Thank you for joining us for this edition of the Modlin Global Analysis podcast. I'm glad to be joined by Dan Modlin for a series of questions. We're going to have this week where we normally focus on international affairs, but this week we're going to focus on the debt conversation that we see going on in Washington. So Dan, you had some questions and thoughts on that?
Dan
Yes, Kevin, there's obviously been a lot of partisan bakery from both. Slides about the negotiations that lead to this debt limit question, and I think it might be helpful if we step aside from the partisan discussion of this and just get down to the basics, talk a little bit about how this got started, what were the factors that put us in this situation with this debt limit crisis?
Kevin
That's a great question. First, the federal government approves three types of spending type issue related matters, so one has to do with the total spending that occurs through a fiscal year as you're what we call appropriations bills, then you also have the taxes that are occasionally approved by Congress that go on until an endpoint. And then you have the conversation around a debt limit, and these questions all converge in different time frames, but basically, your debt hits at a moment where your revenues are not meeting up with the spending and particularly in environments as we've seen. In recent years, with increased obligations for spending for entitlement programs that you have this wall and needing to address the debt.
Dan
Now you touched on this a bit, but maybe we could expand a little bit more and help us understand why leaders don't have a better idea of when the debt limit is going to be reached.
Kevin
So a lot of this has to do with the fact that while we have an idea of the total revenue that we will bring in year over year as a federal government and the idea of the total spend. At any given day, any given week, and month, it has variations to it. So we have an idea in the total, but month over month there's variation, and that's not unlike what we may expect with the weather. We don't know when it's going to rain, but we have a general idea of how much rain we will get each year. So because of that, we don't know when the limit will always be hit, but we have a general idea of when it will come about.
Dan
Now, one of the questions I think a lot of people have during these discussions is why it seems that leaders wait until the last minute frequently to resolve fiscal situations in Washington. You have quite a bit of experience working on Capitol Hill yourself. Help us understand that. Why is it that people can't sit down and get these things worked out in advance?
Kevin
Even though the specific date is uncertain, sometimes on when the debt limit may be met. The general timeline and when it's anticipated is understood by all sides and in Congress. They are not ignorant about timelines or when these develop, it has to do with what the expectation of what leverage they can get from certain time frames or when addressing certain. Questions and the general anticipation was that House Republicans were not benefiting from a prolonged standoff on this question that over time they would lose leverage in negotiating with time and the Senate side thought that they had more leverage over time and. So the anticipation was, is that these timelines would feed into that. Now what contributed also to this assessment was the expectation that House Republicans would have difficulty getting a measure approved and through the Chamber and they didn't expect that would happen. So both the expectations on where leverage was, but also the feasibility of a measure being passed or kind of merged together and perhaps conflated in some estimates. So what we're seeing now is now that House Republicans passed their measure and this has brought about a more robust debate among proponents of reducing some spending programs and those that are running more of what's called a clean debt limit increase. And I think it'd be interesting to explore the component parts of this. Those there's some proponents that want to have what's called a clean increase, which would be just increasing the debt limit to a certain time period. And then there are others that want to have certain reform policies within it. I think it's very unlikely that either side will get all of what they want, but actually some type of a compromise maybe developing throughout all of this, and one of the big pieces is that no side wants to continue deliberating over this very long, especially into next year, and this provides A rationale for both sides to reach some type of an agreement.
Dan
We've been living through a period of of inflation here in the last 18 months or so. How has that contributed to the debt crisis and also to the need to resolve it?
Kevin
So inflation both affects the amount of revenue that comes in. So theoretically you could have more revenue come in, but also you have more that goes out and your your set program since probably assumed that just because there's more expenditures then there is revenue that the inflation is also going to have more of an adverse effect. It also has an adverse effect because it has more debt that you need to be paying off and it makes it more difficult to do that. So that inflation rate is definitely not beneficial on the negotiations. On that level, but it also makes the overall deliberation more difficult because in a situation where you have high inflation, you're actually going to have a societal pushback from addressing programs that they would maybe reduce deficits. While at the same time you would have more reasons and more pressure on the budget to actually address those, so inflation only makes these issues a lot harder, but it could be argued that inflation is one of the reasons why this is hard to begin with, so not addressing it is also really problematic.
Dan
Now if we can, let's look at this from the perspective of the average American citizen. Why should they be concerned about this issue?
Kevin
Anytime Washington's talking about spending, I think the general public would benefit from paying attention to that. In fact, I think issues around spending are ones that don't always generate as much attention as hot button issues, but a lot of times hot button issues don't go anywhere in Congress, but spending questions frequently do in some form, some type of compromise. So I think that those are often less noticed, but I think they are usually very consequential. The debt ceiling specifically is important because if Congress does not address this, there's wild differences in what the effects could be. But I think overall the anticipation would be that the US would be less committed to paying down its debts and that this would contribute to higher interest rates overall. So this would ripple throughout the economy, because the basis of our overall interest rates. So what I pay on credit card or my mortgage is in reference to the overall national deficit numbers as well as. The ability to pay these things, and again, there's rich debate about that, but I think we could anticipate that interest rates would increase and that there would be doubts around that. So we'd probably also see a revision in our debt ratings.
Dan
In closing, if you might talk a little bit about lessons that maybe. Again, that average American citizen might learn from this what? These kinds of issues do come up over the years. What can we take from this experience maybe to help be better informed the next time this comes around?
Kevin
I think the public always benefits from again paying attention to the status of tax bills, spending bills and the occasional debt limit increase and spending less time watching cable news and things like that while following the financial news. And the goings on with these, because these have real kitchen table ramifications. So if i were to extrapolate and make an assessment of what this looks like going forward, I actually think that there is room for compromise between the Republicans and Democrats. Even though there are rhetorical differences, there are many components of this compromise that are actually pretty palatable to both sides. For example, we’re seeing funding from emergency COVID end spending and using that to pay down the deficit. That doesn't have a huge effect, but it is very popular on both sides. There's also discussion about changing permitting policy that would allow for certain energy projects to go forward more quickly. What I think is the big question right now is going back to this timeline that both sides want to not have to deal with the debt increase discussion next year. What the trade off will be for that. So if if the White House wants that to be addressed in 2025 then what will the formula look like for the budget freeze or for incremental increases year over year? I think as we're recording this, that's where the big standoff point is. I think that is the leverage points for each side talking and everything. So I I anticipate that there will be a 5 to 10 year budget window that there will be some type of a reduction in spending. Perhaps it will be a one year. Increase probably the big debate right now is what budget year will be the reference point. They will extrapolate from there, but they're going to be talking about big budget numbers and everything, but that will be the big puzzle piece, I think, going into this conversation and what the big stand-off point is. Whereas other pieces are going to be easier to resolve, but this is also resolvable.
Dan
It's a very complicated but important issue, and Kevin, thank you very much for taking a few minutes to kind of put this into terms that I think maybe a lot of us who don't follow this on a daily basis have a little better understanding of what's going on with the debt limit crisis.
Kevin
I enjoyed talking as always.
Debt Limit Background