just not going to save spending. So, for example, they want to cut money for the IRS,

but this money was appropriated to help the IRS crack down on tax cheats. And so you actually lose more revenue from tax collections than you save from cutting the spending. And so not all of this is budgetary. There are a lot of provisions that they have in here because they're ideological not to save money. But on the permitting side, there is some argument that it's budgetary because we have

very laborious permitting process in the United States. There's a lot of red tape. It takes years to build. infrastructure projects and they're subject to tons of litigation and tens and thousands of pages of review. And if you streamline that, you can get more banged for your infrastructure buck. And that, if not saving money, make sure that you get a higher return on what you get more for what you're spending. And so I think it is, there is an argument that permitting reform is a fiscally responsible thing to do.

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And when you're ready to launch, use offer code dispatch to save 10% off your first purchase of a website or domain. Romney Ryan era. I mean, well, that was 2012. But 2011, that sort of conversation, Medicare and Social Security were still on the table, which is a huge chunk of federal budget, if McCarthy and the Republicans have taken that off the table, is what ever deal emerges from this actually going to make an impact on the national debt as a ratio to GDP?

Or is it just sort of Republicans are trying to, Republicans just trying to get a win because they have a lever? Oh, it's definitely the latter. I mean, there's a very big difference. I should also, I mean, even that kind of understates it because the Boehner Republicans wanted to reduce both defense and non-defense spending. They wanted to reduce domestic spending more, but there were defense cuts. And the McCarthy House has not only taken Social Security and Medicare off the table,

but they want to increase defense spending and they want to increase veterans spending. And so, at least you take them at their word. And so they've really taken over 85% of non-interest spending off the table. There is no plausible amount of cut you could do. do, you're taking that much of the budget off the table and all of the revenue side, there's basically no way to meaningfully alter the long-term budget trajectory. Okay. So, and I may want to return to that later, but when I was writing an article earlier this week, I talked to you on Monday, and you were sort of saying, yeah, I mean, best case

scenario, an agreement's reached within 48 hours, but the week is dragged on, and I've heard conflicting things a week of out. Maybe they're really close or maybe they're still really far away. So one week out from June 1st, which is what Yellen says she thinks the X date is, where do things stand sort of what are the best and worst case scenarios here and how likely are they? Well, Price, if you ask me now, I would still say, I think we're going to get a deal in the next 48 hours. Okay. It is quite possible that if you ask me 48 hours from now, that will still be my answer. That will honestly probably be my answer. That might be my answer every day between now and June 2nd. But I do, I mean,

it seems like there is progress. And I'm still hopeful that they're going to get a deal in time to vote on it. Okay. Is that, I know McCarthy's talked about 72 hours between introducing the bill and let's so let's people read it before it gets passed. Do you expect all that to happen? And it's just sort of, well, we sort of eke it out. Yeah, what would that look like? Once Biden and McCarthy, like, let's say, by the way, we're recording this on Thursday the 25th, if we get off this call and there's a press conference,

they say, hey, we have an agreement. What's the timeline from there? Sure. So I assume it will take a day or two to put together the legislative text. It depends on how much they've been drafting as they go versus waiting for the agreement to start drafting. My guess is as they get closer to the deadline, there has been more drafting each iteration.

and less waiting until the end. But there will still be some time needed to put the finishing touches. Then you need 72 hours for the House to review and vote. And then, you know, there's going to be the question about the Senate where individual senators can really slow things down. I think ideally what everybody wants is to have it past the House,

show that it can pass the House, and then anything that the House has passed that Joe Biden has said he'll sign, we know was going to get through the Senate. But if you're getting really close to the deadline and the Senate just has procedural delays it needs to work through, then they might need to vote on them at the same time.

And I think that would probably be the more stressful scenario for everybody. But I think realistically, and this is why I would still say, you know, I think we'll have a deal in the next 48 hours is, I think it's pretty clear that a deal they reach in the next 48 hours

can be voted on before June 1st. I'm not sure that I would say that, you know, four days from now. I wanted to ask you about an idea that I read from Josh Barrow yesterday talking about you know what happens if this doesn't come together before

June 2nd like I've followed congressional negotiations enough to know like things just end up taking longer than if everyone says they're going to even when something eventually passes and what he brought up was the case of 1985 I'm not really sure what the details

of that negotiation was but the gist as he presented it was the Treasury Department sort of kept saying like, yeah, this is the last day, we can't, this is the X date. And then they would sort of find some other, you know, extraordinary measure that they hadn't realized existed before and sort of kept pushing it along. Is that sort of thing, a realistic option for the treasury to do to keep kicking the can down the road? Or is it, you're sort of stuck in the first week of June? I would not count on that at all. Because, like, remember, the use of extraordinary

