By Jack Rasmus
Over the weekend, US House of Representatives speaker McCarthy and president Biden announced a tentative agreement on raising the debt ceiling. The deal—almost certain to pass Congress later this week—represents a typical Neoliberal fiscal policy deal.
Ever since neoliberal capitalism policies were introduced under president Carter in the late 1970s, and subsequently expanded dramatically under Reagan, Neoliberal fiscal policy has been characterized by accelerating Pentagon and war spending; simultaneous cutting of business-investor taxes; acceptance of consequent escalating budget deficits—and in turn US national debt levels; and the use deficit/debt to cap and reduce social program spending.
That Neoliberal fiscal policy mix of tax-spending-deficit policies mix clearly defines the recent McCarthy-Biden deal.
That Neoliberal fiscal policy mix of tax-spending-deficit policies mix clearly defines the recent McCarthy-Biden deal.
In the roughly two-year agreement, extending from the present to the end of February 2025, Pentagon spending will rise by 11% in the 2024 fiscal year which begins October 1, 2023. That 11% is estimated at $885 billion. A further increase in Pentagon spending will certainly take place the following fiscal year, commencing October 1, 2024, but the deal doesn’t say how much further rise in Pentagon spending is projected for that second year.
Pentagon vs. Defense Spending
It’s important to understand that the $885 billion in Pentagon spending is not exactly the same as US defense spending. Around $200 billion more in defense related spending occurs in US government departments in addition to the Pentagon.
For example: all the oil costs for the US military (the largest single consumer of fossil fuels in the world) comes out of the Energy Department. budget. Veterans benefits spending for past wars comes out of that department. Then there’s CIA’s spending on mercenary and its own field forces. So too for the State Department which finances similar covert military activities. Part of Homeland Security costs can be considered defense. And then there’s the so-called ‘black budget’ of secret US military weapons development that never even gets reported in publications of the US budget or by the US press. That’s been estimated around $75 billion a year. So actual, total annual US Defense spending—in contrast to Pentagon spending alone—is probably around $1.1 trillion a year.
Taxation & the National Debt
Economists estimate that tax revenues, or lack thereof, are responsible for about 60% of deficits and therefore the debt (which is just the accumulation of annual deficits). Tax revenues are reduced as result of tax cutting and/or reduced revenues as a result of slow economic growth when recessions occur—or when post-recession recoveries are weak.
The McCarthy-Biden deal prohibits raising business-investor taxes the next two years. Businesses and investors will thus be assured that their Trump era $4.5 trillion in tax cuts, December 2018-28, will continue. Estimates of the cost of the lost tax revenues caused by the 2018 Trump tax cuts, from 2023 through 2028, will be about $2.7 trillion thus contributing significantly to a further rise in the national debt by 2025.
A Short History of US Debt Trajectory 1980-2025
That the McCarthy-Biden deal has nothing to do with the national debt is obvious from the fact two more years of US deficits, and thus the national debt, are expected to continue to rise by $4 trillion—up from the current $31.4 trillion level. US government debt levels will therefore exceed $35 trillion by the time the next ‘debt ceiling negotiations’ occur. However, neoliberal capitalism is not concerned about rising debt levels per se. (Which means it is not at all traditional ‘liberalism’ in the historical sense of that term).
During the era of US neoliberal capitalism, which extends from 1978-79 to the present, US national debt has accelerated. When Reagan took office in 1981 it was less than $1 trillion. By 2001 it had risen to approximately $6 trillion. Starting 2001 the national debt accelerated sharply under George W. Bush, as Mideast war spending escalated and Bush era taxes were cut by $3.8 trillion simultaneously.
The US national debt further accelerated under Obama. When the latter assumed office in January 2009, the national debt was around $10 trillion. Obama then cut taxes and introduced spending totaling around $787 billion in his 2009 fiscal stimulus program. He subsequently then extended the Bush tax cuts another two years in December 2010, to 2012, when they were to expire in December 2010 after their initial 10 year period. That two-year extension cost another $803 billion. Then, outdoing himself, starting in 2013 Obama once again extended the Bush era tax cuts, permanently this time, at an estimated additional lost tax revenue cost of $5 trillion.
Obama thus cut taxes, composed about 80% of cuts for businesses and investors, more than $6 trillion. The tax cuts, the slow economic recovery from the great recession that also reduced US tax revenues, and the $787 billion (plus another $50 billion or so for ‘cash for clunkers autos’ and first time home buyers assistance) spending in his 2009-10 fiscal stimulus programs, resulted in the US debt rising to about $18 trillion when Obama left office in January 2017.
Then came Trump’s $4.5 trillion additional tax cuts passed in December 2017, followed by year one (2020) of the Covid economic shutdowns and spending all of which pushed the national debt level to about $22 trillion when Trump left office.
The collapse of the economy in 2020-21 driving down tax revenues, the further tax cuts in 2020 through 2022, the continuing of Trump’s 2018 tax cuts, the bailing out of businesses in the various Covid economic stimulus bills of 2020-21, the roughly $3 trillion spent on households’ assistance during Covid, the mere 1% GDP growth in 2022 (December 2021 to December 2022) that depressed tax revenues, the funding of the Ukraine war ($200 billion in 2022-23), and Biden’s roughly $1.65 trillion spending on three business investment stimulus bills of 2022 (Infrastructure, Semiconductor & Manufacturing subsidy, and the energy industry misnamed ‘Inflation Reduction Acts), and the steady rise in interest on the debt from less than $300 billion in 2019 to estimated $600 billion in 2023—all converged to accelerate the national debt to its $31.4 trillion current level.
We can expect another even more contentious debt ceiling crisis déjà vu in about two years.
