What does this debt limit “deal” really mean?

June 5 was going to be the day the Treasury Department would run out of money to pay all of the government’s obligations. On the surface, it seemed like our elected officials acted quickly the week beforehand to deal with the problem, passing legislation to avoid an economic disaster that would have put our country on an even more perilous debt trajectory as debt interest rates skyrocketed. However, a closer read of recent history suggests that we may only be out of the frying pan and into the fire.

Just days before the supposed deadline, the federal government enacted an agreement to suspend the debt limit until 2025 (allowing the federal government to continue to spend beyond its incoming revenue) in exchange for rather minor reforms: modest budget caps for the next two years, small transfers from unpopular programs to offset cuts to Democrat’s preferred social programs, some COVID funding clawbacks, marginal expansions of work requirements on welfare, assurance that Biden won’t extend the expensive student loan repayment freeze past August (the half trillion dollar forgiveness program is still operational, but facing challenges at the Supreme Court), some tweaks to the energy infrastructure approval process, approval for West Virginia’s Mountain Valley natural gas pipeline, a toothless budgeting rule for expensive rules from the administrative state, and a measure that would automatically reduce government funding levels to 99 percent if the government could not agree on new funding bills. Though it is designed to force accountability in the appropriations process, some are worried that this automatic reduction mechanism will backfire and result in even greater spending as lawmakers panic in the face of automatic cuts.

Perhaps the greatest success of the Republican-controlled House of Representatives was forcing President Joe Biden to do what he foolishly insisted he would never do—negotiate. The whole point of the debt limit is to provide these kinds of moments of negotiation and deliberation over the country’s economic trajectory.

And yet, it’s not clear that Biden really gave that much away compared to what he got. Current estimates are that the White House convinced Congress to rubber-stamp a staggering four trillion dollar debt limit increase, though the reality is that there is no actual cap whatsoever on how much debt the federal government can take on between now and 2025. In an emergency, it is not unrealistic to imagine that Congress might blow through the budget caps it set and pile on more debt as if nothing was ever negotiated this year. While it is possible that the Biden offer is the best that Congress could accomplish given its current hand, we will always be left wondering what might have happened if Biden came to the negotiating table sooner or Republicans held out a little bit longer.

Many Republicans shied away from hardball because the approaching deadline brought with it an increasing likelihood that the United States would default on obligations or come too close to that possibility and see its rating downgraded anyway. After all, the latter happened in 2011. But playing chicken with the debt ceiling wasn’t even the first reason given by Standard & Poor’s (S&P), the credit rating agency that made the decision.

As S&P made clear then (though posterity seems to have forgotten): “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.” In other words, even though at the time of the downgrade, the federal government had already increased the debt limit, avoiding default, S&P downgraded the United States anyway because it had done nothing significant to address the debt crisis, just the smaller debt limit crisis.

In the lead-up to the declared deadline in 2023, one of the other Big Three credit rating agencies, Fitch, placed the United States on “rating watch negative,” naming many of the same debt trajectory concerns from 2011. Their release specifically criticizes the “failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden,” citing concerns about an underperforming economy and a historically high debt-GDP ratio.

It’s not enough to avoid the debt limit crisis. If the United States is going to escape economic catastrophe, it also needs to address the more important debt crisis. The 2023 deal does almost nothing to get the fiscal ship of state back in order. With debt like this, we are losing our ability to pay for the things that are essential to our national survival. We simply cannot have a country if we can’t fund our government.