Happy Monday! This week in Washington, D.C., is sure to be dramatic. Whether it will be productive is far less certain. President Joe Biden and the top four congressional leaders will meet at the White House tomorrow to discuss their debt limit standoff. Neither side is backing down from their positions. If anything, they’re digging in. We’ll also be getting new inflation numbers on Wednesday. And we’re reminding you now: Sunday is Mother’s Day, so get those flowers and brunch reservations ready.
Here's what’s happening … or not happening, as the case may be.
Biden and McCarthy’s Big Meeting
Expectations are extremely low for tomorrow’s big meeting between President Joe Biden, House Speaker Kevin McCarthy and the three other top congressional leaders. With as little as three weeks to go before the Treasury runs out of cash to pay its bills, potentially unleashing an economic catastrophe, Biden and Republicans have yet to budge from their positions or offer any indication that they might find a way to break their stalemate.
“The meeting is not expected to produce anything close to final agreement on a fiscal plan that could include raising the debt limit. But even small points of consensus could be hard to come by,” Jim Tankersley of The New York Times writes. “While both sides say they want to reduce the nation’s future debt burden, there is almost no overlap in how they aim to achieve that outcome. The only point of agreement so far is on the one thing Mr. Biden and Mr. McCarthy consider off limits in budget talks: Social Security and Medicare, the primary sources of projected federal spending growth in the decades to come.”
One option that keeps coming up: a short-term extension of the debt limit that would buy both sides more time and could effectively tie the debt limit and budget issues together, potentially allowing each side a way to save face.
That’s not happening tomorrow. “One way to tell nobody is expecting a quick breakthrough?” Semafor’s Jordan Weissmann writes. “The White House has already said Biden is planning a trip to New York on Wednesday — where several of the most vulnerable Republican House members reside — where he’s planning a speech trashing the debt ceiling bill Republicans recently passed through the house.”
What Democrats are saying: Biden reportedly remains steadfast in his refusal to negotiate over raising the debt limit, insisting that any discussion of spending cuts should happen in the context of budget talks, where the full faith and credit of the United States would not be at risk.
House Minority Leader Hakeem Jeffries (D-NY) insisted in an interview with NBC’s “Meet the Press” yesterday that a “clean” debt limit increase — one with no strings attached — was the responsible way to avert a crisis. “Everyday Americans understand this principle: If you have a bill, you need to pay it,” he said. “If you fail to pay it, it’s going to adversely impact your credit rating, your credit score will drop. If your credit score drops, your costs are going to go up and if America defaults on our bills, that’s exactly what is going to happen. And everyone is going to pay the price.”
Jeffries said that a short-term extension would not be the responsible solution, but he did not rule out the possibility. The White House similarly told NBC News that a short-term extension is “not our plan.”
What Republicans are saying: GOP lawmakers insist that a clean debt limit increase simply won’t happen. Forty-three Republican senators sent a letter Saturday to Senate Majority Leader Chuck Schumer saying that they stand with House Republicans in opposing a debt limit increase without “substantive spending and budget reforms.” Senate Minority Leader Mitch McConnell and other party leaders were among those signing the letter, an effort led by Sen. Mike Lee of Utah.
Given the continued absence of Democratic Sen. Dianne Feinstein, Democrats would need 10 Republicans to join them in raising the ceiling, but only six GOP senators did not sign the letter.
Even as GOP lawmakers publicly stick to their hard line, Politico reports that some senior party members have been working to tamp down expectations for any deal, pushing the idea that Republicans should see it as a victory if they only get a portion of what they included in the package that passed the House.
“The key challenge McCarthy and his deputies face is to figure out a way to placate conservatives who have been pressing them to adopt a position that they privately believe is unrealistic,” Politico’s Playbook crew reports. Some House conservatives have insisted that anything short of their bill would be unacceptable, but there’s no chance that a negotiated deal would include everything in the GOP plan. “If a win is getting everything you ask for all the time, then it’s going to be very hard to win,” one senior GOP aide told Politico. “If you get permitting reform or work requirements — and you don’t get everything else — you can legitimately say that is a win.”
