The bill is designed to cause a shocking upward redistribution of income. It includes draconian spending cuts—mostly to health care and food assistance for children and families—in order to give massive tax cuts to the wealthiest households. Because these cuts to health care and food assistance are so broad and deep, and because the tax cuts for anybody who is not already rich are so paltry, the bill will cause the bottom 40% of households to actually lose income on average. This group includes roughly 125 million people, and for a family of three it will include households with incomes up to $85,000. Meanwhile, households in the top 0.1% (those making over $3.3 million per year) will gain over $100,000 annually under this bill.

The spending cuts will also help finance the administration’s dream of an authoritarian-style immigration enforcement regime, providing funding at staggering levels to expand internment camps and surveillance across the country. This enforcement, of course, won’t help workers or create more jobs—on the contrary, it will cause massive job losses for both immigrants and U.S.-born workers.

Because the bill structures its painful cuts on cynical political timelines in an effort to avoid accountability, the suffering will unfold steadily over the next decade. But just because the pain will be strategically doled out over a longer timeline does not make it any less real or urgent. People will die. Children will lose access to food, and families will lose access to health care. Hospitals will be forced to downsize and close, particularly in rural areas. This will cause huge disruptions to local economies as the spillover effects from the loss of health care jobs will trigger significant job losses outside of health care.

The bill’s Medicaid cuts will hit the hardest in precisely those areas that can weather it the least, given that the counties with the highest share of people on Medicaid are also the counties with the highest unemployment rates. But the GOP has decided that it doesn’t matter if kids go hungry, parents can’t afford the medicine they need, towns can’t properly fund public schools, or jobs are wiped out in struggling rural counties—as long as the wealthiest Americans get a big, beautiful tax break.

And, those tax breaks are such massive giveaways to the rich that they will increase the deficit by close to $4 trillion, even with the draconian cuts for the most vulnerable. It’s worth noting that the GOP is desperately trying to hide that fact. They have taken the extraordinary step of coming up with a new and utterly bogus baseline against which to measure the cost of the bill. Their gimmicky methodology “finds” that the bill will reduce deficits by about $500 billion. Through this sleight of hand, Republicans are shamelessly lying to the public about the cost of the bill in order to make it sound less grotesque and damaging than it actually is.

If this bill becomes law, there will be a protracted period of economic pain that takes years to play out. By sharply raising deficits at a time when inflation and interest rates are already too high, the bill will gradually suppress productivity-boosting private investment—including in clean energy and much-needed housing. This crowding out of investment will be on top of the expanded scope of deportations made possible in this bill, which will shrink the nation’s labor supply. It’s further compounded by the Trump administration’s historically broad and steep tariffs that will raise prices and disrupt supply chains, along with deep cuts to crucial federal workforces that are key complements to private-sector growth.

In short, this bill will be another key contributor to weaker economic growth over the next decade, making us and our children reliably poorer for no reason other than to write larger tax cut checks to the richest people in the country. This bill is one of the most destructive economic proposals we’ve seen in the U.S. in generations.

The legislation is mostly a stunning exercise in the upward redistribution of income, consisting of huge tax cuts mostly for the rich and steep spending cuts mostly for health care and nutrition assistance programs used by vulnerable families. But because the tax cuts boosting incomes for the rich are so large, even with the steep spending cuts, it is also an exercise in significantly increasing federal deficits and debt.

The Senate version of the bill would add nearly $4 trillion to the federal debt. This is a lot to be adding to the federal debt during a time when unemployment is low, inflation is above-target, and interest rates remain far higher than they’ve been for most of the last 15 years.

Further, if Republicans wanted to add $4 trillion to the national debt, they could write a check for $12,000 to every single adult and child in the United States. Yet, the bottom 40% of households in the U.S. won’t get any benefit at all from this bill, instead their incomes will outright fall. Why? Because all of that $4 trillion (and more) is needed to write enormous checks to the richest households. For example, the richest 130,000 households—who currently make more than $5 million per year—will receive almost $300,000 annually from the Republican budget bill.

So, what did the bill’s architects do with this inconvenient fact as they debated the measure in the Senate? They denied it. The method of denial is insisting on scoring the deficit effect of the bill on a “current policy” rather than a “current law” baseline. The mechanics of this (explained below) are a little wonky, but the result is that using a “current law” baseline—the standard in every previous federal budget throughout history—would correctly show that the budget bill would add $4 trillion to debt, whereas adopting a historically unprecedented “current policy” baseline would instead erroneously show that it added less than $500 billion.

The reason that there is a large difference between these two baselines stems from some gimmickry contained in the last big Trump tax cut—the Tax Cuts and Jobs Act (TCJA) of 2017. That bill’s main priority was a large and permanent tax cut for corporations. Today, corporations are paying hundreds of billions less in taxes because of it and will forever unless the law is changed. The TCJA also included tax cuts for individuals. Even these were tilted toward richer households, but there were some cuts up and down the income distribution.

However, the budget reconciliation rules dictate that only bills that do not increase the federal deficit in the last year of the 10-year budget window are allowed to pass with a 50-vote threshold. If the bill does increase deficits in that last year of the window, then a filibuster-proof 60 votes are needed. Because the TCJA’s individual tax cuts were secondary in importance to the tax cuts for corporations, the only way to have that bill not raise deficits in the last year of the budget window was to phase out the individual provisions in the last years of the budget window. These provisions sunset in 2025—absent congressional action, the current law says taxes will rise (mostly for the richest households).

But as of 2025, the TCJA’s individual provisions are in effect. So, if one assumed—law be damned—that the current policy of the TCJA was already going to be in place forever, then the cost of extending them relative to that current policy baseline is zero.

Using current policy as a baseline for assessing the effect of federal legislation on budget deficits is utterly irrational. One could use this reasoning to pass a bill instituting a universal basic income (UBI) of $12,000 per person in the United States, then pass another bill “extending” this UBI under a current policy baseline and declaring that there is no cost to it.

