Happy Friday! The United States won’t be defaulting on its debt. President Joe Biden is set to sign the Fiscal Responsibility Act of 2023 into law as soon as tomorrow, suspending the debt limit until 2025 and ending months of tension in a standoff that could have resulted in economic catastrophe. Here’s the latest.
Biden Touts ‘Critical’ Win With Debt Limit Deal
In an address to the nation on Friday, President Joe Biden celebrated the passage of the bill to raise the debt limit. "Crisis averted," he said.
In his first speech from the Oval Office as president, Biden portrayed the deal as another step toward bipartisanship and economic progress. "Passing this budget agreement was critical. The stakes could not have been higher," he said. "No one got everything they wanted but the American people got what they needed. We averted an economic crisis and an economic collapse."
Biden touted both what was included and excluded from the deal. "We’re cutting spending and bringing deficits down," he said. "And, we protected important priorities from Social Security to Medicare to Medicaid to veterans to our transformational investments in infrastructure and clean energy."
The president is set to sign the bill suspending the debt ceiling as soon as tomorrow, White House press secretary Karine Jean-Pierre told reporters on Friday. The bill, called the Fiscal Responsibility Act of 2023, must be finalized by Monday to ensure that the Treasury Department can continue to meet its obligations.
The Senate sped through a series of votes Thursday night to pass the bill in a bipartisan, 63-36 vote, with 17 Republicans joining 44 Democrats to send the measure to Biden’s desk.
Here’s a final look at the takeaways from the drawn-out debt limit drama.
A reminder of the key elements in the deal: The Fiscal Responsibility Act of 2023 suspends the debt limit until January 2, 2025. It also caps non-military discretionary spending for two years. For fiscal year 2024, non-military spending will be limited to $704 billion while defense spending will be set at $886 billion, though some lawmakers are already pushing to add supplemental funding for Ukraine. In fiscal year 2025, the spending levels are set to rise to $711 billion for non-military programs and $895 billion for defense. The bill also broadens work requirements for some federal benefits and rescinds unspent Covid-19 funding, among other elements. All together, the deal would reduce deficits by about $1.5 trillion over the next decade, according to the Congressional Budget Office, though precisely how much will be saved will depend on future decisions by lawmakers. See more about what’s in the deal here.
McCarthy notches a (surprise) win: The speaker has taken pleasure in repeatedly telling reporters that they and other lawmakers have underestimated him. McCarthy picked this fight — it was, after all, a "manufactured crisis," as the White House said. But the speaker managed to get his members to unite behind him, get Biden to negotiating table and then get two-thirds of his Republican majority to support his deal and hike the debt limit in the face of a conservative revolt. McCarthy may not have won the negotiations with the White House, depending on who you ask, but he did secure some policy concessions. He could still face some flak from the far right, but for the moment he earned the right to crow a bit. "Is it everything I wanted? No," McCarthy said of the deal this week. "But sitting with one House, with a Democratic Senate and a Democratic president who didn't want to meet with us — I think we did pretty dang good for the American public."
Biden burnishes his record of bipartisanship: The White House stayed relatively quiet about the deal ahead of votes in the House and Senate, wary that touting the agreement might rev up further opposition. But Biden can now point to yet another piece of major bipartisan legislation enacted during his presidency, following the Infrastructure Investment and Jobs Act of 2021, last year’s CHIPS and Science Act, a gun law and legislation to help veterans exposed to toxic burn pits. And the president has already emphasized that the deal he agreed to preserves almost all of his other major legislative accomplishment, the Inflation Reduction Act.
"No one gets everything they want in a negotiation, but make no mistake: this bipartisan agreement is a big win for our economy and the American people," Biden said in a statement after the Senate vote.
Biden may have misjudged McCarthy and he did have to abandon his insistence that he would not negotiate over the debt ceiling (even though he has insisted that the talks were about a budget, not raising the borrowing limit). And he may have upset some progressives with the concessions he allowed, particularly the new work requirements for some people to get food stamps and cash assistance.
Still, as his remarks on the deal show, he burnished his bipartisan bona fides ahead of the 2024 election — and he may have avoided not just a debt default but also a government shutdown. The bill includes an incentive for appropriators to enact all 12 annual spending bills by the end of the year: an automatic, across-the-board spending cut. At the very least, that mechanism makes a shutdown later this year less likely.
But the nation’s fiscal outlook hasn’t really changed: A default may have been averted and the debt limit won’t be a problem again until early 2025, but the long-term fiscal outlook hasn’t changed all that much because of the deal.
Fitch Ratings, one of three major credit ratings agencies, said Friday that it was keeping the United States on "negative watch," indicating that it might still downgrade the country’s AAA rating in light of the recent brinkmanship and the fiscal outlook. Fitch said that, while the deal and its modest deficit reduction are positive factors, the repeated political clashes around the debt limit erode confidence in U.S. governance. "In fact, there has been a steady deterioration in governance over the last 15 years," Fitch said in a statement, citing "increased political polarization and partisanship as witnessed by the contested 2020 election, repeated brinkmanship over the debt limit and failure to tackle fiscal challenges from growing mandatory spending."
