Republicans Will ‘Crash the Economy,’ Biden Warns

By Yuval Rosenberg

Happy Monday and a happy Diwali to all who celebrate the festival of lights!

With two weeks to go before Election Day — and with polls showing a sentiment shift favoring Republicans — President Joe Biden and Democratic candidates are looking to hammer home their message to voters whose primary concerns are the economy and inflation.

Here’s what you need to know.

Republicans Will ‘Crash the Economy,’ Biden Warns

President Joe Biden on Monday delivered what he called his “closing argument” to voters ahead of the midterm elections, which he said offered “a choice between two vastly different visions for America.”

Speaking to staffers at the Democratic National Committee headquarters in Washington, Biden declared that Democrats were focused on “building a better America for everyone with the economy that grows from the bottom up in the middle out where everyone does well.” Republicans, by contrast, want to impose “mega trickle-down economics that benefits the very wealthy,” Biden said, while targeting popular benefits programs for cuts and putting the economy at risk by playing political games with the debt ceiling.

“Republicans have made it clear that if they win control of the Congress, they will shut down the government, refuse to pay our bills, and it will be the first time in our history America will default unless I yield and cut Social Security and Medicare,” Biden said. “They’re flat-out saying that, in order to cut Social Security, Medicare, they’re threatening to default on the federal debt. There’s nothing, nothing that would create more chaos, more inflation and more damage to the American economy than this. … Republicans are going to crash the economy” if they get their way, he added.

Who’s the responsible one? Biden argued that Democrats are the more responsible party when it comes to the federal budget. “We the Democrats are the ones that are fiscally responsible. Let's get that straight now,” he said. “And we're investing in all of America, reducing everyday costs while also lowering the deficit.” By contrast, “Republicans are fiscally reckless pushing tax cuts for the very wealthy that aren't paid for,” Biden charged, referring to reports that GOP lawmakers plan to push for an extension of the 2017 Trump tax cuts.

The president also pushed back against the way his opponents portray his party. “Republicans love calling Democrats big spenders and claim that they are for less government spending,” he said. “Well, give me a little break here, just look at the facts. The federal deficit went up every single solitary year in the Trump administration, went up every year, and went up before the pandemic and went up during the pandemic and went up every single year on his watch. And one big reason for that is that they voted for a $2 trillion Trump tax cut which overwhelmingly benefited the biggest corporations and the wealthiest Americans, and it racked up significant debt and not a penny was paid for.”

The president highlighted the reduction in the budget deficit under his administration in 2022 — the largest one-year drop in U.S. history, driven almost entirely by the expiration of Covid-related relief spending. “The deficit fell by $1.4 trillion dollars this year, cut the deficit in half,” he said. “And that follows a drop last year of $350 billion. And by the way, because we're finally ensuring corporations began to pay their fair share, [and] we're giving Medicare the power to negotiate drug prices, we’re going to reduce the deficit over the next 10 years by another $250 billion.”

Fiscal battles ahead: Confident they will win control of at least the House, some GOP lawmakers are planning their approach to fiscal issues — an approach that could involve attempts to cut federal spending, using the debt ceiling as leverage.

House Republican Leader Kevin McCarthy (R-CA) last week pushed back against the idea that Republicans wanted to use the expected negotiations over raising the debt ceiling next year to cut Social Security and Medicare, but other Republicans in the House have been speaking about doing just that.

Rep. Chip Roy (R-TX), a member of both the Freedom Caucus and the Republican Study Committee, told Politico that he wants to use whatever opportunity Republicans have to fight for spending cuts. “You have two simple leverage points: when government funding comes up and when the debt ceiling is debated,” Roy said. “And the only question that matters is, will leadership use that leverage?”

Rep. Jason Smith (R-MO), the ranking member on the House Budget Committee, has also said that he wants to use debt ceiling negotiations to push for spending cuts. “On multiple occasions over the past decades, an increase in the debt limit has been accompanied by reforms to curtail and cut Washington spending and impose fiscal restraints on Congress,” he said in a statement.

Still, there will likely be numerous hurdles for these Republican lawmakers to clear before they can test whatever leverage they might have. Some more centrist Republicans may agree to work with Democrats to pass a 2023 budget bill in December, pushing the next funding battle well into next year. Similarly, the debt ceiling may not need attention until the second half of 2023. And even if the most radical fiscal hawks in the House Republican caucus can push through a deal that involves spending cuts, Biden has sworn to veto it.