Lindsey Graham, Republican Chair of the Senate Budget Committee who was behind the push to use the current policy baseline, has gloated that “I’m the king of numbers as budget chairman—I’m Zeus.” But innumerate or dishonest politicians aren’t actually allowed to repeal the laws of math or economics. It is a fact that the Republican budget bill adds trillions to the national debt, period. And it does it for the simple purpose of making the rich richer and the poor poorer.

Let’s start with a quick recap about the debt ceiling and how it could cause a crisis. The U.S. Treasury draws on banking accounts at the Federal Reserve to fund federal governmental activities—remitting paychecks to federal government employees, sending Social Security checks to beneficiaries, reimbursing doctors for treating Medicare-covered patients, paying defense contractors and interest to bondholders, and so on. These accounts are fed on an ongoing basis by both tax revenues and the proceeds from selling bonds (debt). But because the United States has a statutorily imposed limit of how much outstanding debt is allowed, in theory the debt ceiling means that when it’s hit that Treasury would no longer be allowed to sell bonds and deposit these proceeds. In this scenario, accounts at the Federal Reserve would dwindle as they are now only fed by ongoing taxes, which are insufficient to cover all spending. It’s worth noting that this would be such a disastrous outcome that policymakers should feel obligated to engage in any possible workaround.

The U.S. is currently running a federal budget deficit of just over 6% of gross domestic product (GDP). If the debt ceiling was allowed to bind spending at levels that could be financed only by taxes, federal spending would have to be cut instantly by over $1.5 trillion (on an annualized basis—equal to roughly $130 billion per month). This $1.5 trillion is people’s incomes throughout the economy (whether they are federal employees or contractors or Social Security recipients or doctors and hospitals reimbursed by federal health programs). As incomes were slashed, these households would pull back on spending. Businesses losing customers would pull back investment. A vicious spiral leading to recession would begin with shocking speed.

Further, throughout U.S. economic history the downward spirals of economic crises were ended entirely because the federal government’s taxes and spending have acted as “automatic stabilizers”—taxes fell and spending rose as unemployment soared and the economy entered recession. But in a crisis driven by the debt ceiling, as taxes fall spending would have to fall further. Instead of acting as an automatic stabilizer, the federal government would act as a crisis amplifier.

This extremely grim set of totally predictable outcomes is why we’re so strident that the debt ceiling should be abolished. It serves no useful purpose and only provides a means through which extremists in Congress can do profound damage to working people. It also needs to be raised soon to avoid this kind of potential crisis.

But for now, another threat of political zealots and the crises they could cause looms even larger.

Elon Musk’s recent spate of illegal impoundments and firings can be seen as an attempt to mimic what a debt ceiling crisis would look like. Instead of spending being bound by a legal bar against issuing new debt, spending is currently being bound by the whims of a billionaire who bullied his way into accessing the Treasury accounts that distribute spending where it is legally obligated to go and shutting it down. But in terms of pushing the economy closer to crisis, how spending is suddenly constricted is less important than the result—sharp spending reductions can throttle economic activity and push the economy closer to recession and crisis. And because these spending reductions would only relent or reverse at the whim of Musk’s team, the automatic stabilizer function of the federal government could not be relied upon to kick into gear.

At this point, the illegal impoundments have not added up to a scale that would be comparable to a debt ceiling scenario, but, again, this is entirely because the Musk team has so far decided to not impound that much spending. If they decide that it would be fun to impound more and cause a crisis, what’s to stop them? Having one person in charge of whether or not the U.S. government actually spends the money that’s been legally obligated by Congress is not just a democratic disaster, it is absolutely a recipe for economic crisis.

To date, the real damage done by the illegal impoundments and firings is the valuable work of federal employees that is not being performed and the hollowing out of key state capacity. Our federal workforce was too small and too poorly paid even before the Trump administration allowed Musk’s teams to start arbitrarily hacking at it. Further constricting it will lead to a profoundly less functional government—and that matters a lot to people’s lives, cheap cynicism aside. But if the DOGE team isn’t stopped, their cuts won’t just sap the long-run productivity of the economy, it could easily cause a full-blown crisis in the near term.

Myth: “The economy is simply bad under the Biden administration”

In January 2020, the share of Americans saying that the U.S. economy was in “poor” shape was below 10%, but in recent months that share was above 40%. However, the unemployment rate in early 2020 and the middle of 2023 was essentially identical. The share of adults between the ages of 25 and 54 with a job was actually higher in the more recent period. Economic growth in the last quarter of 2019 was 2.6%, while it was 4.9% in the third quarter of 2023. The economy is growing (at least) as fast as it was pre-pandemic, and jobs are more plentiful.

This higher-pressure labor market has substantially eroded inequality in wages. Consider one metric of inequality—the ratio of the 90^th-percentile wage (the wage earned by the worker who has higher pay than 90% of the workforce) to the 10^th-percentile wage. Between 1980 and 2019, this ratio rose enormously by about 34%. But a full third of this 39-year increase has been erased in less than three years after 2019 because of rapid growth in pay for low-wage workers, which has not been a historical norm. If this inequality reduction sticks, it could well be the single most important development in the economy in decades.

Myth: “Inflation has crushed living standards and that was the Biden administration’s fault”

Inflation was too high for most of the past two years. But, average wages for most Americans are higher today than pre-pandemic even after accounting for inflation. So, jobs are both more plentiful and pay more than they did pre-pandemic.

As for blame, the case for the Biden administration causing inflation is extraordinarily weak. Inflation was global, with every single advanced economy in the world seeing a pronounced increase in inflation, even as these countries took widely divergent responses to the pandemic recession. As of today, the U.S. has substantially lower inflation and lower unemployment than nearly all of our advanced country peers.

