Biden and the US budget crisis
“There is a serious threat here”
05/09/2023 11:48 am
The USA has already torn its debt ceiling, an agreement on the budget is urgently needed. David Vandivier, Professor of Fiscal Policy at Georgetown University in Washington DC, warns of a real threat to the financial markets – and explains why the political process in Congress is severely disrupted. The former advisor to US President Barack Obama still sees chances of a quick solution.
ntv.de: The USA are on the move the debt ceiling. US President Joe Biden urgently needs to reach an agreement with Congress. Do you think there will be a quick fix?
David Vandivier: There will have to be a quick fix because the timeframe is much shorter than, for example, 2011 and even 2013. Not long ago, Treasury Secretary Janet Yellen issued a statement saying we have already reached the debt ceiling . We are in a sort of overtime right now where the Treasury Secretary is taking so-called extraordinary measures, which are basically financial and accounting maneuvers, but at the end of the day she could run out of funds.
Do you see a chance that President Biden and Congress can find a solution?
We have come to a point where President Biden has taken the position that was taken in the Obama administration. And that goes back to the debt limit crisis of 2011, where there were protracted debt limit negotiations – starring Senator McConnell and then-Vice President Biden. These talks failed. I mean people are forgetting that these talks with the White House have collapsed. So it was the leadership of Congress that sat down and found a solution to the 2011 debt limit crisis. The position that the White House has taken is: we are not negotiating the debt limit. So it’s the responsibility of the US Congress. So there’s a broader discussion, and that’s where there are a few nuances. President Biden has said that if a lot of these issues are budget related, he’s ready to talk about the budget because we’re in budget season and the approval process has to happen anyway. So I think both sides are approaching the talks from a slightly different point of view, but ultimately there are a lot of issues that need to be resolved, not only in terms of the debt ceiling but also in terms of the budget.
Could it be that there are problems with the environmental programs? That, for example, subsidy programs will also be canceled under the Inflation Reduction Act?
It could be, of course this is just the beginning of the negotiations. It wasn’t long ago that Republicans in the House of Representatives passed a bill basically saying we’re going to raise the debt limit by next year. But the price comes in some cuts – for example in green energy programs and also savings from the IRS. But that is the proposal that the Republicans in the House of Representatives have put on the table. The Democratic-controlled Senate has already rejected the proposal, and the White House also opposes it.
Republicans control the House of Representatives. And they are calling on President Biden to economize. Do you have a point with that?
We’re in divided government and there’s a whole budget process, which usually involves a budget vote, where the House of Representatives passes their version of the Budget and the Senate passes their version. These two must be reconciled. The truth is that the budget process is largely broken. It is very rare for a budget to pass between the House of Representatives and the Senate. But this year, perhaps circumstances could force a compromise between the two sides.
It is above all the Republican members of parliament who support the Make America Great movement, with whom an agreement could be very difficult. Are these politicians causing the biggest problems in the budget negotiations?
We’re in a very interesting situation: the Republicans only have a four-seat lead in the House of Representatives. That’s a very small number. She is one digit. The same goes for the Senate and Democrats. There’s a two-seat lead. So a group of two, three, four, five, six members can cause real problems. And that’s what makes the budget and debt ceiling process even more dangerous this time around.
Isn’t this political theater where the politicians, and this time House Speaker McCarty, want to show their leadership?
We’re in Washington – there’s always a bit of political theater involved, but at the end of the day, there’s a really serious threat here. It’s about trust in the creditworthiness of the United States government. The whole financial system is based on trust. And one of the things that has benefited the United States for many, many years is confidence that we’re going to pay our bills, that bondholders are getting paid. If that confidence is challenged, it could cause serious problems in the markets, could cause serious problems in the United States economy and even the world economy.
Do you expect problems for the entire economy?
Every time we approach the debt ceiling, the markets get a little nervous. You can see it now: There has been a bit of a rumble in the options and government bond markets. The one-year, one-month and three-month bonds are getting a bit more unstable. So I think the closer we get to date X in June, the more unstable the market will become. The only question is how much, and whether lawmakers need to keep an eye on it and reach an agreement before it’s too late.
Do the politicians perhaps need the pressure for these negotiations?
If you go back and look at the debt limit vote and budget negotiations in the past, there is sometimes a bit of volatility in the markets at this time. And that’s causing lawmakers to take notice and realize that something needs to be done, and done fast.
Christopher Wittich spoke to David Vandivier