Congress faces another debt ceiling crisis post-midterms

Tell me if this sounds familiar: A first-term Democratic president, after spending two years managing a precarious majority in Congress, loses control of the House. The new majority, brought to power by the election of highly ideological and conservative first-term members skeptical of the Republican “establishment,” tries to extract concessions from the president by declining to raise the debt ceiling, a federal law limiting how much the government is allowed to borrow. If the ceiling is not raised, the result could be a large-scale recession or even a global financial crisis.

Fearing the worst outcome, the White House agrees to the second worst: over a trillion dollars in spending cuts to placate the new Republican House. Those cuts have major negative consequences for the country over the next decade.

The above all happened in 2011, as President Barack Obama dealt with new Republican House Speaker John Boehner and the hardline Tea Party-backed members of Congress brought to power in the 2010 midterm elections — largely driven by the continuing pain and outrage caused by the 2007-2009 recession.

But it could happen again in 2023. Republicans have retaken the House, albeit narrowly in a weaker than expected performance, and the next likely House speaker, current House Minority Leader Kevin McCarthy, has already signaled that he wants concessions from President Joe Biden in exchange for raising the debt ceiling. McCarthy was heavily involved in the 2011 crisis as House majority whip, and this time around he has even more radical, Trump-loyal members to manage. Denouncing the “out of control spending” of the Biden administration and pledging to hold the debt limit hostage were popular talking points among Republican candidates this cycle.

We cannot be certain how this showdown will end. Outgoing House Speaker Nancy Pelosi and reelected Senate Majority Leader Chuck Schumer have said they will try to nip the problem in the bud and raise the debt ceiling before January; Senate Finance Committee chair Ron Wyden (D-OR) has said he’d be open to using budget reconciliation rules, which would not require any Republican support. Some Democrats, like Sens. Jeanne Shaheen (D-NH) and Elizabeth Warren (D-MA), have called for eliminating the ceiling altogether, which would prevent any repeat of the 2011 standoff in the future.

President Biden could also use executive power to subvert the ceiling, either by asserting that ignoring the limit is the “least unconstitutional” option he can take (compared to ignoring tax and spending laws passed by Congress), or by minting a platinum coin worth trillions of dollars, which is totally a real option.

But despite those options, a full-on repeat of the 2011 standoff looks unnervingly possible. That ended with the Budget Control Act, which the Congressional Budget Office estimated would reduce the deficit by $2.1 trillion over a decade through massive, obligatory spending cuts. Congress later undid some of the cuts included in the BCA, but Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget and a leading budget analyst in DC, tells me that total wound up being around $1.3 trillion. All of those savings were achieved not through raising taxes, but reducing spending. And almost all that reduced spending came from a relatively narrow slice of the federal budget, known as “discretionary spending.”

Large programs like Social Security and Medicaid were excluded entirely, and Medicare only saw modest cuts. But defense spending, federal support for K-12 schools, rental assistance vouchers, environmental protection, and various research and development programs all suffered.

The dynamics that led the Budget Control Act of 2011 to take the form it did have not suddenly disappeared. They reflect longstanding political pressures on both parties in Congress that persist to this day, and could easily lead to a similar deal if the debt ceiling is not raised in the lame-duck period. The 2011 deal cut billions in funding to priorities like clean air and water, education, housing, and more. A 2023 deal could do the same, or worse.

The US federal government is an insurance company with an army

There’s an old saying in DC that the federal government is basically an insurance company with an army. That’s not exactly true, but it’s close. Defense spending, Social Security, Medicare, and Medicaid combined made up about 62 percent of the federal budget in 2019 (see this CBO infographic). During the pandemic, huge stimulus and unemployment payments pushed that percentage down, but in normal times about three out of every five federal dollars go to those programs. If you add in other “mandatory” programs like federal employee pensions and food stamps, and interest payments on old debt, the share grows to over 85 percent.

Outside of defense, which Republicans are loath to cut, Social Security, Medicare, and Medicaid are where the money is. More ideologically committed (see the Republican Study Committee, to which 156 members of Congress belong) and/or gaffe-prone (see Ron Johnson) Republicans tend to call for big cuts to these three. Some RSC members have explicitly demanded that a debt ceiling increase in 2023 be tied to reforms to these programs.