It is perhaps not coincidental that the tentative debt ceiling agreement (the 79ths in US history by the way) extends only to 2025. That’s when the $4.5 trillion Trump tax cuts of 2018 come up for a vote in Congress on whether to make them permanent instead of expiring in 2028. So we can expect another even more contentious debt ceiling crisis déjà vu in about two years.
The McCarthy-Biden Social Program Spending Cuts
As with all neoliberal fiscal policy measures, the deal’s 11%+ Pentagon-Defense spending increase—combined with the absence of any tax hikes in the deal—has meant cuts to social program spending.
The main cut in discretionary social programs is the agreement to freeze all 2024 fiscal year spending at 2023 levels, and in 2025 to allow a mere 1% increase in such spending.
On Monday, May 30 House Speaker McCarthy publicly bragged, when measured in dollar terms, the deal results in $2.1 trillion in social program spending reduction. Biden says it’s ‘only’ $1 trillion. The New York Times estimates the two-year deal amounts to a cut in total discretionary spending—defense and non-defense—is 18%. However, since the Pentagon gets a 11% (plus more in 2025) increase, the net discretionary non-defense spending cuts are likely in the 20%-25% range.
Total available funds for discretionary social program spending—like education, transport, health, etc.—in the 2024 fiscal year is capped at $704 billion. But it’s really only $583 billion after $121 billion spending on veterans is taken out of the $704 billion total non-defense. The US considers vet spending as spending on social programs but it should be considered Defense spending.
The $583 billion for discretionary non-defense spending contrasts with the $886 billion for the Pentagon alone. Or $1 trillion for Pentagon and Vets. (And still more for other ‘defense’ costs distributed in other departments of the US government).
In other terms of the deal involving discretionary social program/non-defense spending:
- An estimated $30 billion in unspent Covid funds is cut. That’s another de facto $30 billion taken out of the economy.
- In environment policy, fossil fuel companies are now able to expedite reviews and obtain licenses quicker. And West Virginia Senator, Joe Manchin, gets billions in funding for his gas pipeline in his state.
- Republicans get an initial ‘bite of the apple’, as they say, in work requirements for single adults as a precondition for receiving food stamp benefits. The prior age rule for work requirement was raised from 50 to 54, with exemptions for veterans and the disabled. McCarthy did not get his additional work requirement rule for recipients of Medicaid.
- Biden gets to keep his $60 of his $80 billion to hire IRS agents. $20B is redirected to other spending. That means only 7200 more agents will be hired during the deal’s two years. The research arm of Congress, the Congressional Budget Office, has estimated if more agents were not hired then continuing tax avoidance and tax fraud would reduce tax revenues by $204 billion. (The CBO has also estimated that failure to raise taxes by ending Trump’s 2018-28 $4.5T tax cuts for business and investors results in a loss of $2.7 trillion in US government tax revenues).
- Biden compromised with McCarthy as well on the subject of student loan forgiveness. In addition to preventing any student loan forgiveness, McCarthy wanted immediate restoration of student loan payments plus retroactive back interest added to loans during the Covid period moratorium. In exchange for McCarthy dropping these draconian proposals, Biden agreed to resume student loan payments this August 2023.
Deficits and Debt Continue
Previously it was noted that Neoliberal fiscal policy is fundamentally unconcerned with annual deficits and a rising national debt. That’s no less true in the current debt ceiling deal.
McCarthy may brag that the agreement amounts to a $2.1 trillion reduction in non-defense spending over two years due to the freeze and 1% caps. But the truth is that the annual deficits will continue to rise in the $1.5T to $2T per year range. Independent estimates are the US debt will continue to rise by $4 trillion by the end of the deal. That’s more than $35 trillion by the end of fiscal year 2025. Interest on the debt this year will rise to approximately $600 billion, up from less than $300 billion in 2019, and even higher by 2025.
The causes are obvious:
- No rescinding of Trump’s 2018 tax cuts (which the CBO estimates will add $2.7 trillion to the debt).
- Continued below historic average US GDP growth which reduces tax revenues as well.
- Third, an ever-rising Pentagon and Defense spending trajectory, as the US funds the Ukraine war while preparing for another, even bigger one in west Asia with China before the end of the decade.
Debt Ceiling As Political Theater
The US has raised the debt ceiling 78 times before the current negotiation. This writer has argued the recent negotiations are just a ‘debt ceiling dance’ and predicted it too will be raised, a 79th time. And it has.
It’s virtually certain the deal will be approved by both the US House and Senate and signed by Biden by next weekend at the latest. McCarthy’s margin in the House was a mere 217-215 vote in support of his initial proposals. By agreeing to a two-year non-defense spending freeze and 1% caps—or in other words a $2.1 trillion and 18% discretionary spending cut—Biden clearly gave in far more than he needed to. One would have to conclude McCarthy and the Republicans came out ahead in the negotiations.
The House will vote on the deal on Wednesday, June 1, 2023 and will likely pass it. The Senate will take a little longer but will pass it as well by the weekend. Biden will sign by the weekend. Thereafter, both sides will ‘spin’ the deal and exaggerate their claims. They’ll both hide behind a claim that the economic sky would have fallen in had they not agreed. A dubious claim at best.
Then the real negotiations will begin. For the political theater surrounding the debt ceiling negotiations was in fact an attempt to renegotiate the Biden 2024 budget that commences next October 1, 2023. McCarthy simply used the debt ceiling issue to cut programs early. And he’ll come back for a second ‘bite of the apple’ at the end of this summer.
And if Biden’s negotiating performance during the debt ceiling negotiations is any indicator, he’ll get even more concessions from Biden.
About the Author
Jack Rasmus is author of the book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020, and the previous‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.