Myth: “But prices won’t ever go back down”

That’s mostly right if we’re talking about an average index of all prices in the economy. But these broad indices never really do go down in absolute terms (at least not in modern times). And that’s fine—what matters is the relative growth of wages and prices, and so long as wage growth outpaces price growth, living standards rise. The economy has seen a significant reset of both wages and prices relative to pre-pandemic times. It would be nice to enjoy today’s nominal wages that are 20% higher than in December 2019 while still being able to pay December 2019 prices for everything, but it’s always true that it would be nice to have today’s wages and last year’s (or last decade’s) prices. But that’s not how the economy works.

For specific goods like energy and food, however, prices do often go down. And energy prices are way down relative to recent peaks—peaks driven by global events like the Russian invasion of Ukraine.

Further, some genuine progress has been made in ameliorating long-running cost pressures on U.S. families stemming from health care and education. The American Rescue Plan (ARP) lowered drug prices and provided more generous aid to families buying health insurance in the individual market. And the administration has tried to cancel significant amounts of student debt and expand programs that allow less burdensome repayment plans.

Myth: “The Biden administration kept gas prices high by stopping domestic oil and gas drilling”

For good or bad, this is flat untrue—the U.S. hit an all-time high in gas and oil production in 2023.

Myth: “Debt is out of control in recent years”

The federal government’s debt measured as a share of the nation’s gross domestic product (GDP) has fallen since the first quarter of 2021 (the Biden administration’s first quarter in office). While it is true that the American Rescue Plan boosted deficits substantially in the first quarter of 2021, that was by design and the ARP was the reason why unemployment recovered so quickly in the wake of the pandemic recession as compared with previous crises. But since this planned boost to the deficit jump-started recovery, we have seen some of the largest one-year reductions in federal government borrowing in history. Key Biden administration deficit-reducing actions include a tax on stock buybacks, a minimum corporate income tax, boosted Internal Revenue Service (IRS) enforcement to stop rampant tax evasion and avoidance among the rich and corporations, and reforms to stop pharmaceutical price gouging of public health insurance programs like Medicare.

“So, you’re saying everything’s great now?”

The economy still has plenty of challenges and problems. We allowed a significant and compassionate expansion of the U.S. welfare state undertaken in response to the pandemic to roll back in 2022, causing a huge one-year rise in poverty (and particularly child poverty). Despite a pronounced upsurge in workers’ interest and activism about joining unions, we have not fixed the legal and policy roadblocks to protect this vital right. The federal minimum wage remains at $7.25, and in inflation-adjusted terms has hit its lowest level since the 1950s. Our care economy institutions are in near-crisis and need public investment. Tax rates faced by the richest households and corporations are at the lowest levels in decades.

On each of these issues, however, progress would be made if even a sliver of Republicans in Congress would get on the right side of these issues.

However, without context, these presentations of debt can make the overall fiscal challenge look near-hopeless and create an environment where any measure to reduce debt seems necessary—no matter its other costs.

This post aims to do two things: (1) bring some context to the size of the policy adjustments needed to stabilize the U.S. debt-to-GDP ratio (or just debt ratio); and (2) compare the size of this policy adjustment with plausible efforts to stabilize the U.S. debt ratio using tax increases alone.

To stabilize the debt ratio at today’s level, we would need to either raise taxes or lower non-interest spending by 2.2% of GDP. This is eminently doable through tax increases alone, as our own historical past and the experience of other rich nations suggest. There may be political challenges to raising taxes, but there is very little reason economically to suggest this would be a bad way to solve the U.S. fiscal challenge. In fact, there are multiple advantages to using higher taxes as the preferred method of bringing down the deficit, particularly from a progressive perspective that centers equity.

Taxes permit a more targeted and equitable approach to minimizing the shortfall. A large majority of federal spending is highly progressive in its incidence, providing huge value to low- and moderate-income families (there are obvious exceptions to this rule, like defense spending, but defense spending currently constitutes a relatively small percentage of GDP compared with other expenditures). Given the value of current federal spending for meeting progressive goals, using taxes as the lever for making any needed reductions in budget deficits should be a priority in coming debates over debts and deficits.

The fiscal gap: A summary measure of the future debt challenge

The “fiscal gap” is a tool to quantify fiscal sustainability. It looks at the long-run stability of the debt ratio, measuring how much a government must reduce non-interest deficits in order to achieve and sustain a given target debt ratio.

The chosen target obviously matters a lot, with lower debt ratios requiring significantly larger changes in fiscal policy. For our purposes, we’ll use stabilization at today’s debt ratio as our base case—most experts would agree this is a useful starting point. Some might assume that level is too high, but there’s no serious evidence that any particular debt ratio causes substantially worse economic performance.

The fiscal gap that would stabilize the debt ratio at today’s value is roughly 2.2% of the U.S. GDP. Is that a lot? It’s higher than we would like it to be, all else equal, but it’s likely quite a bit lower than many might assume given how high budget deficits have been in recent years. To some, anything besides a budget surplus might sometimes seem like an unsustainable fiscal position. But that’s not right—even a relatively conservative outlook on the nation’s fiscal stance doesn’t demand a balanced budget.

To illustrate how the fiscal gap can be so manageable even though projected debt levels appear frighteningly high, imagine debt as the level of water in a bathtub. Water is flowing in from the top and draining from the bottom. Think of the fiscal gap as the rate at which water is coming from the faucet. Allowing water flow to increase too fast can overwhelm the ability of the drain to remove water and hence result in steadily rising water levels, causing the tub to eventually overflow. To extend the analogy, the effectiveness of the drain in keeping debt levels stable hinges on how low interest rates are and how high growth is. Low rates and fast growth allow lots of water to be removed from the debt tub. In recent decades, growth has exceeded interest rates, and hence any given flow of deficits (water coming into the tub) has not compounded rapidly into higher debt.

Yet for any given constellation of interest rates and growth, even a small reduction in the flow of water coming in can allow the drain to remove all of the incoming water, and the tub never overflows. In the same way, what’s most important is the size of the fiscal gap—or flow rate—as opposed to the magnitude of the overall debt—or total water in the bathtub—and how fast the drain is removing it.