But those programs are also wildly popular, they’re the last things Democrats are likely to agree to cut, and they have a potent defender in Donald Trump, who repeatedly promised to protect them from cuts as president. That didn’t stop his administration from proposing budgets full of cuts to these programs, or from pushing for a health reform package that would gut Medicaid — but none of those policies actually passed, and the Republican in the White House being openly skeptical of entitlement cuts probably hurt their odds of passage.

Tellingly, Republican leaders spent 2022 running away from their past calls for entitlement cuts. Sen. Rick Scott (R-FL), who months earlier proposed sunsetting every federal law (including Social Security and Medicare) every five years, told CNN in October, “I don’t know one Republican” who wants to reduce Medicare or Social Security benefits, and that he would oppose raising the retirement age for either. (He has apparently not met any of the 156 House members of the Republican Study Committee.) But after the election, Scott told the Washington Post, “We’re not going to just keep raising the debt ceiling without structural reform.”

Likely incoming speaker McCarthy disputed the idea that he’d use the debt ceiling to force cuts to Social Security and Medicare, telling CNBC, “The debt ceiling needs to be raised, but I also know I’m going to strengthen Social Security, Medicare. I never brought them up.”

The making of the 2011 debt ceiling deal

None of these dynamics are new. During the 2011 debt ceiling fight, the Obama White House took a firm line against any deal that cut Social Security or Medicare without increasing taxes. For a brief time, House Speaker John Boehner seemed to be playing ball, agreeing to as much as $800 billion in revenue increases, but it soon became clear that he could not get his caucus to support major tax increases. Without the tax hikes, the Social Security and Medicare cuts that Obama was open to — like slowing cost-of-living adjustments for the former and raising the age for the latter to 67 — went off the table.

Ultimately, the two sides agreed to $917 billion in spending cuts, mostly by capping discretionary spending (both defense and non-defense), but for the other $1.2 trillion in deficit reduction, they punted negotiations to a congressional committee (colloquially called “the supercommittee”). If the supercommittee failed to put together a package slashing $1.2 trillion through tax hikes or spending cuts, indiscriminate spending cuts would ensue through forced decreases in the caps on defense and non-defense discretionary spending. Unless Congress passed spending bills with totals below these new, even lower caps, a “sequestration” process forcing across-the-board cuts to every affected program would ensue.

The supercommittee failed, shocking no one. The across-the-board cuts included as a backup were never meant to take effect. They were an enforcement mechanism meant to pressure Congress into making a deal, the equivalent of paying a guy from Craigslist to punch you if you don’t get your work done on deadline.

But Congress rarely gets its work done on deadline, so it got punched in the face. Which means, of course, Americans who relied on this spending got punched in the face. Because the deal took cuts to Social Security, Medicaid, and the beneficiary side of Medicare off the table, the punch was lighter than it could have been. (Medicare payments to providers were cut, though, which some studies have found reduces quality of care received.) Further, Congress agreed in another deal at the end of 2012 to delay the sequestration cuts for two months, so they began on March 1, 2013. But they took effect then, as planned.

The consequences of the 2013 sequestration

As I wrote at the time, the sequestration led to 7.7 percent across-the-board cuts to defense and 5.1 percent across-the-board cuts to domestic discretionary spending. Military operations funding fell by $17.1 billion, the National Institutes of Health by $1.6 billion, nuclear weapons security by $903 million, border security and immigration enforcement by a combined $890 million, and on and on.

Agency heads had little to no flexibility in distributing these cuts; every “program, project, and activity” had to be cut equally, and “activity” was defined to include things as small as a single buoy the government floated in the Chesapeake Bay. That buoy, somehow, had to be cut by 5 percent (in practice, that meant scraping 5 percent less bird poop off the buoy).

Center on Budget and Policy Priorities

These across-the-board cuts, though, only came because Congress approved spending bills totaling more than the caps they set for themselves (again, assuming the cuts wouldn’t actually take effect). After 2013, Congress was free to pass spending bills that did abide by the caps, after which no across-the-board cuts would ensue. It simply had to make decisions about what spending it wanted to prioritize, subject to those limits. It also could, and occasionally did, change the caps, as in the 2013 and 2015 budget deals, which raised both defense and non-defense spending caps in the short term, partially offsetting that with lower spending later on. The 2018 and 2019 budget deals under Trump increased the caps still further and barely included any offsets, driven largely by a Republican desire to restore defense spending.

Taking all these changes together, the Committee on a Responsible Federal Budget’s Goldwein told me, the Budget Control Act of 2011, the fruit of the debt ceiling crisis, resulted in $1.2 trillion or so in overall deficit reduction, less than the $2.1 trillion originally promised (due to the repeated deals which raised the budget caps) but still sizable. Overall spending was substantially lower from 2011 until the Covid-19 pandemic hit (and threw the federal budget into general chaos) than previously planned.

