Monday, May 29

Neoliberalism or social democracy: the conflict over the debt ceiling in the US reflects a clash of societies

The United States government could run out of money to pay its bills on June 1. It is the alarm bell raised by Secretary of the Treasury, Janet Yellen, in a letter sent a few days ago to the speaker of the House of Representatives, Republican Kevin McCarthy. In it, he asked the members of the legislature to put aside their differences and approve a suspension or an extension of the debt ceiling, that is, the maximum limit of indebtedness that the federal administration can afford.

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The White House is looking against the clock for an agreement with the Republicans to extend said limit, something that has been done up to 78 times since 1960. But, with each meeting between Joe Biden and the leaders of Congress, it is more evident how far apart the two are positions: in the last attempt, this Tuesday, Democrats and Republicans left their meeting in the Oval Office without “any new movement,” as summarized by McCarthy.

On the one hand, the conservatives are not willing to increase the debt ceiling and are taking advantage of the situation to ask major cuts in public spending. On the other hand, the Democrats want to continue with their legislative agenda, which provides for an increase in spending, and they choose to increase the limit, something that Congress has already done up to three times during the term of Donald Trump, without the need for any cuts. .

This shows that the debate over the national debt, a burden that has been growing for decades during successive Democratic and Republican governments, has nothing to do with expanding — or reducing — its ceiling. Rather, it has to do with an ideological question: if it is expanded, as has been the case, is it preferable to do so as a result of lower taxes or greater public spending?

“A catastrophic and avoidable crisis”

If no action is taken, the government could run out of liquidity, very soon, the first day of next month. If that happens, he will not be able to meet his payments, which would create “a completely avoidable and catastrophic economic crisis,” Yellen noted in his letter. For the first time in its history, the US could neither pay the debt, nor its interest, nor the bills, nor the payrolls of public workers, nor items such as social security, Medicare or the army. As if this scenario were not tragic enough, the volatility of the financial markets would add another layer to the chaos, triggering an inevitable recession and severe credit crisis, and the loss of investor confidence in the dollar.

All this is avoidable, and the ball is in the hands of the House of Representatives. The US Constitution gives Congress the last word to mark the debt ceiling, after negotiating it with the Executive. For this reason, several formal and informal meetings between McCarthy and Biden have been repeated in recent months to try to find a way out of this situation. But, in the absence of an agreement, the country is dangerously close to the precipice.

The Republicans, who have dominated the Lower House since the midterm elections, are not willing to give in to the demand of Yellen and the Democratic Party as a whole, to which the Federal Reserve joined last Wednesday. In fact, they have approved a legislative initiative that proposes their own extension of the ceiling, but they condition it to a significant cut in spending.

Specifically, they want to reduce 4.8 trillion, and point to specific items, especially social spending, that they consider “unnecessary”: the forgiveness of student loans, subsidies for the development of renewable energies, food stamps, unused funds for the coronavirus and other public aid. In this way, they have passed the baton to the Democrats, who have already advanced that they will reject the initiative in the Senate, since they consider that these items are non-negotiable and affirm that they are not willing to accept cuts.

It is not an unprecedented scenario

From time to time, the US has found itself on the edge of this precipice, but it has always been able to get out: either by widening the ceiling, or by suspending it, as happened twice between 2014 and 2016. And as federal spending has increased , successive governments have been in charge of expanding this limit, up to 78 times since 1960. If at the end of that decade it was around 2 trillion dollars, it currently amounts to 31.4 trillion.

Over the past ten years, the government’s annual deficit has ranged from $400,000 to $3 billion, adding to the country’s total debt. Something that has happened with both Democratic and Republican governments. The former have contributed to the deficit through greater social spending; the latter, as was the case under Trump, primarily through tax cuts for the rich. In either case, this has led to continuous suspensions and increases in the ceiling throughout this century, two possible measures that, on this occasion, could once again solve the financial mess.

Since the arrival of the new millennium, a similar situation has been reached on numerous occasions. The most serious was in 2011, when Barack Obama held the presidency, without the control of Congress. Then, the Republicans used the same tactic as now: they took advantage of the calendar to pressure the Democrats until they accepted cuts in public spending, 72 hours before the suspension of payments. Although this managed to avoid more serious consequences, the late resolution meant a significant fall in the stock market, which plummeted 20% in one month.

On this occasion, in reality, the debt ceiling was reached in January and, since then, the Secretary of the Treasury has been managing to avoid the default based on “extraordinary” financial maneuvers. But the alternatives are running out, and Yellen has reiterated that the date on which the administration’s liquidity runs out could come as early as June. Failure by the government to pay “would cause irreparable damage to the US economy, the livelihoods of all Americans, and global financial stability,” warned the Treasury secretary.

An ideological battle: less spending or more taxes?

The debt ceiling conflict is part, in form and substance, of an ideological struggle. And the discussion is not about whether to expand or reduce the deficit: both parties, when they have been in government, have expanded it, and when they have been in opposition, they have called for reducing it. The debate lies in the reason for the expansion —or reduction— of the deficit and, therefore, of the debt limit: the increase in public spending or the tax cut.

In fact, despite the fact that the right usually defends the idea of ​​a minimal, austere state, and with a functioning similar to that of a company —that at the end of each year, balance income and expenses—, in reality their governments have been those who have widened the deficit more. The proof is that the debt began to grow disproportionately in the 1980s, after the tax cuts approved by Ronald Reagan, one of the great promoters of the minimal State.

In the following decade, the end of the Cold War allowed the government to cut military spending, and the years of economic boom helped to clean up public coffers during the government of Democrat Bill Clinton. Until at the beginning of the 2000s, already in the time of George W. Bush Jr., the so-called dotcom bubble exploded, due to the speculative growth linked to Internet companies. This new crisis, linked to the two Bush tax cuts (2001 and 2003), as well as the military campaigns in Iraq and Afghanistan, made the debt almost bent during the Republican’s term (from 5.8 billion in 2001 to more than 11.9 billion in 2009).

During the years of the Great Recession (2007-2009) and the subsequent years of crisis, the Bush and Obama governments had to increase public spending, leading to a further increase in debt. They did it, first to rescue the banks, and later, to increase social services and create a minimum social shield at a time when unemployment had reached 10%. Thus, during the Obama years, the debt almost doubled again, from $11.9 trillion to $19.5 trillion.

Then came Trump who, after the pre-recession job recovery, approved in 2017 one of the biggest tax cuts for the rich, which added even more pending to the increase in debt. During his tenure, which lasted four years — half that of his predecessors — he added as much as $7.8 trillion to the national debt.

And at the end of his presidency came the coronavirus pandemic, during which both he and his successor, Biden, approved a series of subsidy packages. These, added to measures that involve a significant increase in public spending, such as the Inflation Reduction Law, the Infrastructure Law or the cancellation of student debt, have contributed to a new increase in debt, of another 3 trillion, during the current mandate.

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