The U.S. is a low-tax nation compared with international peers

Comparing the United States with its peers can provide some context. U.S. spending is middle of the pack in recent years due to its surge of COVID-19 relief spending, but trends on the lower end when looking at numbers before 2019. Similarly, U.S. revenue is abnormally low. Our revenue-to-GDP ratio was 31.5% in 2019, much lower than the average of 42.7% amongst peer countries. This places our revenue-to-GDP ratio at the second lowest out of 27 peer countries (and the lowest if you exclude the unusual case of Ireland). Note that the countries that collect more revenue relative to their GDP also tend to provide more government services than the U.S. In short, a country’s welfare state generosity hinges on how much they are able to raise in taxes. You can learn more about how the United States compares on the EPI Tax Explorer.

There are two obvious lessons here.

First, we’re an outlier in how small our fiscal footprint is. Compared with the rest of the world, we don’t tax and spend much. Given that public spending is a key way to reduce inequality and poverty, the small fiscal footprint of the U.S. means we haven’t invested much in poverty alleviation relative to our international peers.

Second, raising U.S. revenue levels to the average level of our peer countries would raise the equivalent of $2.61 trillion, roughly five times the amount needed to close the fiscal gap. Importantly, places like France and the Nordic countries collect this level of high revenue while still delivering reliable growth in living standards. These rich, high-functioning countries don’t seem hampered by excess taxation.

Our peer countries prove that high revenue levels are entirely possible, even though the U.S. revenue-to-GDP ratio does not need to get even close to the top of the revenue scale to close the fiscal gap. It’s worth noting that if we relied on just spending cuts to close projected fiscal gaps, this would just lock in our abnormally small fiscal footprint and our current stingy approach to poverty alleviation.

Now, suppose that we did raise exactly the amount of revenue needed to close the fiscal gap, or about $500 billion in revenue, and that we did this with just taxes. This would raise the U.S. revenue-to-GDP ratio to 32.4%. This does not shift the United States in its international ranking much. Increasing taxes by 2.2% still keeps the United States at the bottom, far from the thresholds set by most peer European countries.

The U.S. once had taxes high enough to close today’s fiscal gap

Of course, the U.S. isn’t France—are higher taxes possible here? Could 2.2% of GDP be raised without pushing U.S. taxation well outside its historic comfort zone? There are no current policy proposals to raise 2.2% of GDP in additional tax revenue, but it is certainly plausible from an economic point of view. Besides the evidence offered earlier from international comparisons, even our own not-so-distant economic history has shown that tax revenues high enough to close today’s fiscal gap were either actively being collected, or clearly would have been, if not for radical policy changes that cut tax rates.

For example, the Trump tax cuts are projected to cost approximately 0.7% of U.S. GDP annually on average over 10 years. The largest specific provisions decreased the corporate tax rate, and this provision alone caused revenue to fall by roughly 0.5% of GDP. And these were not even the biggest tax cuts in U.S. history—that title is taken by Reagan’s tax cuts.

We can perform a thought experiment by considering the tax revenue we would have raised if tax rates by income percentile had remained at pre-Reagan levels. These historical federal tax rates confirm that it would be possible to raise 2.2% of GDP in taxes.

The overall average federal tax rate in 2019 was three percentage points lower than in 1979, before Reagan tax cuts. This is unusual, in and of itself, because taxes across countries tend to increase as a share of GDP as per capita income rises. More importantly, though, this means that we’ve had taxes high enough to close today’s fiscal gap in the past; increasing taxes to generate 2.2% of GDP in revenue would not be anything unprecedented.

The fact that tax rates for all income groups are lower in the present day than in 1979 suggests that the series of tax cuts undertaken at various times since then cost us a critical sum of lost revenue. If we had kept tax rates stable at the 1979 level, we could have generated approximately an additional $532 billion in 2019. This is greater than the fiscal gap, suggesting that we could have closed the fiscal gap already.

Suppose, however, that we do not want to keep tax rates for all groups fixed at 1979 levels. For example, consider the counterfactual where we maintained the 1979 tax rates for all groups except the bottom quintile of households. This bottom quintile saw significant tax cuts between 1979 and 2019, and these tax cuts (with effective tax rates actually becoming negative in recent decades) stopped the issue of taxing households into poverty. Hence, it would make a lot of sense to protect the tax cuts that have happened for this group. Maintaining 1979 tax rates for all groups except the bottom fifth would still have yielded an additional $469 billion by 2019, which is approximately 95% of the fiscal gap.

A similar exercise can be done to see how much revenue could be raised if we had kept tax rates the same since 1979 for just the highest quintile of households. In this scenario, we could have generated an additional $261 billion—closing roughly half of the total fiscal gap.

In short, it took a series of large (and regressive) tax cuts over a series of decades in order to generate today’s fiscal gap. Absent these cuts, revenue was firmly on track to be high enough to keep the fiscal gap at near-zero. It hence seems reasonable to think that taxes alone could indeed close the fiscal gap without pushing U.S. tax rates out of any zone of plausibility.

How much taxes should come from the top households?

Besides keeping the tax rates for the highest-income households constant at 1979 levels, one could imagine even more progressive revenue options that might put a big dent in the fiscal gap. For example, a 5% surtax has occasionally popped up in policy debates, including in early versions of the Affordable Care Act. In a counterfactual world where we kept tax rates for the top 1% at 1979 levels and then levied a 5% surtax, we could have generated $293 billion over this time period.

Crucially, proposed versions of the surtax apply to capital incomes as well as ordinary income. This is important because the incomes of the richest households are disproportionately made up of capital income. Specifically, capital incomes make up approximately a third of the income of the top 1%, a proportion that has steadily grown in past decades. Therefore, we’ll need higher capital income taxes if we want to target those dollars. This may come in the form of higher rates or broader bases on capital gains, dividends, and corporate income taxes.

Overall, taxes have the power to do much of the heavy lifting when it comes to closing the fiscal gap. By preserving (or even expanding) the ability to maintain our (albeit stingy) welfare state programs, a tax-first approach would not only lead to stronger revenue streams but would also contribute to a fairer economic landscape.