So, what did this all mean for actual users of government services? For some, the impact was temporary. Head Start, the pre-K program for low-income children, kicked 57,000 kids off its rolls when the sequestration hit. But the next year, funding was restored and stayed roughly on track for the rest of the decade. Some affected spending categories actually rose dramatically over this period, most notably health care for veterans, which members of Congress prioritized in appropriations bills.

Center on Budget and Policy Priorities

So what did suffer? The Center on Budget and Policy Priorities’ David Reich co-authored a category-by-category report and found that between 2010 and 2021, every single category of non-defense discretionary spending besides veterans’ programs saw declines after adjusting for inflation and population growth. Economic security, health care, and scientific research programs were close to stagnant, falling by 4 percent or less. But funding for environmental protection and parks fell by 15 percent; general government operations by 26 percent; education and job training by 14 percent; diplomacy and foreign aid by 19 percent; agriculture, energy, and commerce by 19 percent.

Housing vouchers through the Section 8 program could not keep up with rents; the Center estimated that between 2010 and 2017, voucher funding fell by 9 percent after adjusting for rent inflation. “We saw significant decreases in the number of families that were being served over that time,” Peggy Bailey, the Center’s vice president for housing and income security and a former senior adviser to HUD Secretary Marcia Fudge, told me.

A study from the American Association for the Advancement of Science found that aggregate research and development spending from the federal government was $200 billion lower due to the Budget Control Act; health research from the National Institutes of Health and the VA fell by over $7 billion a year relative to previous historical trends, while the National Science Foundation got almost $2 billion a year less.

That was bad news for people interacting with government programs. The two biggest social assistance agencies in the US are the Social Security Administration (which administers old-age and disability payments) and the Internal Revenue Service, which administers tax credits that are crucial for reducing poverty. Adjusted for inflation, funding for the agencies fell by 13 and 19 percent between 2010 and 2021, respectively.

The IRS lost a third of its enforcement staff, rendering it incapable of going after many high-income tax cheats. The Inflation Reduction Act included a historic infusion of funds to fix this problem, but McCarthy has said the very first bill a GOP House passes will be a measure to repeal those funds.

The federal government isn’t the main source of funding for K-12 schools, but what grants it does make fell by 11 percent from 2010 to 2021, adjusting for inflation.

Perhaps the single worst category of cuts that took effect — given what followed — were to programs related to pandemic preparedness and effectiveness. As Reich and Katie Windham note, the Centers for Disease Control and Prevention’s budget fell by 7 percent from 2010 and 2021, and its grants to state and local public health agencies fell by 20 percent. That almost certainly hampered America’s ability to anticipate and respond to pandemics like Covid-19, and almost certainly cost lives.

Some of these funding gaps were made up in 2020 and 2021 through the CARES Act and the American Rescue Plan. Those bills provided emergency rental assistance and supplemental funding to state governments that helped make up for years of declines in federal support for things like K-12 education. But those were emergency measures meant to assist states during an extraordinary historical moment. They didn’t guarantee adequate funding over the next decade.

What will a 2023 deal look like?

We do not know exactly how the new House majority will approach the debt ceiling. Maybe they’ll quietly approve increases and shrink away from a fight. Maybe Democrats will use the lame-duck session or a trillion-dollar coin to make the issue moot for good, or at least until 2025. Maybe Congress will suddenly decide that cutting Social Security and Medicare benefits while raising taxes on the middle class is a great idea.

Anything’s possible! But personally, I’m steeling myself for a repeat of the 2011 budget deal, precisely because the dynamics that led to it narrowly focusing on a small sliver of the budget are still there. Republicans are still vehemently opposed to tax increases, and Democrats are equally vehemently opposed to tax hikes affecting all but the richest 1 percent or so of Americans. Social Security and Medicare are still hot potatoes, and while other “mandatory” programs like food stamps are less popular, Democrats have historically held firm against any cuts to them.

That leaves discretionary programs, both defense and non-defense, covering everything from the FBI to medical research to our embassies abroad. Those programs took a severe battering during the 2010s under the Budget Control Act, and there’s every reason to expect them to take a battering in whatever deal emerges in 2023. The consequences are not straightforward to predict, but could weaken important parts of the government that have already been underfunded for a decade.