The question at the start of this year was whether a divided Washington would descend into congressional chaos and dysfunction, comparable to the budget standoffs of 2011, as most observers expected, or whether the coalition that had ended 2022 with a bipartisan budget agreement and an impressive roster of other bipartisan legislation could keep that momentum going. As the gloomiest predictions now seem to be playing out, and Congress continues to threaten the nation with a potential national debt default and economic upheaval, it is important to remember that there was, and still could be, an alternative path and note the many choices of political actors in reaching this stage.
1) American voters made a choice to elect a Democratic president, and give the Democrats narrow control of the Senate, but also give Republicans a narrow majority in the House of Representatives. Public opinion polls show voters hate Washington gridlock, but they frequently elect divided government. Our study of Washington dysfunction for our book “Divided We Fall, Why Consensus Matters” (Brookings 2022) tells us divided government can frequently lead to the kind of nightmare we all experienced in 1994-1995 and then again in 2011-2016 with repeated standoffs and deadlines, government shutdowns and threats to default. But this is not inevitable. Divided government was highly functional in 1997 when a period of relative peace followed the budget wars and President Bill Clinton and Republican Speaker Newt Gingrich negotiated a budget deal that replaced government deficits with four years of budget surpluses.
2) House Republicans made a choice of confrontation over cooperation when they chose Kevin McCarthy to be Speaker after he announced plans to threaten the American people by allowing a default on the national debt unless President Biden agreed to package of spending reductions and reversals of his 2022 legislative achievements. It is a sign of the toxic level of negative partisanship in our national politics that Republican voters will continue to support elected leaders who threaten catastrophic harm to the US economy in a ploy to gain leverage in budget negotiations with Democratic presidents, but that is where we have arrived.
3) House moderates made the choice to miss two opportunities to change tracks to avoid the potential train wreck of a government default and continuing battles over the budget. The bipartisan Problem Solvers Caucus and Republican Governance Group members became part of the problem undercutting governance when they failed to assert themselves and insist on a less confrontational strategy when McCarthy needed their votes to become Speaker, and again when he needed their votes to pass the list of ransom demands that was the “Limit, Save, Grow, Act” that passed by a single vote, allowing the default threat to move forward.
4) Senate Republicans led by Minority Leader Mitch McConnell have not yet, but could still, act as the grownups in the room and defuse the partisan standoff by negotiating a compromise with the Senate Democrats and President Biden. This was the formula for bipartisan success in 2022, it is how we got past the default threats and budget standoffs during the Obama Administration, and it is the most likely path to avoid further disaster in the current crisis. McConnell took a tumble in March and suffered a meaningful head injury which clearly diminished his influence at pivotal moments and likely contributed to his decision to check out of the current negotiations leaving them to Biden and McCarthy. McConnell needs to plan for the likely failure of these talks to reach an agreement before the “X date” and work with Majority Leader Chuck Schumer and the leaders and members of the Senate Budget Committee to craft legislation that can pass the Senate, and then the House, when the bond market is in free fall. Our best guess at the broad outlines of such an agreement are offered below.
5) President Biden and Senate and House Democrats also made choices that contributed to our current plight. Rather than reacting to the aggressive posture of the House Republicans, the Democrats needed to proactively build on the alternative path by reaching out to McConnell and the Senate Republicans with active cooperation toward long-term bipartisan budget compromise. Biden put a lot of deficit reduction in his Fiscal Year 2024 Budget, but he needed to dangle even more potential compromises to get McConnell into substantive negotiations on taxing and spending levels. Biden would then already be participating in the budget talks McCarthy was threatening the global economy to join.