The 14th Amendment option: The White House has reportedly been evaluating the possibility of having the Treasury borrow continue to borrow by invoking the 14th Amendment, which says that the “validity of the public debt of the United States … shall not be questioned.”
Legal scholar Laurence H. Tribe wrote in favor of that option in a New York Times essay on Sunday. And the National Association of Government Employees, a union representing nearly 75,000 federal workers, filed a lawsuit Monday in U.S. District Court in Boston challenging the constitutionality of the debt limit. “The Fourteenth Amendment requires the President to meet obligations to the holders of federal debt,” the complaint says. “To do so, he must either borrow or find the necessary funds to do so from cancelling, suspending, or refusing to carry out spending already approved by Congress.”
But the White House reportedly is wary of taking unilateral action. The Washington Post’s Jeff Stein reports that advisers “view the options as risky choices that could cause lasting economic damage.” Biden on Friday kinda, sorta dismissed the idea for now at least, telling MSNBC, “I’ve not gotten there yet.”
The bottom line: Tuesday’s meeting isn’t likely to resolve the impasse, and investors are getting more jittery. “Markets are beginning to aggressively price in a potential default,” RSM Chief Economist Joe Brusuelas wrote Monday. “Not only have three- and five-year U.S. credit default swaps soared to multiyear highs, but distortions are also emerging at the front end of the Treasury curve.”
House GOP Budget Caps Would Cut Deep: Analysis
House Republicans passed a bill that would slash spending and roll back parts of President Biden’s environmental agenda in exchange for temporarily raising the debt ceiling, but GOP lawmakers have not defined what, exactly, they plan to cut by imposing budget caps on next year’s budget.
Republicans have declared that non-discretionary programs including Social Security and Medicare would be exempt, along with defense, the largest single pot of discretionary spending. And in response to Democratic attacks, they have denied that their plan would cut health care for veterans or funds for border security. That leaves a much smaller pool of spending that would be subject to the GOP plan, and sharply increases the size of the cuts that would have to be made.
According to an analysis published by Margot Sanger-Katz and Alicia Parlapiano in The New York Times Monday, the Republican plan would reduce discretionary spending in all remaining programs by 51% after 10 years. “Universal discretionary caps would cut spending by an average of 18 percent over a decade, compared with what’s expected if current levels grew according to inflation,” they wrote. “But with defense, veterans’ care and homeland security exempted, the caps would result in cutting the rest of the discretionary budget by more than half.”
According to the Biden administration — which says the proposed cuts would amount to a 22% reduction in discretionary spending in 2024, assuming defense spending is immune — the GOP plan would force the federal government to close 125 air traffic control towers, eliminate Pell grants for 80,000 students, reduce staff at the FBI by 11,000, and eliminate food assistance for 1.2 million Americans with young children.
Bobby Kogan, a budget expert at the liberal Center for America Progress who provided some of the data for the Times article, said that the Republican claim that the spending caps would involve only minor reductions in spending is misleading. “The cuts are DEEP,” Kogan tweeted Monday, referring to the chart below. “Regardless of whether you assume the cuts are applied proportionally or defense & VA medical care are protected, non-defense discretionary programs excluding VA medical care would be pushed to historic lows, in a stark break, under the plan that 98% of the House GOP supported.”
Why US Tax Revenues Are Smaller Than Expected This Year
As the Treasury Department warned last week, the drop-dead date for raising the debt limit could arrive as soon as June 1, earlier than most analysts had expected just a few weeks ago. The main reason the so-called X-date — the day on which the U.S. runs out of cash to meet its obligations — has moved forward is that federal tax revenues have come in below projections. On Monday the Penn Wharton Budget Model released an analysis that digs into the details.