Fitch added that "governance shortcomings" could undercut some U.S. advantages, including the size of the economy, a dynamic business environment and the "unparalleled financing flexibility" afforded by the dollar being the world's preeminent reserve currency.
The company said it plans to resolve its negative watch in the third quarter of this year. "The coherence and credibility of policymaking, as well as the expected medium-term fiscal and debt trajectories will be key factors in our assessment," it noted.
Jim Tankersley of The New York Times notes that the deal involved just modest cuts to one part of the federal budget — and shows just how hard it will be for lawmakers to more meaningfully address the debt. Both parties agreed to exclude Social Security and Medicare, large mandatory spending programs, from the discussions and Republicans refused to consider raising revenue. "Washington is back to pretending to care about debt, which is poised to top $50 trillion by the end of the decade even after accounting for newly passed spending cuts," Tankersley writes. "With that pretense comes the reality that the fundamental drivers of American politics all point toward the United States borrowing more, not less."
And the debt limit will come up again: Biden had said that he may look to challenge the debt limit once the current showdown was resolved. He could still look to have the limit nullified on constitutional grounds.
Some Democratic lawmakers continue to argue that the debt limit has long outlived whatever usefulness it once might have had. "We can’t just make it through the crisis once again and mop our brows and say, ‘Phew, this is done,’" Sen. Elizabeth Warren of Massachusetts told CNN. "It’s not done until we get rid of the debt ceiling permanently."
And Hawaii Sen. Brian Schatz told CNN that this latest deal only highlights how ridiculous the debt limit is. "The best that defenders of this law can muster is, ‘Well, a global economic collapse didn’t happen this time,’" Schatz said. "Why take the risk? We just risked a catastrophe for what? Appropriations top lines? Increasing the age threshold for SNAP working requirements from 49 to 54? What a terrible, sick joke."
Rep. Brendan Boyle, the top Democrat on the House Budget Committee, has been pushing legislation that would allow the Treasury Department to raise the debt limit but give Congress the ability to override any such decision. But he acknowledged to CNN the risk that lawmakers will just move on. "Human beings have a tendency to forget. This has been such a torturous experience for my Democratic colleagues that I hope they will not forget," he said. "However you voted on this deal, the one thing we need to be fully united behind is the next time we are in charge, we need to never again be placed in this situation."
Another Banger of a Jobs Report Shows Labor Market Still Hot
U.S. employers added 339,000 jobs in May, the Labor Department reported Friday, blowing past expectations while signaling that the job market remains remarkably robust. The employment growth figures for March and April were revised upward, as well, adding another 93,000 jobs to this year’s total. And although the unemployment rate jumped three-tenths of a percentage point to 3.7%, joblessness is still near half-century lows, with the uptick driven in part by prime-age workers returning to a labor market that seems to be providing plenty of jobs.
Job growth was particularly strong in education and health services (+97,000), professional and business services (+64,000), government (+56,000) and leisure and hospitality (+44,000). Economist Elise Gould of the Economic Policy Institute wrote that "gains in both leisure and hospitality and government employment are particularly welcome news as they remain the sectors with the largest job shortfalls since before the pandemic," adding that "those deficits are steadily shrinking month after month."
The White House celebrated the news, highlighting the monthly numbers as well as the 13 million jobs added to the U.S. economy overall during the Biden administration and the still-low unemployment rate. "[T]he share of working age Americans in the workforce is at its highest level in 16 years," President Biden said in a statement. "Meanwhile the annual inflation rate has fallen for 10 months in a row, and it’s down more than 40 percent since last summer. During that time, take-home pay for workers has gone up, even after accounting for inflation. … In short, the Biden economic plan is working."
What recession? Although many analysts have been expecting the Federal Reserve’s anti-inflation campaign to produce a slowdown or perhaps a recession at some point this year, the latest jobs numbers suggest otherwise. "Holy moly, jobs growth comes in hot again," University of Michigan economist Justin Wolfers tweeted. "Don't believe the doom-and-gloom talk. This economy is motoring along." Wolfers noted that job growth averaged 283,000 per month over the last three months. "Recession? What recession?" he said. "There is literally no chance this is a recession."
Joseph Brusuelas, chief economist at RSM, agreed. "Job growth remains robust in what is a historically tight labor market. Despite headlines around layoffs, the duration of unemployment stands near eight weeks, suggesting that jobs remain plentiful and that those who are displaced find employment, often at better wages, quite quickly," he wrote. "As long as the economy continues to produce more than 200,000 jobs a month, this economy is not going to slip into recession."
Stephen Stanley, chief US economist at Santander US Capital Markets, said Friday’s report is just one in a series that points to ongoing strength. "Not only the payroll figures but pretty much every other measure of labor demand (JOLTS job openings, online job listings, initial claims, etc.) indicate that the labor market remains hot," he wrote in a note to clients, per Bloomberg.