Biden and the Democrats also made a choice (albeit begrudgingly) to make a debt default more likely when they agreed to participate in negotiations to avoid a debt default. As we have argued here and here (and here and here) there was little chance the Republicans would follow through on their default threat as long as Biden refused to negotiate. Instead of negotiating with the President, Republicans would realize they were trapped in a negotiation with bond holders who were not going to back down. Bond holders would just sell their bonds sending the markets tumbling until the Republicans reversed course. Of course, Republicans would blame Biden for refusing to negotiate, but they alone would be the actual cause of the manufactured “crises” and they would also be able to solve the “crisis” by themselves. Last week, when Biden agreed the manufactured “crisis” would end through bipartisan negotiations, the chance of an actual default increased dramatically, because there really is very little common ground between the parties on what an agreement to raise the debt ceiling should include, and how long it should postpone the next debt crisis. There is a real risk that negotiations will fail because it is difficult to see what Biden could offer that House Republicans could accept.
This is why the Senate needs to have an agreement ready if the House and White House talks fail to reach an agreement in time – even with the possibility of one or more deadline extensions with small and temporary debt limit increases of a few weeks at a time that will themselves be difficult to negotiate. Even though we are unable to see enough common ground for an agreement between McCarthy and Biden, it is possible to surmise what Schumer and McConnell could agree to that while unacceptable to most House Republicans could pass the House if markets were tumbling.
Duration: No less than the end of calendar 2024. Democrats cannot agree to any deal that just sets us up to rinse and repeat this crisis next year, before the 2024 election. To get this Democrats, will have to be willing to make some meaningful concessions.
Covid Relief Money: A claw-back of the unspent Covid relief money is the low hanging fruit for both sides and may have already been negotiated as a ransom payment to extend the negotiations for a few additional weeks.
Something of value: Republicans have historically insisted on bad public policy like the budget sequester in 2011 or this year’s efforts to limit the number of IRS auditors, but to get Senate Republicans to agree to raise the debt ceiling through the election year, Democrats will have to make some sacrifices. We think a cancellation of last year’s student loan forgiveness is a likely candidate because it was the one spending increase that was not “paid for” with dedicated revenues so it added to the deficit, and because the alternatives are far worse. Other possibilities could include adding work requirements to Medicaid which means more rural hospital closures or work requirements for the Supplemental Nutrition Assistance Program which means more hungry poor children. It is hard to see how either of these benefit voters living in agricultural states.
Level “Discretionary” Funding: The most likely outcome for the part of the budget that is not growing faster than the rate of inflation and least needs to be cut is that it would be extended at FY 2023 levels through the end of FY 2024 with a continuing resolution (CR). Republicans could claim this as the “win” that justifies all this chaos, and Democrats would likely be able to negotiate additional funding for the war in Ukraine if they identified an equal amount of budget savings in a supplemental budget request.
Permitting Reform: America needs reform of the process of obtaining construction permits because the current system adds unacceptably long delays for new projects, but we do not need to do this under threat of a debt default on terms that were written by the construction industry to weaken regulations that were designed to protect the environment and give communities a voice in major development decisions. Both parties should commit to a process for substantive permitting reform by the middle of 2024.
Long-Term Deficit Reduction: If 2011 is any guide to what we can expect in 2023, then we should expect to see some commitment to a budget process designed to make the needed dramatic actions to put the nation’s finances on a sustainable path. This will have to include reductions to projected increases in entitlement spending (mostly by reducing healthcare spending) and raising new revenue (by closing tax loopholes, expiring, or cancelling past tax cuts, and raising taxes on large corporations and the wealth or income of billionaires and multi-millionaires). This process could be a commitment to regular order in the budget committees, or to a “Super-Committee” of House and Senate members, or an independent commission along the lines of the Simpson Bowles Commission in 2010.
Both sides in the negotiations have agreed that Social Security and Medicare are off the table, after Donald Trump reversed decades of Republican economics by pledging to protect the programs from budget cuts. President Biden responded to Republican shouting during his State of the Union Address by listening to the interrupters and confirming that they were taking both “entitlement” programs out of the budget talks. But funding for Social Security and Medicare is on an unsustainable path. The Trust Funds supporting both programs are projected to become exhausted in the next 10 years, so it is easy to say you support the programs, but much harder to offer a plan to support them into the future. Perhaps we need a “Commission on the Sustainability of Social Security, Medicare, and Other Critical Government Programs” to work on viable bipartisan solutions to the real fiscal challenges we face now and will continue to face in the future.