measures was not common prior to 2011. 2011 was the first time we hit the debt ceiling and really pushed extraordinary measures to their limit. And so I would say that a lot of the low-hanging fruit had not yet been picked in 1985. And between 2011 and now, they've really, you know, they've picked all they can. And also, as we're now a week out, and she's still saying June 1st, if we don't, you know, if we get to June 3rd and haven't defaulted, I think it is more likely due to dumb luck than the Treasury pulling a rabbit out of their hat. Okay. So speaking of being a week out, you mentioned earlier in 2011, they were a week out when they got the deal done and they still, I can't remember which rating agency did the downgrade, but there was still a down. in the United States credit score,

is that on the, do you see that as a possible option here, even if McCarthy and Biden agree to something, or now just the financial markets expect a deal to happen? And so whenever it happens, they'll just be content. I think we're not, I think that as long as we don't do something worse now

than we did in 2011, I think the ratings agencies that decided not to downgrade us in 2011 will not downgrade us again. If we go over the X state, then I think all bets are off. I think even if we're making bond payments, if other payments are getting delayed because we were willing to go over the X state without raising the debt ceiling, that could hurt our credit rating.

If we're actually missing payments, that will definitely hurt our credit rating. So I think there is very much the prospect of a downgrade on the table if we default. But I think if Congress and the president do their jobs and get this done by the time they're supposed to, I think our credit rating is probably safe. I wrote earlier this week about some of the different scenarios of approaching and potentially crossing the X state. But how would we know, do you have any idea how we would know if we did cross the X state? Like would Yellen sort of just put out a statement saying, by the way, it happened. Like, how would we know? I would say if you're supposed to get a payment from the

government that day, it's possible you will still will if you're holding a treasury bond. but your social security payment, you're going to not have it. If you're a government contractor or government employee, you're not going to have that payment. And it's going to be very obvious to you. I'm sure they'll put out a press statement. I'm sure she'll talk about it.

But that's going to be the material impact of crossing the X state. Best case scenario and maybe plurality, most likely scenario as we get a deal, worst cases, those payments start getting missed. and the financial markets freak out and potentially freak out

to the extent that we enter a recession. Yes. Okay, well, I wanted to take a step back here towards the end to ask you about the debt itself because based on both this conversation and previous conversations, my sense is that you would say that the debt ceiling is bad.

It would probably be better if we didn't have this really risky fight happening every few years. But that's not because the debt itself isn't important, And in fact, the debt continuing to increase as a percentage of GDP can have really negative long-term ramifications. And in fact, at some point in the future could, you know, spiral into a fiscal crisis. So can you say a little bit more about that, sort of why people should care about the debt itself and potentially like what, do you see a future in which both voters and politicians do a better job? thinking about the debt responsibly.

Do I see a future? Can I envision it? Yes, I mean, you know, I'm a very imaginative, creative person. Do I think it's high probability? I don't, I mean, I've been, I started working on these issues in 2011, and I would say that with very few exceptions, each year has been worse than the one before it. I think we've been moving in the wrong direction.

I did think that inflation did seem to kind of turn people a little bit, you know, start thinking a little bit more about the impact of these fiscal choices because the more debt we accumulate, the higher interest payments are, the higher our deficits are, the more spending there is, that creates inflationary pressure. And I think, you know, we're starting to see like what the implications of that might be. But I don't know that we're really, you know, if we're still in the situation where the immediate start of negotiations is the Republicans take most federal spending off the table. And the Democrats, by the way, also taking most revenue off the table.

President Biden's pledge not to raise taxes on anybody raising, earning under $400,000 is also very limiting. You know, those positions are going to have to change if we are actually going to tackle the debt problem. So if you were king for a day, what would you do to help to, like, There are no political consequences for you. You can just sort of wave a wand and make it happen. You know, what are you doing in terms of spending cuts that makes sense, tax increases that

makes sense? And let's say you can also, you can choose to get rid of the debt ceiling as part of it. Yeah, well, I mean, the first thing I'm doing is getting rid of the debt ceiling because I think, I think the way to think about it is if you're running up your credit cards, the debt ceiling is not preventing you from putting money on the credit card. It's just preventing you from paying the bill. And the problem is the debt you're running up, not the fact that you're paying the bill when it comes to you. So I would get rid of the debt ceiling and I would put in place a process that forces Congress to grapple with the actual budget decisions themselves, not

financing those decisions. But ultimately, no process is going to make Congress do something they don't want to do. So they have to actually enact better policies. We have obviously not something that I can go into in a couple of minutes here, but we have a 95-page budget blueprint on our website that we did in 2019 that I think is still operative. Most of the policies would still make sense. And it's a combination of tax changes, spending entitlement reforms that would, you know,

together put the debt on a downward trajectory as a percent of GDP. And there's a lot of different policies in there because it's a pretty big problem. But I think it is, it is one that you could mathematically tackle if you had the political will. I'm just not sure that we knew. Well, on that note, Ben, thanks for sharing your time and knowledge. And I look forward to looking at that blueprint and would encourage our listeners to do so as well. So thank you. Anytime. Thank you.