Emily Zhang was an intern at the Economic Policy Institute in the summer of 2023.

“Debt limit deals” are a way to force policy change through a backdoor by holding the U.S. (and global) economy hostage. Accepting that “debt limit deals” are just business as usual every time we approach the ceiling basically means that one political party can gain access to an inordinately powerful “hack” around the normal democratic process so long as some arbitrary conditions prevail.

Republicans have a majority in just one chamber of Congress, and face a president of the opposing party. Normally, this would mean they would have to argue their case for policy changes on the floor of the House, and compromise more often than not. However, just because we were about to cross over the utterly arbitrary debt limit, Republicans magically gained enormous amounts of leverage to dictate policy—including a lot of policy divorced from the specific conversation of addressing the debt and deficits. This is not a sensible way to govern.

This deal looks significantly less harmful than the original McCarthy proposal that passed the House last month, but it still contains several worrying provisions. Notably, it still includes a concession to expand and tighten work reporting requirements for some of the most vulnerable Americans to access the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF). These should never have been part of a debt ceiling discussion.

While the deal includes new exemptions that could actually extend access to SNAP to people in certain categories (like veterans), it would needlessly still put a large number of older adults ages 49–54 at risk of losing their food stamps if they can’t meet the new burdensome requirements to report on work activities. (This is despite the fact that we know workers over 50 already face difficult working conditions and a tougher labor market than younger workers.)

Paperwork and reporting for these programs are already excessively burdensome and deny aid to those in need. The fact that the deal’s new exemptions for certain groups might actually expand receipt of food stamps just highlights the damage being done by current work requirements. They increase red tape and increase the risk of getting kicked out of much-needed safety net support—they do not boost job opportunities or employment for individuals in need. The inclusion of this provision from conservatives has nothing to do with reducing federal spending or encouraging work, and everything to do with punishing poor people.

While less severe than the original Republican proposal, the deal will also place a cap on non-defense discretionary spending at current levels for the next two years, meaning that federal spending will not keep up with inflation. This is effectively a spending cut to nearly every spending area outside of the military, from housing and child care assistance to environmental protection.

It’s ridiculous that Republicans claim to care about fiscal responsibility in this debate, but also completely took tax increases off the table in negotiations. This is despite the fact that tax cuts passed in recent years are prime contributors to the deficit, offering little to no economic benefit to the rest of us in return.

In fact, the Republicans did not just take tax increases off the table; they demanded constraints on the Internal Revenue Service’s (IRS) ability to enforce tax laws by taking away the budgetary resources needed to modernize their systems and to audit wealthy tax cheats. While Republicans didn’t get everything they wanted, the final deal will claw back some of the boost to IRS resources provided by the Inflation Reduction Act. This is essentially an attempt to return to the era of “do-it-yourself tax cuts”—something we’ve allowed for the richest Americans since the last harmful debt limit deal in 2011 decimated IRS funding.

Ultimately, we need to abolish the debt ceiling, and, at minimum, we should have had a clean debt limit increase. The administration should never have been in a position of negotiating the ability for the government to meet its basic existing obligations. As long as we have a debt limit, we will continue to risk forcing unpopular, harmful cuts to federal investment at the expense of the economic well-being of low- and middle-income people.

Short of getting votes for abolishing the debt limit altogether, we can at least have the Treasury Department start experimenting with measures that would allow workarounds in the future. For example, Treasury could issue and auction a small amount of consols or premium bonds. If Treasury begins doing so early, they could ensure that a market for these premium bonds exists before they need to be used, when the debt limit threatens to bind us again in 2025. This would make issuing them much more credible in the next debt ceiling crisis, and could shift leverage away from those attempting to weaponize the debt limit in future.

Read the full Twitter thread here.

It turns out “work requirements” don’t work. How do we know? Because the same corporate interests pushing so-called “work requirements” right now in Congress have been pushing the same idea in states for years. @EARNetwork @AACF https://t.co/cm2GEryDiA

— Economic Policy Institute (@EconomicPolicy) May 22, 2023

Most adult Medicaid enrollees who can work are already working, except for those out of the workforce due to school enrollment, a disability, or caregiving responsibilities. @EveryTxn https://t.co/YvapaoKdI4

— Economic Policy Institute (@EconomicPolicy) May 22, 2023

“Work requirements” disadvantage those who are working hardest at low-wage jobs with unpredictable schedules. Those in temp or part-time jobs may struggle to meet arbitrary hours worked quotas each month, facing constant risk of losing benefits. @ncjustice https://t.co/jqr5iEwrCU

— Economic Policy Institute (@EconomicPolicy) May 22, 2023

Who does benefit from “work requirement” policies? Multimillion dollar corporate temp agencies and staffing services who profit off government contracts to place Medicaid or SNAP recipients in low-wage, short-term jobs that trap families in poverty. https://t.co/C1ynWAAGDS

— Economic Policy Institute (@EconomicPolicy) May 22, 2023

Policymakers must reject dangerous TANF proposals that encourage states to restrict benefits for families with the greatest need. https://t.co/p5GElRszyV

— Economic Policy Institute (@EconomicPolicy) May 22, 2023

If the X-date comes and nothing is done except the federal government fails to fulfill its spending obligations, economic calamity will ensue: People who depend on programs like Social Security and food stamps will suffer, and the spillover effects on the larger economy would certainly cause a recession—and a truly horrible one if the stalemate lasted for any significant amount of time.

The factor forcing this terrible outcome would not be any implacable economic reality, it would simply be Congressional Republicans weaponizing the absurd political institution that is a statutory debt limit that can only be adjusted through acts of Congress. With a responsible Congress, the debt limit would be a silly inconvenience to policymaking. But twice in the past 12 years, Republican-led efforts in Congress have brought the nation to a near-crisis—and the current near-crisis could still graduate into a real crisis in coming weeks.

