The Four Big Problems With — And Four Silver Linings Around — The Debt Limit Deal

August 1, 2011 7:00 a.m.

Progressives are furious. Conservatives are somewhat less furious. And for the most part all anybody knows about the budget plan is that it cuts a lot of spending over 10 years, and includes no guarantees that anybody — particularly the well-off — will pay more in taxes. Thus, the anger: after huge tax cuts for the rich, two unfunded wars, and a financial crisis triggered by Wall Street greed exploded budget deficits, the people asked to narrow the gap are overwhelmingly regular folks.

All of this while the economy is still reeling. It might not be as bad as this, but there’s certainly a lot missing here.

So with that background in mind, here are the four worst problems with, and four silver linings around the debt limit deal.SILVER LININGS


Most economists would agree, now is a bad time to cut government spending. We’re already seeing the contractionary effects of the end of the stimulus, and this just reinforces those. The good news is that the near term cuts are quite small. Only about two percent of the nearly $3 trillion in savings outlined in this plan occur in the first year, and they don’t all come from social programs. They also come from defense spending and other domestic programs. So its near-term impact on the economy will be pretty small. Of course, if the economy doesn’t recover soon, the out year cuts will turn out to be very painful.


As explained at length on Sunday, most of the projected savings from this plan will come from a new Congressional committee, tasked with finding at least $1.2 trillion in deficit reduction, either from entitlement cuts, or tax increases or both. If that committee gridlocks, or Congress doesn’t pass its recommendations, or President Obama vetoes that package, it will trigger automatic, broad cuts to both defense and domestic programs. Most of that will come from defense spending and from Medicare providers. The bad news is, there’s no tax revenue in the triggers, so no guarantee anywhere that the truly wealthy will have to contribute to deficit reduction. The good news is, the breakdown of this enforcement mechanism is fairly progressive, given that it’s all cuts. It amounts mostly to a two percent cut for Medicare providers, and a whopping $500 billion in defense cuts over 10 years. Programs for the poor and for veterans and Social Security and Medicaid are all cordoned off. The added bonus here is this means influential defense hawks, and the interests that back them, will do whatever they can to force the committee to pass a bipartisan fiscal plan, even if it means picking a fight with anti-tax Republicans. The other added bonus is that these “sequestered” cuts won’t take effect until 2013 — the same time the Bush tax cuts are scheduled to expire.

The Bush Tax Cuts

This plan contains zero guarantees that taxes will be raised — more on that below. But it’s unexpectedly compatible with the White House pledge to let at least some of the Bush tax cuts expire, particularly those benefiting the wealthiest American. Here’s why: When the new fiscal committee convenes, it will have free reign to look at both entitlement cuts and tax increases. The problem is that tax increases are scored by the Congressional Budget Office against “current law,” which assumes the expiration of all the Bush tax cuts. So if the committee tries to end the tax cuts for the top earners, but make the rest of them permanent, it will score as a big tax cut and thus a budget buster. Not something a committee tasked with deficit reduction will want to touch. But that means the committee will have to look at other revenue raising options — loopholes and expenditures that have nothing to do with the Bush tax cuts, say, or a new millionaire’s tax bracket. But that also means the Bush tax cuts will survive this process in a way that almost guarantees they’ll be set to expire at the end of 2012. That gives Democrats a lot of leverage if they want to pick a fight over those cuts with Republicans next year. History suggests they’ll chicken out. But perhaps they won’t.

No default

It sounds defeatist to count the fact that this plan avoids default as some sort of victory. Raising the debt limit has almost always been a routine matter in Congress, and calling it a victory in a way dignifies the GOP’s willingness to put the country’s creditworthiness at risk in pursuit of largely unpopular ideological goals. Throughout this fight, Democrats backed off demand after demand. But they held firm on one: the idea that the Republicans shouldn’t be able to kidnap the same hostage again in the middle of election season. This plan, in a convoluted way, guarantees that the country won’t run out of borrowing authority again until the end of 2012. There will be other hostage crises between now and then, but none with consequences as grave as debt default.


Domestic discretionary cuts

The first part of the budget to take a hit — and that will be hit for at least a few years into the future — is the one part of the budget that hasn’t grown particularly fast over the last decade. And it’s also the part that matters the most for regular people: Health programs, education, clean energy, and transportation. It will be cut and capped, in a way that the Congressional Budget Office forecasts will amount to hundreds of billions of dollars less spending for these crucial programs.

What it lacks

Late last year, President Obama struck another big deal with Congressional Republicans — one that extended all of the Bush tax cuts for two years, but also included a payroll tax holiday for employees, and a one-year extension of unemployment insurance. As the Recovery Act has phased out, those concessions are now the only two things providing the economy with billions of dollars a month of extra juice — juice that will run out at the end of 2011. Earlier in this debt limit fight, when Obama was aiming for a “grand bargain,” he was also pushing to include a year long extension (and possibly a widening) of both of these measures. They didn’t make the final cut. And if they don’t get extended sometime between now and December 31, the resulting economic contraction will be significantly larger than the contraction caused by the initial spending cuts, which in the early years are relatively small.

What it isn’t

Of course, this austerity plan could be worse. Cuts could be heavily frontloaded and larger, and aimed more squarely at the poor and middle class. Defense is a real target here, as are Medicare providers, as opposed to Medicare beneficiaries. In the base deal, veterans and Social Security and Medicaid beneficiaries are walled off from immediate cuts. But at the end of the day, this is still an austerity plan. What the country really needs is a large stimulus — aid to states, big infrastructure programs and so on — with an eye toward fiscal consolidation later in the decade. The White House argues that budgetary concerns so dominate the political landscape that new deficit spending right now is out of the question, and only possible in the future if preceded with consolidation measures like this one. But part of the reason Washington is so primed for austerity now is that the White House let that faction of the establishment seize the initiative. It didn’t necessarily have to be so.

What it doesn’t do

Literally nothing about this plan will do anything to slow the growth of health care costs — the true driver of the country’s structural deficit. A future deficit plan, one that includes entitlement and tax reforms, might do that, but there’s really no guarantee. In the end, this plan assures that most of the savings will come from programs that don’t really need, and can’t easily afford, to be cut. It doesn’t change the nature of government, as conservatives want, and it doesn’t take the “deficit” issue off the table, as battle-weary liberals would like. In that way, it’s just sort of mean. It also contains zero guarantees that we’ll see any fresh sources of federal revenues. The down payment on deficit reduction comes entirely from discretionary cuts, defense and non-defense. The committee process it sets up doesn’t forbid tax increases, but Republicans will fight them vigorously. And if that fight turns into gridlock, and the statutory enforcement mechanism kicks in, it’ll be all cuts. By the time everything called for in this bill takes effect, Treasury could still be taking in historically low levels of revenues.

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