Earlier this year, U.S Treasury Secretary Janet Yellen warned lawmakers the United States could default on its debt if the debt ceiling isn’t raised by early June.
With June approaching, lawmakers have started negotiations for a debt ceiling raise. Arkansas’ congressional delegation has been supportive of their party’s approach to the debt ceiling.
U.S Rep. Steve Womack, Republican of Arkansas’ 3rd Congressional District, appeared on Arkansas Week and said the debt ceiling needs to be raised. He added a default is off the table. Womack said he supports his party leveraging the debt ceiling to pressure the Biden administration to cut spending.
“We’re going to demand that in order not to be having to do this year-over-year that we start the process of trimming the size and scope of government,” he said. “Then doing things we think are smart policy matters that have had bipartisan support in the past like work requirements for able-bodied adults without dependents that are getting government benefits.”
The Biden Administration has said it is irresponsible for Republicans to attach spending cuts to a debt ceiling raise. Womack said this approach is the only way to get the White House to cut spending.
“Those discussions [on spending cuts] never happen. If they get a clean debt ceiling then there’s no leverage anymore,” he said.
In an interview with CNBC News, U.S Rep. French Hill, Republican of Arkansas’ 2nd Congressional District, said it wasn’t unusual for political parties to use the debt ceiling to negotiate a budget.
“In 2019, Speaker Pelosi wanted to have some more blowout in spending, over $300 billion if my memory is right. That was agreed to by [U.S Treasury] Secretary Steve Mnuchin for President [Donald] Trump and that facilitated the Democrats for moving the debt ceiling,” he said. “Here, the Republicans are in charge and we are wanting to do the opposite.”
Jeremy Horpedahl, associate professor of economics at the University of Central Arkansas, said the negotiations surrounding the debt ceiling are unprecedented.
“This is not something we’ve gone through before. People might remember government shutdowns over budgets,” he said in an interview with Arkansas Week. “This is something totally different. Congress has already passed a budget now. We’re running into a problem where the Treasury may not be able to pay what Congress has already authorized because we’ve hit the debt ceiling.”
Horpedahl added that debt ceiling negotiations aren’t helpful and that most economists don’t believe the debt ceiling can be used to lower long term debt.
Like Womack, Hill agrees spending cuts need to be tied to a debt ceiling raise. In a press release, Hill said he supports the recently passed Limit, Save, Grow Act, which was passed by House Republicans.
“In our history, we have negotiated spending cut deals and spending reforms eleven times by using the debt ceiling as a constructive catalyst to action – the passage of this legislation is a strong start. I, alongside my Republican colleagues, look forward to President Biden coming to the table and negotiating with Speaker McCarthy on controlling spending and a responsible approach to the debt ceiling,” Hill said.
According to the Committee for a Responsible Budget, the bill would suspend the debt ceiling until March 2024 or until the debt increases by $1.5 trillion. The bill, if passed, is projected to cut federal spending by $4.8 trillion dollars. The bill includes repealing energy tax credits and spending, preventing student debt cancellation and rescinding unused COVID-19 relief funds.
Both of Arkansas’ U.S Senators John Boozman and Tom Cotton have signed onto a letter from Republican Senators to the White House expressing support for House Republicans' approach to the debt ceiling.
“Our economy is in free fall due to unsustainable fiscal policies. This trajectory must be addressed with fiscal reforms. Moreover, recent Treasury projections have reinforced the urgency of addressing the debt ceiling. The House has taken a responsible first step in coming to the table with their proposals. It is imperative that the president now do the same,” the letter said.
Effects of a default
While speaking to Talk Business & Politics about the state of the economy, Mervin Jebaraj, economist at the University of Arkansas Walton College, said Congress raising the debt ceiling toward the end of the deadline will be similar to the last time this took place.
“I think what we’ve seen the last time this happened is an increase in borrowing costs. So borrowing costs for the federal government have already gone up last year. That’s going to increase even more, which means that we’re going to be paying more as taxpayers because of running up against this debt ceiling increase,” he said.
He said those negotiations also lead to declines in the stock market and consumer confidence.
Horpedahl echoed Jebaraj and said these negotiations can be harmful for economic growth.
Jebaraj also said if the U.S were to default on its credit it would have to look for spending cuts to pay its debt.
“What they’re going to do is cut payments to federal employees, who will continue to work but without a check. Social Security and Medicare beneficiaries are going to see reduced payments to be able to meet debt obligations,” he said. “I think that is where we run into trouble, when we start pulling back on the amount of money Social Security or Medicare recipients are able to utilize.”
Horpedahl said the effects of a default would also trickle down to the state level. He said local governments are starting to rely more on federal funding than in year’s past.
“We have a large number of people in this state [Arkansas], a larger number than most other states using Medicare, farm subsidies and things like that. All these payments would be stopped or cut by 80%,” he said.
Last week, President Joe Biden met with Speaker of the House Kevin McCarthy, R-California, to discuss raising the debt ceiling.
