As Biden, McCarthy clash on US debt, what are differences?

They’re not quibbling about minor points. There are stark differences in how President Joe Biden and House Speaker Kevin McCarthy want to shore up the government’s finances.

The Democratic president primarily wants higher taxes on the wealthy to lower deficits; the GOP congressional leader favors sharp spending cuts.

Staring down a fast-approaching deadline to raise the U.S. government’s debt limit, they have to find some version of common ground as they jostle in public over the nation’s $31.4 trillion in red ink. But how can they reconcile their competing visions while also achieving the levels of deficit reduction both say they want?

PLAYING CHICKEN

McCarthy wants House Republicans to vote this week on a proposal that would shave an estimated $4.8 trillion off deficits, mostly through spending caps on “discretionary spending.”

By having the House pass his plan, McCarthy hopes to goad Biden into negotiations. Biden is insisting on a “clean” increase in the government’s legal borrowing authority. No negotiations on that. But what Biden has offered Republicans is the chance to negotiate about the yearly budget — provided the speaker produces a detailed spending outline.

White House press secretary Karine Jean-Pierre laid out the administration’s thinking at Tuesday’s news briefing.

“We’re not going to negotiate on something that they should be doing, which is avoiding default,” Jean-Pierre said. “But when it comes to the budget, when it comes to how they want to see spending cuts for the American people, we will have that discussion.”

Which side will give ground? Will both have to?

On Monday, McCarthy’s spokesman, Chad Gilmartin, sent out an email listing quotes from 11 Democratic lawmakers who have suggested talks should start.

“Biden must decide between recklessness or responsibility,” Gilmartin wrote.

Kent Smetters, faculty director of the Penn Wharton Budget Model, said the fight over government finances amounts to a game of chicken.

“We know games of chicken tend to lead to extremism,” he warned.

WHAT ARE THE OPPOSING PLANS?

This is the simple summary of what McCarthy has proposed: In exchange for voting to raise the government’s borrowing authority by $1.5 trillion or however much is needed until March 2024, discretionary spending would fall back to 2022 levels next year. There would be a 1% cap on future spending increases; tax breaks to address climate change would be gutted; student debt forgiveness and more generous repayment plans would be canceled, and there would be work requirements for people who get government aid.

That list could change as the legislation gets discussed in the House and McCarthy tries to line up 218 votes for passage. The White House opposes the current iteration, saying it would cause a 22% cut in spending for programs that would hurt schoolchildren, poor families and veterans.

Biden offered his own budget proposal in March that would cut deficits by about $2.9 trillion over a decade. It would raise $4.7 trillion from higher taxes on corporations and wealthy households, with an additional $800 billion in savings from changes to programs. Accompanying that would be $2.6 trillion worth of new spending. There would be a $35-a-month cap on insulin prices and restoration of the expanded child tax credit that would give families as much as $3,600 per child, compared with the current $2,000.

WHAT WOULD THE PLANS DO TO THE ECONOMY?

The Congressional Budget Office on Tuesday said that McCarthy’s plan would cut deficits by $4.8 trillion over 10 years, but its estimates do not look at the possible impacts on the economy. Private estimates are starting to be released that indicate the U.S. economy would be hurt by the GOP’s proposed spending cuts next year.

Moody’s Analytics on Monday released estimates showing there would by 780,000 fewer jobs at the end of 2024 if the House GOP plan became law. Expected growth in the overall economy would slow to 1.6% from 2.25%.

Mark Zandi, chief economist at Moody’s Analytics, said his company did not analyze Biden’s budget because he views “the clean debt limit scenario as consistent with his policies, particularly in the next 2-3 years.”

By way of comparison, the White House estimates growth next year of 2.1% if Biden’s budget plan becomes law. The conservative Tax Foundation in its analysis says that Biden’s tax hikes would eliminate 335,000 jobs in the long run, an estimate based on multiple years. The Tax Foundation’s model says that the higher corporate tax rates in Biden’s plan would be the biggest long-term drag on growth.

Why does Moody’s Analytics think the Republican cuts hurt the economy? The spending caps would likely cause programs that aid the poor to be slashed. Lower-income households tend to “quickly spend any support they receive from the government,” which then circulates through the economy and supports growth and consumer activity, according to the Moody’s estimates.

WOULD EITHER PLAN FIX THE DEBT?

Not really.

The problem is that both Biden and McCarthy have declared Social Security and Medicare off limits. Those two programs, along with Medicaid, are what will likely keep driving up government spending and the debt.

“We still have a growing debt path because discretionary spending is growing smaller over time with mandatory spending becoming bigger,” said Smetters, faculty director of the Penn Wharton Budget Model. “Even if we phased out all discretionary spending, Social Security, Medicare and Medicaid are driving the debt going forward.”

Spending on these three programs is equal to about 11% of the total economy right now, a figure that will grow to 15.4% by 2050, according to the Penn Wharton Budget Model. The national debt would more than double, largely as a result of these expenditures outstripping tax revenues.

The savings claimed by McCarthy could also be significantly less than advertised, if Republicans are in a position in 2025 to renew the expiring tax cuts from the 2017 overhaul of the tax code that former President Donald Trump signed into law. Continuing all those tax cuts — some of which Biden also wants to preserve — would add about $2.7 trillion to deficits over 10 years.

IS THERE COMMON GROUND?

Both Biden and McCarthy say they don’t want to default, though they’ve been willing to blame each other for the possibility that the U.S. government might not be able to pay all of its bills at some point this summer. Both lawmakers have expressed interest in streamlining permitting for energy production and infrastructure.

IS IT TIME TO GET WORRIED?

If you follow the financial markets, there is one revealing sign that investors are starting to get concerned. There has been an increase in the cost of buying insurance in the event that Treasury fails to pay its debts as scheduled.

Known as “credit default swaps,” this insurance on six-month and one-year U.S. Treasury notes already costs more than it did in 2011, the last major debt ceiling showdown, according to data from the Intercontinental Exchange. Still, this is a lightly traded financial instrument, and there are not signs yet that fears have seeped into the stock market.