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A Debt Ceiling Showdown This Week

Speaker McCarthy
Reuters
By Yuval Rosenberg and Michael Rainey
Monday, January 30, 2023

Happy Monday! President Biden visited Baltimore today to discuss how funding from the Bipartisan Infrastructure Law will be used to replace the 150-year-old Baltimore and Potomac Tunnel. He will head to New York tomorrow to tout another important tunnel infrastructure project.

In Congress, the Republican-led House is set to vote this week on a number of pandemic-related bills, including the “Pandemic is Over Act,” which seeks to terminate the Covid-19 public health emergency. The Senate has been slow to get going in 2023, as Republicans ran into some issues in finalizing their committee rosters and the chamber still needs to pass its organizing resolution.

The key action to watch this week may take place on Wednesday, when Biden will meet with House Speaker Kevin McCarthy. Don’t expect much progress from those talks, though. Also Wednesday, the Federal Reserve is likely to raise interest rates again. And then Friday will bring the jobs report for January.

Here’s what you should know.

Round 1 in the Debt Limit Fight

The slowly unfolding fight over the debt limit and federal spending will inch forward on Wednesday as President Joe Biden and House Speaker Kevin McCarthy meet, their first such sit-down since Republicans took control of the House and McCarthy won the speaker’s gavel.

The White House said the meeting would cover “a range of issues.” The debt limit is clearly on the list. The Biden administration is adamant that it will not negotiate over the debt ceiling. “I will not let anyone use the full faith and credit of the United States as a bargaining chip,” Biden said last week.

The White House says it is the responsibility of Congress to raise the borrowing limit without conditions in order to avoid a potentially catastrophic default. “The President will ask Speaker McCarthy if he intends to meet his Constitutional obligation to prevent a national default, as every other House and Senate leader in U.S. history has done, and as Leaders McConnell, Schumer, and Jeffries have pledged to do,” a White House spokesman said. “He will underscore that the economic security of all Americans cannot be held hostage to force unpopular cuts on working families.”

McCarthy insists the United States won’t default — but he has promised hardliners in his party that he’ll push for spending cuts in exchange for raising the debt limit. “I want to find a reasonable and a responsible way that we can lift the debt ceiling, but take control of this runaway spending,” McCarthy told CBS News’s “Face the Nation” on Sunday.

Republicans have yet to lay out what cuts they are proposing, but McCarthy on Sunday said he wants to take Social Security and Medicare off the table. He left open the possibility of reducing defense spending. “I want to make sure we're protected in our defense spending, but I want to make sure it's effective and efficient,” he said. “I want to look at every single dollar we're spending, no matter where it's being spent. I want to eliminate waste wherever it is.”

Republicans will soon have to tip their hand, though, as Politico’s Caitlin Emma points out. “GOP lawmakers say they’re committed to adopting a budget plan for the coming fiscal year, which would reflect where they’d slash government funding,” she writes. “Passing a budget is guaranteed to be a painful test for the new majority. It’s one thing to call for fiscal responsibility — it’s another to be the political face of program cuts. GOP leaders will have to thread the needle between members loath to cut Pentagon funding and conservatives like Rep. Jim Jordan (R-Ohio) and Sen. Rand Paul (R-Ky.), who say military cuts must be on the table.”

McCarthy on Sunday emphasized that he wants to put the federal budget on a path to balance — though, as we detailed last week, doing so without raising any new revenue would be extremely challenging, or essentially impossible if major areas of the budget are deemed to be off limits.

McCarthy has downplayed those challenges with talking points that make it sound like balance can be achieved simply by eliminating waste from discretionary spending. “I think the rational position here is sit down, eliminate the waste and put us on a path to balance,” he said Sunday.

The bottom line: McCarthy is trying to ramp up pressure on the White House, but he’s in a difficult position himself, having promised his conservative members that he’d only agree to support an increase in the debt limit in exchange for a “budget agreement or commensurate fiscal reforms.” That’s why Democrats are pressing McCarthy for details on what spending he wants to cut. “The plan is to get our Republican colleagues in the House to understand they’re flirting with disaster and hurting the American people. And to let the American people understand that as well,” Senate Majority Leader Chuck Schumer told Politico. “And I think we’ll win.”

Wall Street Sending Mixed Signals on Debt Ceiling Showdown

Treasury Secretary Janet Yellen has warned that a default on U.S. debt obligations could spark a “global financial crisis,” but some experts aren’t so sure it would come to that. According to Politico, some analysts on Wall Street think the Treasury will be able to continue to make its bond payments if the debt ceiling is breached, simply by holding back a range of payments from individuals and businesses.

In essence, the analysts are embracing a plan being discussed in Republican circles that would empower the Treasury to prioritize payments once the debt ceiling is breached.

“Most investors who follow this closely are very aware the United States will not default on its bonds,” Ajay Rajadhyaksha, global chair of research at Barclays, told Politico.

Bob Elliott, CEO of investment firm Unlimited Funds, said that the Treasury has the tools it needs to avoid causing economic chaos. “We would expect them to use those tools to ensure that the U.S. doesn’t experience a default,” he added.

