Episode 95

May 24, 2023

James Slotnick on the politics of raising the U.S. debt ceiling

James Slotnick, Head of Government Relations and Sustainability at Sun Life, discusses the current negotiations in Congress around raising the debt ceiling by June 1st.

Steve Peacher: Hi everyone, this is Steve Peacher, President of SLC Management, and once again I'm joined by James Slotnick, who is a Vice President and head of government relations and sustainability at Sun Life. So, James, thanks for taking time once again.

James Slotnick: Yeah, happy to. I think this is my third or fourth. I feel like, you know, if I get to five, it's like that old Saturday Night Live thing I’ll have to get the jacket with the “five” on it, fifth time guest, but we'll see, you know, Steve, see how I do this time to see if I get invited back.

Steve Peacher: Well, you've done a great job so far, so obviously we tap into you every time that there's something going on in Washington that. you know. has broad impact and whether it's an election or legislation. And of course we're recording this on Tuesday morning, the 20 May 23rd. You know the topic du jour is the debt ceiling. We've been here before, every time we've been here before there's been a last-minute deal, but you know, and having listen to this a few times you do start to wonder this time will this time be different. So you know why should anyone believe that something won't get done, because every time in the past something has gotten done, even though there have been some ramifications. We saw the debt downgraded by one of the ratings agencies a few years ago. But should anyone think that there is not going to be something done here?

James Slotnick: It’s, this feels, does have all the elements of this could be that time, that it doesn't happen. You have, you know, tight, a slim majority I should say, for the Republicans in the House, and then, you know very small majority for the Democrats in the Senate. You know, when you look at what the House was able to do and 2 or 3 weeks ago, with the “Limit, Save and Grow Act” that passed by one vote which did increase the debt ceiling with some spending cuts to offset those, but it so it does feel like it's the environment where this could happen. Last week, was 40 or so Republicans signed a letter that said, you know, they support what's in the “Limit, Save and Grow Act” so again, it does feel like there's an environment where republicans are, are willing to dig in a little bit and really make sure they get what they want. That said I think there is, they have an open person that's willing to negotiate in President Biden. And so, although it does feel very much like 2011, maybe more than any of these other situations have over the past few years, I think like 2011 we're going to see something late in the game. Get over the finish line, and again, like 2011 it's similar. You had Speaker Boehner then negotiating directly with President Obama, and here you have Speaker McCarthy negotiating with his team directly with President Biden. So, although all the elements are there for maybe this is the time, I think we do get a deal at the end.

Steve Peacher: And assuming we do get a deal, what is it going to look like? Do you think?

James Slotnick: There's a roadmap for this. There's some low hanging fruit, and you know, everyone listening to this has heard some of these items. There's a maybe $50 or $70 billion dollars of unspent Covid Relief Fund that's still floating out there that the States have. Republicans really want to claw that back. The number is not big, but it's a, it sounds good to get back this unused Covid money, and it sounds like the President and his team are on board with that. Both sides seem to agree that spending is has accelerated over Covid. I went back and looked. If you go back to the 2019 spending numbers, you know, pre Covid this year we're about 30% high, that the 2022 spending numbers I should say, we're about 30% higher than 2019. Now, obviously Covid, you'd expect those type of increases. But Republicans are really saying, hey, if we could just cap spending at 2022 levels, which is 30% higher than where they were in 2019, they'd accept that. And so you sort of feel the Biden administration trying to wrangle around. Is it going to be 2022, or maybe 2022 plus, but holding those levels for another couple of years you know, seems to be something that that both sides are on board with. And you know some of the harder things will be, permitting reform is something else that the Biden administration seems open to that's important to Republicans. I think maybe something it's a little bit harder that but probably gets ironed out at the end is creating some type of work requirements around the some of the entitlement programs. Now, certainly Medicaid is not going to be a program that has work requirements that the Biden administration is going to buy into, but maybe SNAP, supplemental, nutritional assistance program, or TANF the temporary assistance program, you know those maybe you see some soft edge, soft edge work requirements come there, and then both sides can sort of say, hey, you know we're willing to negotiate. We're able to keep spending, if your Democrats are able to say we're able to keep spending love level significantly above where they were before Covid. If you’re Republicans are able to say, hey, we're able to stop this spending. Yeah. And then you see, maybe it's a year and a half debt ceiling increase, and we're back here again after the 2024 elections.

Steve Peacher: We're always going to keep coming back to this.

James Slotnick: Always coming back, Steve.

Steve Peacher: You know that's the you know I heard an interview I guess it was recorded yesterday with McCarthy, and he was talking about spending as a percentage of GDP, government spending is a percentage of GDP. I guess, in the recent past they’ve been around 21% has jumped up to around 24%. So you know, when you, those are sound bites that can be pretty powerful. But as you say maybe there's a path where both sides and claim on win because higher spending remains but it gets capped. If, let's say that the unthinkable happens and we don't get a deal and the Government actually hits, starts to have to not make certain payments on bills that have come due and there's a big discussion around how that would play out specifically. But let's say we kind of hit that wall. Who, what's the political fallout? Who does that favor politically?

