President Biden and Republican House Speaker Kevin McCarthy reached a last-minute deal on the U.S. debt limit, and Congress quickly passed the legislation although their agreement has received criticism from both Republicans and Democrats, with concerns that concessions were made on both sides.
Jason Furman, a policy expert and professor at Harvard Kennedy School, shed light on the deal and the economic implications of the ongoing debt-limit drama.
Furman expressed his view on the process that led to the budget and debt-limit agreement, calling it “terrible and harmful.” However, he noted that the outcome of the deal falls somewhere between what Republicans and the president wanted, which is expected in a divided government.
This particular debt-limit negotiation has caused significant turbulence compared to previous ones due to the extreme starting position of House Republicans and the president’s reluctance to begin negotiations without signs of compromise. The financial market turbulence associated with this negotiation has been the most severe in recent history, with significant movements in market pricing and interest rates on treasury bonds.
When asked about the impact of the deal on the economy and national debt, Furman stated that the Congressional Budget Office has scored the bill and estimated over $1 trillion in savings.
However, the actual savings will depend on Congress’s adherence to the legislation.
Furman believes that while any savings are mildly helpful from a macroeconomic perspective, this agreement is not the ideal way to reduce the debt.
The deal includes cuts to “non-defense discretionary spending,” which encompasses important areas such as education and research. Furman would have preferred a combination of tax increases, reforms, and reductions in spending on entitlement programs.
The potential risk of default if the bill stalls was also discussed. Furman explained that if there is a delay in passing the bill, the Treasury may not have enough funds to make full payments, which could be unprecedented and alarming.
The exact consequences of such a scenario on financial markets and rating agencies are uncertain, but they are likely to be negative.
Regarding the economic impact of the ongoing debt-limit drama, Furman acknowledged that the anticipation and uncertainty have already harmed the economy over the past few months.
The diversion of attention, higher interest rates, market instability, and a decline in confidence have all contributed to these negative effects. However, Furman believes that a few more days of drama will not significantly increase the costs already incurred.
The interview also touched on potential alternative options to avert default, such as invoking the 14th Amendment or minting a $1 trillion coin. Furman expressed skepticism about these options, stating that the 14th Amendment might not be viewed as a viable solution by financial markets, and invoking it could lead to panic.
Furthermore, he believes that the Supreme Court would likely not allow Biden to use the 14th Amendment to resolve the debt crisis, and concluded that negotiating with McCarthy was the best available option for the president.
As for the future, the deal prevents a debt-limit fight during next year’s presidential election.
However, Furman pointed out that unless there is a way to change the law, Congress will continue to face this issue. He advocated for repealing the debt limit, stating that negotiations should occur in a normal way rather than the abnormal process observed recently.
This article provides valuable insights into the recent debt-limit deal reached between President Biden and Speaker McCarthy. It highlights the challenges faced in a divided government and the potential economic implications. The discussion around alternative options and the need to address the debt limit issue in a more normal process is also thought-provoking.