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McCarthy’s debt-limit deal shows real leadership in tackling nation’s top needs

When Speaker Kevin McCarthy asked President Joe Biden to begin negotiations to lift the debt limit just after taking the gavel, he received condemnation from both sides of the aisle.

Biden demanded a “clean” limit increase with no strings attached, ridiculing McCarthy’s offer as “the MAGA economic agenda.”

And many on the left echoed Treasury Secretary Janet Yellen, arguing that it could be catastrophic to hold the debt limit hostage and risk government default.

AEI’s Michael Strain went so far as to say that the process of negotiating over spending itself is illegitimate, arguing in the Financial Times that, “When it comes to politics, the normalisation of brushing up against default combined with leaders that have waning influence over members of their parties is a catastrophe waiting to happen. “

One measure of strong leadership is the ability to focus on a specific goal while ignoring the noise until you achieve that goal.

In this case, Speaker McCarthy understood that our country finds itself in a uniquely treacherous time in our economic history, and that strong medicine is required to avoid significant economy upheaval.

Kevin McCarthy

He laid out the relevant reality repeatedly, including at his recent speech at the New York Stock Exchange: The stagflationary environment we now live in really has one main cause, runaway spending.

Federal government debt has risen to $32 trillion; the way trillions are bandied about in policy discussions and can make your head spin.

Some perspective: If the yield curve for Treasuries levels off at about 5 percentage points, interest payments on that debt this year would be $1.6 trillion — exceeding defense spending.

It would exceed Medicare spending, as well. And Social Security outlays. Without budget reform, it’s hard to see how those programs continue.

Meanwhile, Americans have seen inflation soar — and then remain remarkably persistent, despite the Federal Reserve’s steady tightening: The annualized increase was 4.8% last November, dropping only to 4.7% this April, still light-years away from the Fed’s target.  

Macroeconomists know why progress  in stopping inflation has been so slow: While the Fed has been trying to slow the economy with tighter monetary policy, Congress has been feeding the fires with ever-higher spending that goes straight into aggregate demand.

Thus, cutting spending to a more sustainable level is essential both to fighting inflation and to protecting the federal government’s solvency.

They motivated him to pass the House debt-limit bill containing key reforms despite heavy odds against success. They him the resolve to stay firm at the negotiating table until this deal was settled.

The U.S. Capitol is seen reflected in rain puddles on Monday, May 29, 2023

Democrats love spending; as they saw McCarthy gaining traction, their howls grew louder and nastier. But the hard facts will keep him focused to pass it — and then to seek more reform.

The agreement accomplishes a great deal:

In all, it should bring spending reductions of a bit more that $2 trillion over the next six years, relative to the pre-agreement baseline. That cuts reckless spending by about 25%..

Too often, fiscal policymakers act like St. Augustin, desiring to be good, “but  not yet.” In contrast, this deal strongly signals to financial markets there’s a real chance that runaway spending will be put under control.

It shows that our divided political parties can come to reasonable economic compromises.

And it shows those who believe policy needs to change even more in the future that Washington now has a powerful agent of change in charge of the House of Representatives.

That’s progress.  That’s leadership.

Kevin Hassett chaired the President’s Council of Economic Advisers under Donald Trump and is now a Hoover Institution distinguished visiting fellow.