James Slotnick: It hurts Democrats more than Republicans. Republicans are, and I think they've been very on message with this, you know Speaker McCarthy and even Senate Republicans have said, there's one chamber that's passed a bill to raise the debt ceiling, and that's House Republicans, and that that is accurate. You know they have passed legislation that would cut spending and increase the debt ceiling for the next 2 years, so they, Republicans are able to say with a clear heart and clear conscience, we, you know, we proposed something. The leader Schumer in the Senate does not have the votes with the filibuster and all those things to get a clean debt ceiling bill through. So the Senate hasn't been able to pass anything. The House has a bill that's passed, so Democrats are much, or Republicans are much better positioned at this moment than Democrats are. On top of that if you go and look at President Biden's approval rating it's not great. I mean, if you look over the last 5 or 6 Presidents at this point their presidency about 100, and, excuse me, 850 days in the President, former President Trump, and former President Biden at this point were about the same about 42% approval, which is significantly below where President Obama, President Bush, President Clinton were at this at this exact time. So Democrats are not in a position of strength. Both sides certainly need to get a deal done, but I think Republicans are much better positioned if we do go over that cliff, you know, hopefully we don't. And again I don't think we will, but I think politically, Republicans would fare better than Democrats.

Steve Peacher: You know it's so hard to know what would happen in the markets, because I don't think you hit you hit one date. This notion of an X date. I think the Government has certain flexibility. But then but then all of a sudden people would get the sense that yeah certain bills aren't being paid. And it would depend, I think, on what, on how that rolled out in terms of what the market impacts were. Certainly, if the government wasn't meeting maturities on maturing treasury obligations that starts to have a lot of technical, you know, impacts. If the rating agencies further, you know, downgrade the U.S. that ripples through, you know, financial institutions that use ratings for capital requirements, it runs through asset management, contracts that have minimum rating requirements. It could run through money market funds and how those are Treasury money market funds, and how those are priced. Obviously, anyone counting on maturing treasuries that didn't mature but there are, but there are, there is flexibility the government has to actually meet maturing that. So you're just not sure exactly logistically how it would play out. But I think that would be key to how the markets react, and also if the market’s sense that this was a day or two and then it was gonna of light a fire and is going to get resolved that would be one thing, if the markets got the sense that oh, my gosh this was a big impasse, and it was gonna become a bigger and bigger problem, the opinions of the two sides ossified. Then you could have a real market meltdown. So it's so hard to predict.

James Slotnick: Yeah, Steve, one thing and I forgot to mention this. But you make a good point. So one thing that Speaker McCarthy has to balance is, as we know, it took him a couple of votes to get the Speakership, and as part of those negotiations with his members he guaranteed that no legislation will be voted on until 72 hours after the text was released. So you know, because a lot of his members were complaining that over the last, you know, the former speakers that you know bills would come out would be thousands of pages, you have no time to read them. So to your point on knowing that there's a deal but maybe there's a delay or two, it feels like Speaker McCarthy is going to have to stick to that. So even if there's a deal, there's legislation, the House is gonna, unless he can get his members to agree, he said they'd give them 72 hours to read the bills before they're voted on. So that's you know. So that, if you think January or June 1st is going to be the date, you know you sort of need legislative text by then, and then, you know, the Senate can move much faster. But that's another wild card there. Does the house actually need 72 hours to review the legislative text.

Steve Peacher: Right, one thing that I think has been helpful is that the June 1st date has been put out there. It's not a hard and fast date, but I think Treasury Secretary Yellen has put that out there as hey, it could be as soon as June 1st, and I think people have listened to that, and it has certainly spurred activity. If for some reason we go beyond June 1st and you know the world doesn't end and it, you know. And my guess is, the government would find ways to extend that. You know I think everybody would hope that that wouldn't cause people to take the foot off the pedal toward you know an agreement where people said, well, maybe June 1st wasn't that hard a date after all, and maybe we've got more leeway. I think that would be a step backward.

James Slotnick: Secretary Yellen has been on message, she, and I think you know to your point it's been helpful to drive the President and Speaker McCarthy, and their delegates to say we got to get this figured out by June 1st, so that's been helpful. One just one other thing to add. I've been fascinated, you know, any you know your listeners can Google this. If you Google the Feds minutes from August 2011, it does, they do talk about how they were thinking about prioritizing debt payments, and it's so I mean it's not like the you know the Treasury hasn't, you know they don't like to talk about it. But to your point they have a plan somewhere in place where if we did hit that date they know how they're going to pay the bills, you know, every day thereafter.

Steve Peacher: It's too bad that a country like the United States is having to spend a lot of time coming up with plans for exactly how they would allocate money if we hit a debt ceiling. But unfortunately, that's the world we live in. Well, James, thanks again for taking the time. Thanks for everybody who's listening. As I mentioned, we're recording this on Tuesday May 23, I think this will be out for people listen to it a couple of days from now, so things could have changed over the next 48 hours between when we reported this and when you listen to it. But you know that's kind of our best view at this point. So, James, thanks again for taking the time and thanks for listening to this episode of “Three in Five.”

James Slotnick: Thanks Steve.


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