In 2011 (the last instance of protracted debt limit brinkmanship), the GOP demands for large spending cuts did mammoth damage to the living standards of U.S. families by sabotaging the economic recovery from the Great Recession and financial crisis of 2008–09. This time around, the GOP demands are not just for recovery-damaging spending cuts, but also for a complete do-over on already passed legislation; Speaker McCarthy’s recently released list of demands includes rolling back student debt relief as well as the Inflation Reduction Act’s (IRA) climate provisions and enhanced enforcement against the nation’s rich tax cheats.

The cuts to IRA climate provisions would be literally catastrophic—the act’s climate provisions are the only thing keeping the U.S. economy on a path of needed emissions reductions to contain the worst damages of climate change. Further, hundreds of billions of dollars of planned private investment have already begun based on the incentives provided in the IRA. Stripping these climate provisions away would snap the economy back to a path toward climate catastrophe and be a huge waste of society’s resources.

All of this clearly calls for abolishing the debt limit to keep irresponsible Congressional majorities from holding the nation’s economy hostage to its policy preferences in the future. But what makes today’s debt limit showdown so bad is how normalized it has become—often with the encouragement of too many in D.C. policymaking circles who should know better. Many institutions and people who had argued forcefully in the past that the debt limit should not be wielded to force policy concessions—from business lobbies to former Treasury Secretaries to bipartisan think tanks—have instead this time blessed the absurdly shallow “deal” put forward by Speaker McCarthy. If this drive to normalize debt limit brinkmanship does not spark an economic meltdown this time, we all know where it leads next time.

This makes it imperative that the Biden administration does whatever it takes to keep the debt limit from binding our nation’s continued prosperity (yes, the nod to Mario Draghi is intentional). Their negotiations with Speaker McCarthy cannot include spending cuts or special legislative processes that make it easier to enact cuts going forward (no supercommittees).

Some defenders of the debt limit claim that it is good because it forces Congress to “reflect” on the nation’s fiscal trajectory. Former Trump administration budget director Mick Mulvaney made this claim about how the debt limit should be treated: “…the debt ceiling is really that buzzer that goes off when your battery is busted in your smoke alarm. It always goes off at an inconvenient time, it is always a pain to change it, but you always do it.”

This analogy is predictably terrible as a description of the real world. A faulty battery in a smoke detector can’t burn your house down. The debt limit could. But if Mulvaney really thinks that’s how the debt limit should operate, then a deal could be constructed consistent with this interpretation: each debt limit breach should lead to an entire day of legislative debate in Congress over the nation’s fiscal trajectory. And that’s it.

If the Speaker doesn’t agree to that deal, then the administration should use the range of accounting and legal workarounds available to them to keep the debt limit from binding. These are all suboptimal relative to debt ceiling abolition in the short run, but in the long run they will end up implicitly codified (unless the Supreme Court wants to take responsibility for forcing an unnecessary economic crisis) and will take the prospect of a debt limit crisis off the table of future presidents and Congresses. This would be a huge gift to the future.

Speaker McCarthy’s proposal would slash spending across federal programs for the next decade, cutting federal resources for everything from child care programs to environmental protection safeguards. If these deeply unrealistic spending cuts actually came to pass, the human toll would be enormous, and economic growth would be deeply damaged.

The McCarthy proposal also resurfaces a completely inaccurate but alarmingly persistent conservative claim: the idea that government anti-poverty programs are unnecessarily generous, bloated, and are keeping people out of the workforce who should otherwise be supporting themselves entirely through income earned in the labor market. The proposal seeks to severely restrict access to Medicaid health coverage and food stamps by imposing onerous requirements to prove that recipients are working or looking for work. Past evidence about these types of burdensome reporting requirements shows clearly that they will not actually lead to increased employment but will deprive vulnerable families of vital support.

Income support programs are not keeping people out of the workforce

The implicit claim that the U.S. labor market is hobbled by a too-generous welfare state is awfully hard to see in the data. Job growth in 2021 and 2022 hit its highest two-year stretch in the nation’s history. The unemployment rate is currently at a near-historic low. The prime-age employment-to-population ratio hit its highest point in March 2023 in more than 20 years. In general, many low-wage workers have seen the benefits of a tight labor market in the pandemic recovery, as employers have raised wages to attract and retain workers. In short, when jobs are available, workers have rushed to fill them. And while food assistance programs and other safety net supports are a vital lifeline to keep many out of poverty, the benefits are nowhere near enough on their own to fully support the cost of living for many families. Where has the idea come from that there’s an urgent need to address these supposedly too-comfortable benefits keeping people out of the workforce?

The premise of adding more onerous work and reporting requirements is also based on an inaccurate picture of who currently receives federal assistance through these programs. As the Center on Budget and Policy Priorities recently noted, nearly two-thirds of adults with Medicaid already work. Since the early 2000s, many safety net and income support programs have actually shifted toward requiring proof that recipients are also working or looking for work, but the gains of this shift have been near-impossible to see in terms of increased employment. Since 1990, all new investments in safety net spending have gone toward families with at least some labor market earnings. Those who are unable to find or do work under the current requirements are already in extremely difficult circumstances, and taking away the few safety net supports they have available would be economically devastating.

The U.S. safety net is in serious need of reforms, but not because of inaccurate claims that its excess generosity keeps people out of work. The biggest problem with the U.S. safety net is that our programs don’t help as many people, or as effectively, as they should. Public spending in the United States as a share of GDP is extremely low relative to other rich nations, and we spend far less to fight poverty than other comparatively wealthy countries. Low-income people already spend a ridiculous amount of energy attempting to prove and maintain their eligibility for these modest supports.

Imposing additional “work requirements” would restrict access to Medicaid and food stamps

Burdensome work reporting requirements are about making the benefits system more sluggish and difficult to access, and do nothing to boost employment. Existing reporting requirements already impose too-high a bureaucratic burden to accessing needed help. Passing these more burdensome requirements being called for by Speaker McCarthy would require people in need of assistance to devote even more of their bandwidth to dealing with forms and make-work bureaucratic tasks, rather than spending that time and energy looking for good work in meaningful and productive ways. The solution should be to reduce the amount of “means-testing” required and to make programs more readily accessible, not to restrict them further.

