Debt deal’s impact on the economy.

The debt deal between President Joe Biden and House Speaker Kevin McCarthy (R-Calif.) allows the federal government to continue functioning for the next year and a half. To make the agreement, both sides conceded what they believe are important issues. One thing the agreement provides is a clear picture each party envisions for the future role of government in our lives.

What the Deal Includes

• A $50 billion reduction in nondefense discretionary spending for fiscal 2024
• The president agreed not to spend $30 billion in as yet unspent COVID funds
• The debt-ceiling agreement provides for a 1 percent cut in all discretionary appropriations if Congress fails to pass all appropriation bills by the end of this year

Many Republicans will be disappointed with this small change in direction. However, elections have consequences. With the Democrats in charge of two-thirds of the government, there are limitations to what the remaining third can accomplish. From this perspective, the House Republicans were at least able to trim a bit of the excess federal spending from recent years.

The Negative Impact of Excessive Federal Spending

My book, Rich Nation, Poor Nation: Why Some Nations Prosper and Others Fail, documents major cycles of prosperity and failure. One characteristic of U.S. policy failures has been cycles when federal spending grows faster than private spending. Since 2020, federal spending has surged, bringing it to 31 percent of gross national product (GDP). Despite a recovery in 2021, federal spending increased to $6.8 trillion due to a combination of COVID spending and the initial stages of the president’s “Build Back Better” legislation. Although GDP rose by a sharp 7.50 percent in 2021, the surge in spending kept the federal share at a too-high 30 percent of the economy.

Even with the debt deal, federal spending will remain at least 23 percent of the economy. This excessive spending can have negative consequences for the nation’s prosperity and future success.