According to PWBM, by the end of April, tax revenues were $150 billion lower in fiscal year 2023 than projected by the Congressional Budget Office. This “tax receipts gap” has two main drivers: individual income and payroll taxes, which were about $117 billion below projections, and corporate income taxes, which fell short by about $36 billion.
Two other revenue sources — customs and excise taxes, and estate and gift taxes — had smaller effects that were largely offsetting.
Although there is still uncertainty surrounding the cause of the lower-than-expected revenues from individuals, PWBM’s Alex Arnon says it looks like it is tied to weaker performance of investments. In 2021, the stock and housing markets surged, producing a surge of capital gains tax revenues during tax season last year. In 2022, some assets lost value amid higher market volatility, reducing the taxes owed in 2023.
For corporations, PWBM says that quarterly income taxes have been running below projections since December, when the first payments of the 2023 fiscal year were due. “One likely explanation is that corporate profit margins have fallen faster than expected,” Arnon writes. “Profit margins expanded significantly in the aftermath of the pandemic but have been declining gradually since 2022 as consumer demand and labor market conditions stabilized.”
Deficit Hits $928 Billion in 2023: CBO
The federal budget deficit for the first seven months of fiscal year 2023 totals $928 billion, according to an estimate released Monday by the Congressional Budget Office. The tally so far (the fiscal year starts in October) is $568 billion larger than the total recorded during the same period a year earlier. Outlays were 8% higher in 2023 compared to 2022, and revenues were 10% lower.
As often happens, the timing of weekends and holidays affected the final tally. “If not for those timing shifts, the deficit in the first seven months of fiscal year 2023 would have been $991 billion, compared with a $295 billion shortfall during the same period in 2022—an increase of $696 billion,” CBO said.
News
- In Debt Limit Talks, Biden and Republicans Start Far Apart – New York Times
- Biden Faces Broad Negative Ratings at Start of Campaign, Post-ABC Poll Finds – Washington Post
- No Good Options if Congress Fails to Raise the Debt Limit, Yellen Says – Politico
- Declaring the Debt Ceiling Unconstitutional Is Risky, Biden Aides Fear – Washington Post
- Government Employees Union Sues Yellen, Biden Over ‘Unconstitutional’ Debt Limit Law – The Hill
- Why McConnell and McCarthy Locked Arms on the Debt Crisis – Politico
- The White House Has a New Line of Attack Against the House GOP’s Debt Bill: That It Would Worsen the Fentanyl Crisis – Politico
- Biden Prepares to Take Debt Ceiling Battle to Vulnerable GOP Lawmakers – NBC News
- Yellen Is Calling CEOs Personally to Warn on US Debt Ceiling -Sources – Reuters
- What to Know About California’s Reparations Proposal for Black Americans – Washington Post
- Disease Experts Warn White House of Potential for Omicron-Like Wave of Illness – Washington Post
Views and Analysis
- Don't Expect a Breakthrough When Biden and McCarthy Meet on the Debt Ceiling This Week – Jordan Weissmann, Semafor
- Why I Changed My Mind on the Debt Limit – Laurence H. Tribe, New York Times
- What Would the G.O.P. Plan Actually Do to the Budget? – Margot Sanger-Katz and Alicia Parlapiano, New York Times
- If I Were Sitting in the White House, This Is What Would Scare Me About Kevin McCarthy – Daniel Pfeiffer, New York Times
- How the Debt Standoff Might End – Steven Pearlstein, Washington Post
- Everyone Thinks the Debt Ceiling Is Someone Else’s Problem – David Dayen, American Prospect
- The Debt Limit and the 14th Amendment Gambit – Ramesh Ponnuru, National Review
- Will Biden and McCarthy Choose Compromise or Humiliation? – David A. Hopkins, Bloomberg
- In Defense of Debt Gimmicks – Paul Krugman, New York Times
- The Imploding US Postal Service Bailout – Paul Steidler, The Hill