In the meantime, the focus on cutting spending and rattling sabers over the need to raise the debt ceiling are giving Democrats what appears to be a major theme of their final pitch to voters with just two weeks to go until the midterms. “The Republicans have said that if they win, they want to subject Medicare, Social Security — health blackmail — to lifting the debt ceiling,” House Speaker Nancy Pelosi (D-CA) told CBS’s “Face the Nation” over the weekend. “They have said they would like to review Medicare and Social Security every five years. They have said that they would like to make it a discretionary spending that Congress could decide to do it or not, rather than mandatory. So Social Security and Medicare are on the line.”

Good News on the Economy – for Now

This may surprise you: The U.S. economy is expected to have grown at an annual rate of better than 2% over the three months from July through September.

Given the persistence of painfully high inflation and what seems like a steady drumbeat of economic pessimism — even if it’s punctuated regularly by strong jobs reports — the forecast for third-quarter growth may be far stronger than many would think.

The first government estimate of gross domestic product for those months will be released on Thursday and economists widely expect it will actually show a rebound from the stagnant first half of the year. Real GDP shrank at an annual rate of 0.6% in the second quarter of the year following a decrease of 1.6% over the first few months of the year. Those two consecutive quarters of contraction sparked talk that the economy might technically be in a recession, though the continued strength of the job market and other indicators led economists to broadly agree that we had avoided such a downturn.

Still, fears about the direction of the economy remained — but the Federal Reserve Bank of Atlanta projects that the economy grew at a solid 2.9% rate over the July-September quarter. Economists at Goldman Sachs estimate that GDP grew at a 2.4% annual pace, while the consensus forecast from economists surveyed by Reuters is for 2.1% growth.

That GDP number will drop just before the campaign season reaches its crescendo — and if it matches even the lowest of those forecasts, it may represent some welcome economic news for President Joe Biden and Democrats.

But one solid report doesn’t mean the economy is in the clear, and economists are increasingly pessimistic that the U.S. will be able to avoid a recession given the Federal Reserve’s campaign of interest rates hikes to rein in inflation. “The looming GDP hit from higher rates and stronger dollar is enormous,” Jeffries economists Aneta Markowska and Thomas Simons said in a report cited by CNN.

A new survey by the National Association for Business Economics found that almost two-thirds of respondents say the country is already in a recession or is likely to fall into one within the next year. “The survey of 55 NABE members conducted Oct. 3-10 also indicated slower demand, an easing in labor market tightness and a slight moderation in price pressures,” Bloomberg News reports.

The bottom line: This week’s GDP report may show healthy growth, but fears are growing that the Fed will not be able to engineer the “soft landing” it had hoped for and that the economy is instead likely to see a downturn in 2023.

Interest Costs on the National Debt Raise Risks for U.S.

In the fiscal year that ended last month, the U.S. government spent $475 billion on interest payments, up 35% from $352 billion the previous year.

The number is set to grow, and Politico’s Kate Davidson warns that interest on the debt could haunt President Biden because it “could limit the government’s ability to respond if the economy tumbles into a recession, potentially throwing millions of Americans out of work, as many economists expect next year.”

The point, Davidson says, is that any additional government spending, whether it be for large programs or support for households affected by a downturn, would need to be paid for by tax increases or spending cuts elsewhere. “Any more big additions to the deficit are really risky,” Jason Furman, who led the Council of Economic Advisers under President Obama, tells Politico. “We saw the U.K. heavily punished for that, and so I think that would be quite problematic.”

Administration officials tell Politico that inflation-adjusted interest rates remain below where they were during the 2000s and that net interest payments are expected to remain historically low as a share of economic output — “a metric that economists have increasingly pointed to as an important measure of debt sustainability,” Davidson writes.

The bottom line: The debt levels and growing interest payments raise the political risk that any response to a potential economic downturn or crisis might be constrained — but they may also raise some market risk. “The lesson of the U.K. is, markets are going to be much more vigilant about any fiscal plan in this environment, particularly for countries that have a large debt stock that are potentially going into an economic downturn and are seeing interest rates move substantially higher,” Daleep Singh, chief global economist at PGIM Fixed Income and a former deputy director of Biden’s National Economic Council, told Politico. “You have to be really careful.”

Quote of the Day

“[Y]ou do not want the perceived problem children in a position of power at the negotiating table with a lot of sharp policy objects around that could impale the global economy: you want to put the proverbial cork on the fork.”

— Chris Krueger, a senior analyst at Cowen Washington Research Group, writing Monday about the possibility of eliminating the debt ceiling and the threat that Republicans will weaponize the borrowing limit if they win control of the House in November. Krueger notes that the ultimate GOP margin in the House could have a huge impact on any fiscal fights ahead, and that the conservative Freedom Caucus will have more leverage if Republicans enjoy only a narrow majority.

News

Views and Analysis