Tuesday, August 2, 2011

DEBT CEILING hangover: A few final thoughts.

I, for one, am still hung over today after imbibing way too much intoxicating drama this week over Congress's trying to avoid global fiscal calamity by raising the debt ceiling.

Now, at last, we have an exciting conclusion:  As of today, August 2, President Obama and Congress have reached a "deal" to raise the debt ceiling by about $2.4 trillion -- enough to reach early 2013 and avoid default -- in exchange for similarly-large budget cuts.  The House approved it yesterday by a vote of 269-161 and the US Senate approved it this morning.   

So calamity is avoided?  The job is done?  Is this not a big success ???

You wouldn't think so.  All I see today are sour faces.  Nobody seems happy with the deal.  The Dow Jones Average is hardly soaring through the roof.  (It's down 166 points at this moment.)    And all I hear are complaints -- 

        (a) the process was so ugly;
        (b) Obama gave away the store;
        (c) the Tea Partiers were reckless hostage takers;
        (d) Congress was totally incompetent;
        (e) nobody cared about anyone but themselves;
        (f) the country was embarrassed, and the economy still stinks;
        (g) they turned school teachers, civil servants, and sick people into villains;       
        (h) the budget cuts are either (i) heartlessly draconian or (ii) fictitious and meaningless;
        (i) that the deal is so one-sided;
        (j) so on, (k) so forth, and (l) so on. 

[My personal favorite came from Cong. Emanual Cleaver (D-Mo.): "This is a sugar-coated satan sandwich.  If you lift the bun, you will not like what you see."]

For me, I see three big things in the outcome, one good, two bad.  Unfortunately, at least to my eye this morning, the bad seems to overshadow the good, as follows-- 

First the good news:

GOOD NEWS: The basic logic actually makes sense-

Two weeks ago, I urged a Grand Bargain on the budget by pointing to some history.  The USA has run up debts as high as today's only twice before: during the Civil War in the 1860s and during World War II in the 1940s.  Each time, we dug our way out with a combination of (a) fiscal discipline, (b) a strong tax base, (c) economic growth, and (d) patience to stay the course for at least ten years.  (See DEBT CEILING crisis: History demands a "Grand Bargain.")

The new debt ceiling "deal" actually gives us a good start in this direction:  It says, in effect, that any new borrowing by the US government must be matched dollar-for-dollar with reductions in future deficit spending.  Over time, if we stick to it, this approach could allow the US government to stabilize its borrowing (keep the hole from getting deeper) and ultimately balance its books.  And if we hold debt steady as the economy grows, then debt, over time, shrinks as a proportion.  A pretty good deal.
BAD NEWS 1:  It is unfair and unbalanced, making it likely to fall apart.

Unfortunartely, the debt ceiling "deal" is structured in a way that is bound to unravel.  Here why:

First, it is unfair on its face.  The package achieves all its deficit reduction from spending cuts, and none (literally not one cent) from tax increases.  This just doesn't work.  The US tax system remains decimated by Bush-era cuts aimed primarily to benefit wealthy people and riddled with loopholes for select interest groups.  Tax collections today are as low levels not seen since the 1950s.  Failure to include any contribution from these groups is unfair and makes the whole approach unstable.   

Second, the mechanism included to address both tax and entitlement issues -- a special Congressional Committee assigned to draft a $1.4 trillion deficit reduction plan by Thanksgiving, subject to a single up-or-down vote in Congress, backed by the threat of broad automatic cuts if it fails -- is almost certain to fail.  Any attempt to include tax revenue in its package will threaten deadlock or rejection by House Republicans.  And if the plan includes no new tax revenue at all, then deadlock will come from the other side.  It's that simple.  

And if the Special Committee's plan fails and automatic cuts take effect -- in January of a Presidential election year -- then Congress sooner or later will find ways to avoid them, especially the military cuts.    

BAD NEWS 2: The precedent promises constant future turmoil.

Finally, we now have three recent examples of conservative Republicans creating artificial crises and using them to blackmail the Obama White House into making concessions on taxes and budget cuts:

  • The deal to extent the Bush tax cuts (December 2010: a 2-year extension in return for not cutting off unemployment insurance and for allowing a temporary reduction in payroll taxes);
  • The Continuing Resolution (April 2011: $30 billion in spending cuts in return for not closing the government); and
  • This week's debt ceiling thriller.
This is a winning formula for budget-cutting Republicans, and the Obama White House has failed so far to figure out an effective response.  As a result, we can expect more

All of this means that, more likely than not, we will be back within a few months for the next crisis.  Next time, let's plan ahead, push back, and not get saddled with a deal that gives us all a hangover.

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