Further, Speaker McCarthy’s claims that this proposal would put the United States on a path to “fiscal responsibility” and lower inflation are laughable. The biggest driver of deficits for the last 20 years has been a steady trend toward ever-larger tax cuts for corporations and the richest U.S. households. No one who actually wants to reduce the federal deficit should be looking to do that on the backs of the poorest and most vulnerable Americans.

The strongest “incentive” that people have to enter or reenter the workforce already exists—they need income to survive and provide for themselves and their families. If they’re not already working but want to, there is likely a very good reason. Many people simply can’t afford or access quality child care, or quality care for other family members, and need to take on those responsibilities themselves rather than entering the paid workforce. People with disabilities may struggle to find jobs that accommodate their needs appropriately, or that provide adequate health coverage. Many can’t find jobs with the fair and predictable scheduling they need. Others may stay out of the workforce because of a persistent lack of economic opportunities available in their neighborhoods, towns, or cities—a lack of opportunity often caused by systemic public and private disinvestment in communities of color or rural areas.

Any policymaker serious about getting people who want to work into the workforce should be looking to address these problems, rather than taking away lifelines to food and health care.

The fact that the statutory debt limit can inject such chaos into the American political system and economy is truly odd. The debt limit measures nothing coherent and has no relationship to any serious measure of the economic burden imposed by the nation’s debt. It has as much relevance to the nation’s objective economic health as today’s horoscope. Yet if it’s allowed to bind, disaster would result. And if the price of convincing House Republicans to raise the debt limit is large cuts to federal spending, this still ensures grave damage to the economy and vulnerable families.

The debt limit—and particularly its relationship to the objective economic facts of the nation’s fiscal health—is poorly understood by too many. In this post, we make the following points about the debt limit in the current moment:

• A recession is guaranteed if the debt limit is not raised. This wound to the U.S. economy would be inflicted entirely by the irresponsibility of the Republican caucus in the House of Representatives.
  • “Reprioritization” of spending in the face of a binding debt limit—or paying some obligations of the federal government in full while inflicting much steeper cuts on other obligations—does not change the fact that a recession would result. In fact, if “reprioritization” privileges holders of U.S. debt over other spending obligations, it could make the recession worse.
• The debt limit measures no coherent economic value. Given the stakes involved, many assume that the debt limit must be some meaningful parameter that plays an important role in maintaining the fiscal health and sustainability of the federal government. This is false. The debt limit is essentially an exercise in numerology.
  • The value of what it measures—the nominal dollar level of outstanding gross public debt—has zero relationship to the economic fundamentals of the nation’s fiscal health. The debt limit is not inflation-adjusted, measures debt the government owes itself, does not include federal government assets, and is completely uncorrelated with genuine measures of fiscal health (like the debt service ratio—or interest payments on government debt divided by national income).
• A deal with spending cuts does not avoid the debt limit’s damage. Given the damage that would be done by allowing the debt limit to bind, some might think that any deal to raise it would be worth doing. But this is not right either. Deals that include steep spending cuts would also carry a high risk of causing a recession. The entire danger posed by the debt limit is that damaging spending cuts might be caused by an absurd political institution. Embracing spending cuts (even not as steep) simply to avoid the absurd political institution cannot be a serious answer.
  • A debt ceiling deal that included steep budget cuts was almost the entire reason why the economic recovery from the 2008–09 recession was the slowest in post-war history.
• The debt limit should be abolished—either formally or effectively. If Congress will not raise the debt limit without a damaging deal on spending, the Biden administration should pursue work-arounds—including potentially minting a trillion-dollar coin—to keep the debt limit from binding.

Overview

The U.S. Treasury draws on banking accounts at the Federal Reserve to fund federal governmental activities—remitting paychecks to federal government employees, sending Social Security checks, paying U.S. bondholders, reimbursing medical providers for services covered by Medicare and Medicaid, and so on. These accounts are fed on an ongoing basis by both tax revenues and the proceeds from selling bonds (debt). But since the United States has a statutorily imposed limit of how much outstanding debt is allowed, once this limit is reached on issuing new debt, Treasury can no longer sell bonds and deposit these proceeds. As a result, accounts at the Federal Reserve will dwindle as they are now only fed by incoming taxes, which are insufficient to cover all spending. If Congress does not raise the debt limit, the Biden administration does not enact any work-around, and federal spending is indeed forced to contract to a level that can be financed only by taxes, then the debt limit will “bind” spending.

Consequences of allowing the debt limit to bind spending

The U.S. is currently borrowing an amount roughly equal to 4% of gross domestic product (GDP) to finance spending. If no new borrowing was allowed due to the debt limit, this means that spending would have to fall by 4% of GDP. A spending cut of 4% of GDP is a mammoth shock, and to have it slam into the economy suddenly would be spectacularly damaging.

For comparison, the abrupt swing from borrowing to saving—known as private-sector “deleveraging”—that led to the Great Recession in 2008–2009 was about a 9% share of GDP, but that was spread over more than two years. This means that the mechanical shutdown of spending caused by hitting the debt ceiling would be about the same annualized size—but would occur even more suddenly—as the one that led to the Great Recession.

Even worse, as the negative fiscal shock rippled through the private economy, the austerity would become self-reinforcing. Say that in the first month, the 4% of GDP cutback in federal spending has a multiplier of 1, so economic activity in that month is slowed by 4% of that month’s GDP in total. (While it’s true that multiplier effects may well not happen right away, illustratively this is the dynamic we’re facing.) With GDP and incomes 4% lower, tax collections will fall by roughly 1% of GDP. So the next month, not only will the original cutback in spending occur, but lower tax collections will ratchet down spending even more—and pretty quickly!

Normally, the federal budget acts as an automatic stabilizer when recessions hit—taxes fall and spending rises and debt increases, all of which spurs economic activity. But a recession caused by an arbitrary legal rule that spending cannot exceed (falling) taxes means that the budget would actually act as an automatic destabilizer.

