The United States avoided a disastrous default on its debt on June 5 after approval by both the US Congress of an agreement negotiated between President Biden and House Speaker McCarthy. What can we learn from this affair? Who were the winners and losers?
At one level, we can breathe a sigh of relief: after a mid-Term election when the President’s Party lost control of one of the chambers of Congress – a typical result for Midterms – the President was obliged to negotiate with the head of the newly elected majority in the House of Representatives, after intense negotiations they reached a reasonable compromise that was approved by a large majority of both the House and the Senate, so we’re back to reasonably functioning Washington politics. But the apparently ordinary incident is actually quite significant, with many subplots and lessons to be learned from the events:
– Since the midterm election, extremist in the Republican Party have been very vocal, appearing to have taken control of the Republican House of Representatives where Republicans have a razor-thin majority. They were clearly willing to accept a US default, there was real anxiety that they would push the US to renege payment on its debt, with catastrophic consequences for the US and the world. In fact, the effective power of Conservatives in the House Freedom Caucus turned out to be much less than expected, they are the biggest losers in the events, it is clear that when moderate Republicans and moderate Democrats can come to an agreement, the center can easily overrule their extremes.
– Similarly, when Republican House Speaker Kevin McCarthy had to accept diluting his power and required 15 votes to be elected Speaker, it appeared he would be very weak, leading to a dysfunctional House. In fact, back in April, to the surprise of many McCarthy was able to mobilize all of his troops on a bill that clearly announced Republican ambitions to massively reduce government spending in exchange for any increase in the debt ceiling. Everyone knew that bill had no chance of becoming law but its passage forced President Biden to negotiate with McCarthy. In the negotiations, he resisted pressure to make excessive demands from his right wing and from Ex-President Trump, he accepted a reasonable compromise, and then was able to get a two-thirds majority of House Republicans to vote for the agreement. McCarthy clearly comes out a winner in the proceedings; his leadership of the Republicans in the House is, for the moment, strongly solidified.
– President Biden also is viewed as a winner, even though he was loudly criticized for accepting to negotiate with McCarthy in the first instance and subsequently agreeing to certain Republican demands. In the normal relations between a Democratic President and a Republican House, Biden knew he had to negotiate with House Speaker McCarthy this spring on the US Federal budget. He initially insisted he would not negotiate on the debt ceiling, only on the budget, but after McCarthy passed his spending reduction bill, Biden had the good sense to back down and begin negotiations on the debt ceiling, which ended in a compromise agreement that most commentators agree was no worse for the Democrats than what Biden would have had to negotiate on the budget. Biden is considered a winner in getting an agreement that i) avoids a default, averting an economic and political crisis, ii) eliminates the debt ceiling issue for two full years, and iii) leaves intact all of his major policies, especially the climate initiative in the Inflation Reduction Act. In addition, Biden can legitimately claim that he was able to put together another bipartisan deal, proving that his experience, wisdom and restraint can make government work, even in the current difficulty environment of partisan animosity.
On the other hand, liberal Democrats are furious at Biden for ceding to Republican demands to cap some discretionary spending, to increase work requirements for certain recipient of food stamps and especially to ease environmental reviews for energy infrastructure projects, including for oil and gas, for example allowing the final construction of the Mountain Valley Pipeline, a pet project of Senator Manchin of West Virginia that is strongly opposed by environmentalists. Forty-six Democratic House members and 5 Democratic Senators voted against the compromise agreement. Some commentators have suggested that Biden’s accepting some of McCarthy’s demands will reduce Biden’s appeal to young voters in 2024, perhaps a critical segment for his re-election.
It is also interesting to note that in this episode, the Republican Party showed it does not care much about the level of US debt and deficits. This is partially the result of Donald Trump’s position, “I’m the king of debt…I love debt” and partially because Republican voters are not very concerned about debt, but this reflects a profound shift in attitude of the Republican Party that has decried debt since the Reagan era.
Another lesson from these events is that it is an additional example in the Republican Party’s repeated success in fighting off any increase in taxes, even for the very rich. The more often this happens, the more it becomes entrenched policy. Over the medium term the US will not be able to significantly reduce its deficits without some increase in taxes, the results of this round of negotiations does not bode well for such a prospect.
A recurrent major loser from these events is the very process of democratic government in Washington. Twice now the minority Party has been able to push the Presidential Party to give major concessions in exchange for accepting an increase in the debt ceiling. It is likely that the cycle will be repeated in the future. Biden tried to change this negative and seemingly absurd exercise, he failed and in the end reinforced it. The episode also once again showed to the world that Washington has difficulty in functioning at a normal level of efficiency, having pushed itself to the brink of disaster, only to avoid a major crisis at the last minute. Fitch, a major rating agency, said it was maintaining its warning of a potential credit downgrade of US Government debt because the “repeated political standoffs around the debt-limit…lowers confidence in governance on fiscal and debt matters.” Surely such a spectacle also contributes to lowering confidence of the rest of the world in the US government.