The Fed’s next move: Most analysts have been expecting the Federal Reserve to pause its anti-inflation campaign at its meeting next week after raising interest rates 10 times in a row in an effort to slow the economy. Friday’s report raises questions about the possibility of another rate hike. Noted inflation hawk and former Treasury Secretary Lawrence Summers said that if the Fed does pause in June, it should be willing to consider a substantial increase in July.
"We are again in a situation where the risks of overheating the economy are the primary risks that the Fed needs to be mindful of," Summers told Bloomberg Television’s David Westin. "If they don’t raise rates in June, I think they have to be open to the possibility that they may have to raise rates by 50 basis points in July if the economy continues to stay way hot and if inflation figures are robust."
Still, many economists are saying that the strong jobs report is unlikely to be enough to change the Fed’s path, at least in June. "Today's jobs report should not materially increase the odds of a Fed hike in June given the short-run reaction function they have articulated with its presumption of a skip," former Obama administration economist Jason Furman tweeted. "But it should raise the odds of a July hike," he added. "And makes it even harder to see a cut later this year."
Diane Swonk, chief economist at KPMG, said that while she doubts the Fed has finished its rate hike campaign, a pause in June is still likely. "Powell seems determined to skip the June meeting for rate hikes," she tweeted Friday. "He has hopes of engineering a soft landing and has proven extremely good at corralling the cats. Also, a skip makes sense given sheer volume of Treasury bills and bonds that need to be issued, stating Monday."
Number of the Day: 9 Million
"More than 9 million American adults aren’t taking their medications as prescribed due to the cost, with those who are uninsured or disabled among the likeliest to cut corners, according to new CDC data released Friday," Axios reports. "Skipping doses, taking less than the prescribed amount or delaying refills to save money can make health conditions worse and more expensive to manage, wrote researchers."
CBO Score of the Week
While the score of the Fiscal Responsibility Act of 2023 provided by the Congressional Budget Office this week received a lot of headlines, CBO analysts have a lot more on their plates. In another compelling but perhaps overlooked piece of work, the CBO provided important information to Congress, as required by law, about the cost of an upcoming event: the Greater Washington Soap Box Derby, which is scheduled to be held on the Capitol grounds on or about June 17, 2023. Fortunately for all racing enthusiasts in the Washington area, the CBO found that the event won’t strain the federal budget.
"H. Con. Res. 43 would authorize the Greater Washington Soap Box Derby Association to use the Capitol grounds on June 17, 2023, or on such a date as the Speaker of the House of Representatives and the Senate Committee on Rules and Administration may jointly designate," CBO Director Phillip L. Swagel said. "Because the resolution would require that the sponsors assume responsibility for all expenses and liabilities associated with the event, CBO estimates that passage of H. Con. Res. 43 would result in no cost to the federal government."
Fiscal News Roundup
- Debt Ceiling Deal Patches Over Chaotic Budget Process – The Hill
- Fitch Keeps US Rating on Negative Watch Even After Debt-Cap Deal – Bloomberg
- Top Democrats Say Biden Should Make This Year’s ‘Craziness’ the Last Debt Limit Fight Ever – CNN
- Congress Could Tax IRS Again After Debt Limit Deal – Politico
- Ailing Transit Agencies to Keep Pandemic Funding in Debt Ceiling Deal – Washington Post
- US Hiring Jumped Last Month. So Did Unemployment. Here’s What That Says About the Economy – Associated Press
- Fed Rate-Hike Pause Still Likely Despite Strong Data – Reuters
- Dow Surges Over 700 Points as Investors Cheer Jobs Report and Debt Ceiling Deal – CNN Business
Views and Analysis
- The Debt-Limit Deal Suggests Debt Will Keep Growing, Fast – Jim Tankersley, New York Times
- The Calm Man in the Capital: Biden Lets Others Spike the Ball but Notches a Win – Peter Baker, New York Times
- Biden’s Underrated Deal-Making Prowess Strikes Again – Jennifer Rubin, Washington Post
- McCarthy Got Rolled. But It’s Good for Him — and America – Dana Milbank, Washington Post
- Biden Is Delivering on His Most Far-Fetched Pledge: Compromise – David Ignatius, Washington Post
- Centrist Fanatics Go Wild Over Debt-Ceiling Deal – Jonathan Chait, New York
- The Center-Focused Politics of the Senate Debt Vote – Philip Bump, Washington Post
- We Didn’t Default. The Republican Party Is Still a Huge Problem – Perry Bacon Jr., Washington Post
- The Freedom Caucus Fizzles – Aaron Blake, Washington Post
- Kevin McCarthy Is a Survivor, Not a Strategic Genius – Ed Kilgore, New York
- Labor Market Is Not Buying Into Talk of a Recession – Jonathan Levin, Bloomberg
- The Biden Economy Keeps Growing—and the Experts Hate It – Timothy Noah, New Republic