If the spending cutbacks occur for a month, say, and then federal transfers make up for the lost month, then much of the damage could be undone pretty quickly. But not all of it. Take the example of retirees who do not go out to eat in their local diners for a month because their Social Security checks do not arrive. If the Social Security checks start coming later and retirees return to diners—and even if the previous missed payments are made up—this does not restore the lost income to wait staff who missed a month of customers.

Finally, these are just the “mechanical” effects of hitting the debt ceiling. The ripple effects stemming from distress in financial markets that would be sparked by missing interest payments on Treasury bonds could be extreme as well. But these mechanical effects are useful to keep in mind when some misleadingly claim that Treasury can “reprioritize” payments to bondholders and hence the United States can avoid technical “default.” Prioritizing interest payments to bondholders just means defaulting even more heavily on Social Security beneficiaries, doctors’ reimbursements for seeing Medicare and Medicaid patients, federal contractors’ bills, safety net spending, and all other federal payments.

“Reprioritizing” some payments over others does not change the grim mechanical arithmetic run through above—and might make it worse. Bondholders are a relatively rich group, and much of the U.S. federal debt is held by other countries. Both of these things mean that cuts to bondholders would result in less of a spending pullback than equivalent cuts to vulnerable families. In short, “reprioritization” is default by another name, and one that makes the economic damage of allowing the debt limit to bind even greater.

The debt limit is numerology

The statutory debt ceiling is a completely arbitrary value—there is no compelling economic justification for its historical values and it is raised (or suspended periodically) purely based on congressional whim and partisan political strategizing. The absurdities in using the nominal value of gross federal debt as a high-stakes economic indicator are abundant.

For example, the debt limit is not indexed for inflation, even as many federal government payments and taxes are indexed (either implicitly or explicitly). Further, the debt limit measures gross debt, which includes debt the federal government owes itself. The biggest difference between the debt held by public and gross debt is the Social Security Trust Fund (SSTF). To help pre-fund the now-arrived retirement of the Baby Boomer generation, for years the Social Security system taxed current workers more than what was needed to pay current beneficiaries. The surplus was credited to the SSTF. As dedicated Social Security revenues fall a bit short of benefits in coming decades, the system (as designed) will draw down the SSTF. But this means that as the SSTF rose—as the Social Security system ran a surplus—measures of gross debt were actually inflated. How can that make sense?

The gross debt also excludes the roughly $2 trillion in financial assets (mostly student loans) held by the federal government. Any measure that aims to measure the balance sheet health of an entity probably shouldn’t ignore trillions of dollars in assets.

Sometimes the debt limit is defended as a useful measure to make Congress pause and be mindful about the nation’s fiscal situation. But this argument is absurd. For one, a measure meant to enforce mindfulness should not be so high stakes and subject to political opportunism. If the debt limit just forced a day of congressional debate whenever it was breached rather than forcing a sudden contraction of federal spending, this argument might make more sense. Most importantly, a prompt forcing Congress to pause and think about the nation’s fiscal health should have some empirical relationship to the nation’s fiscal health. The debt limit does not.

Given the measurement absurdities noted above, it is no surprise that the debt ceiling does not correlate at all with meaningful measures of the burden imposed by the nation’s debt. Probably the most meaningful measure of this burden is interest payments on the debt expressed as a share of GDP. This debt service ratio and the nominal value of the nation’s outstanding public debt (what triggers the debt limit) are almost entirely uncorrelated.

For example, in 1996, gross federal debt stood at $5.2 trillion. By 2019, it was at $22.7 trillion. Yet in 1996, debt service payments—the interest costs needed to be paid on outstanding debt—were 3.0% of GDP, but by 2019 they were just 1.8%. Since 2019, this debt service ratio has declined even further as nominal debt rose by another $8 trillion. The reason why interest rates have collapsed while debt has grown is simply that both variables have been driven by pronounced economic weakness over most of the post-2000 period. But the larger point is that the level of gross federal debt has no reliable relationship to any economic stressor faced by governments or households, so hinging something as high stakes as a hard limit on the federal government’s legal ability to borrow on this measure makes no sense.

A deal with spending cuts does not avoid the debt limit’s damage

People often invoke the damage done by the 2011 showdown over the debt ceiling. But they often miss what was by far the greatest damage done by the 2011 debt ceiling episode: the passage of the Budget Control Act (BCA), a piece of legislation that is relatively unknown to the lay public, but that delivered an anti-stimulus to the U.S. economy about two times as powerful as the stimulus provided by the Obama administration’s Recovery Act in 2009.

The BCA’s caps on federal spending explain a large part of why this spending in the aftermath of the Great Recession was the slowest in history following any recession (or at least since the Great Depression). If this spending had instead followed the normal post-recession path, then a return to pre-recession unemployment rates would’ve happened 5-6 years before it finally did in 2017.

The BCA was the GOP demand for raising the debt limit in 2011, and the Obama administration acquiesced to it. The leverage provided by the debt limit led directly to the worst recovery following a recession since World War II. This leverage the debt ceiling provides to those looking to enforce austerity is its greatest—and often most-overlooked—danger.

The debt limit needs to be abolished—either formally or effectively

Given all of this, it is obvious that the U.S. should join the vast majority of rich countries around the world who do not have a statutory debt limit. It would be most straightforward if Congress abolished it, but that is extremely unlikely in the near term.

For now, if Congress will not act sensibly and raise the debt limit without a damaging deal on spending, the Biden administration should act in any way it can to keep the debt limit from binding. The most fun proposed executive work-around—one that highlights the sheer stupidity of the debt limit—is minting a trillion-dollar platinum coin. If that somehow sounds not serious enough, other work-arounds certainly seem plausible as well. But it should be remembered that the least serious outcome is the one that causes the most damage: letting a wholly baseless bit of numerology—and not the needs of the American people—determine what the nation is allowed to spend.