Some analysts would like to hear more details from the Treasury on what it plans to do. “They need to tell everybody what the real deal is with the Treasury market and whether or not this is a true massive threat or if it’s actually completely benign, which I think it is,” Bank of America rates strategist Ralph Axel said.

Not so fast? Biden administration officials have pushed back against the notion that the Treasury can prioritize payments, saying that there are both legal and political issues that could make doing so difficult if not impossible.

“The notion is intellectually bankrupt,” former Treasury Secretary Jack Lew told Politico.

Lew said that the Treasury ran some exercises during the Obama administration and determined that prioritization might work in theory. However, “It’s never been tested in the real world. We don’t know what the cash flows required are. We don’t know how that would interact with other systems being on or off.” In the end, prioritization amounts to “accepting default,” Lew said – a position that Yellen also takes. “A failure on the part of the United States to meet any obligation, whether it’s to debt holders, to members of our military, or to Social Security recipients, is effectively a default,” she said this month.

And not everyone on Wall Street agrees that the problem is overblown. Bond giant PIMCO recently warned against testing the limits. “We take Secretary Yellen and previous Treasury secretaries – both Republican and Democratic – at their word that prioritizing payments under Treasury’s existing systems is simply not viable and should not be viewed as a feasible alternative to Congress raising the debt ceiling,” PIMCO’s head of public policy said in a statement.

GOP Senators Demand Fiscal Reforms in Exchange for Raising Debt Ceiling

In a letter to President Joe Biden, nearly half of the Republicans in the Senate declared Friday they any effort to increase the debt ceiling must include structural reforms in federal spending.

“We, the undersigned members of the Senate Republican Conference, write to express our outright opposition to a debt-ceiling hike without real structural spending reform that reduces deficit spending and brings fiscal sanity back to Washington,” the lawmakers said.

Led by Sen. Mike Lee of Utah, the two dozen signatories who include Sens. Ted Cruz (TX), Rick Scott (FL), Rand Paul (KY), Mike Crapo (ID), John Barrasso (WY) and Marsha Blackburn (TN) said the demand for fiscal reform in exchange for raising the debt ceiling is a matter of internal policy for Republican senators.

The GOP policy calls for cuts in future spending equal to or greater than any proposed increase in the debt ceiling. Alternatively, the senators say they would consider structural reforms such as the Prevent Government Shutdowns Act, which would automatically fund the government if appropriations bills are not finished in time while requiring lawmakers to remain in Washington until the appropriations work is done, and the Full Faith and Credit Act, which would require the U.S. Treasury to prioritize certain payments once the debt ceiling is reached.

The letter was not signed by Senate Republican Leader Mitch McConnell (KY).

Quote of the Day

“People would say, ‘We have to give you a seat at the table.’ Hell, we are the table. It’s four of us here – five with [White House Office of Management and Budget Director] Shalanda Young – who are controlling, really, the most powerful levers of government.”

Rep. Rosa DeLauro (D-CT), in a CNN article on the four women who hold the top spots on the House and Senate Appropriations Committees. Rep. Kay Granger (R-TX) and DeLauro are the top Republican and Democrat on the House side, while Sens. Susan Collins (R-ME) and Patty Murray (D-WA) lead the Senate panel.

Along with Young at OMB, “women will hold the purse strings in Washington for the first time in history,” CNN’s Melanie Zanona writes. “And with deadlines to fund the government and raise the nation’s borrowing limit looming later this year, it will be up to these four women to pull the country back from the brink of fiscal calamity – no easy task in a divided and hyper-polarized government, and with razor-thin majorities in both chambers.”

Numbers of the Day

$114 Billion: In a story that appeared on the front page of The New York Times on Sunday, Rebecca Robbins details how a drug company has generated $114 billion in revenue since the end of 2016 by delaying competition for its blockbuster anti-inflammatory medication called Humira:

“Through its savvy but legal exploitation of the U.S. patent system, Humira’s manufacturer, AbbVie, blocked competitors from entering the market. For the next six years, the drug’s price kept rising. Today, Humira is the most lucrative franchise in pharmaceutical history. ... AbbVie orchestrated the delay by building a formidable wall of intellectual property protection and suing would-be competitors before settling with them to delay their product launches until this year.
“The strategy has been a gold mine for AbbVie, at the expense of patients and taxpayers. … One analysis found that Medicare, which in 2020 covered the cost of Humira for 42,000 patients, spent $2.2 billion more on the drug from 2016 to 2019 than it would have if competitors had been allowed to start selling their drugs promptly.”

Read the full story at The New York Times.

$4.7 Billion: The federal government will seek to recover $4.7 billion over the next 10 years from private insurers who operate within the Medicare Advantage system, as stricter rules governing clawbacks of improper payments take effect. The new rules, which were first proposed in 2018 and which focus on exaggerated claims of patient illness made by insurers seeking higher payments, were announced Monday by the Centers for Medicare & Medicaid Services.

“Today we are taking some long overdue steps to move us in a direction of accountability,” Health and Human Services Secretary Xavier Becerra told reporters Monday.

Bloomberg reports that the insurance industry is opposed to the new rules and is expected to fight them in court.

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