Is this deal good for the economy, or our fiscal health, or long-term deficit reduction? I think the answer is no on all three counts.
This is the new debt ceiling deal in a nutshell: Republicans get spending cuts without tax increases and a guaranteed vote on the Balanced Budget Amendment. The White House gets the debt ceiling extended until 2013. The Democrats get basically nothing. An optimistic Democrat (if such a thing exists, anymore) could argue the party benefits from the very existence of a deal, which averts default, downplays the deficit in an election year, and clears the way in 2012 to talk about the GOP's Medicare votes. But at the end of the day, Democrats are a left-of-center party in a right-of-center country signing onto a right-of-right deal to reduce the deficit. You practically need infrared goggles to see the silver linings.
But enough about the politics. Is this deal good for the economy, or our fiscal health, or long-term deficit reduction? I think the answer is no on all three counts.
1. Is it good for the economy?
No. Government is a part of the economy. When it shrinks, the economy shrinks, unless the private sector is strong enough to make up the difference.
Today, there is very little indication that American businesses are prepared to bike on their own without the government's tricycle wheels. The economy has grown less than 1% in the last six months, which happened to coincide with the end of the stimulus and the shrinking of overall government. Job creation has been abysmal. The government is the only part of the economy that can go to international markets, borrow a $100 billion dollars tomorrow, and send it in the form of checks to millions of families. Instead, we're prematurely accelerating from stimulus to stasis to austerity.
Government is shrinking already. Total government contributed negative-2% to GDP growth in the last three quarters. In the next two years, this plan will cut government by another $70 billion. That's only 0.5% of a $14 trillion economy -- or 0.25% over two years. It doesn't sound like much. But in a fragile country that barely growing at 1%, even a fraction of total government spending can make the difference between growth and stasis.
2. Is it good for fiscal responsibility?
No. Step back and ask: Why do we care about the debt anyway? The answer is that if we borrow faster than we grow, international investors will eventually turn against us and we'll be stuck with higher borrowing costs permanently.
But growth is a part of fiscal responsibility. If you're not growing, it doesn't matter how fast you borrow. Even with a nearly balanced budget, your debt-to-GDP ratio won't decline because your denominator isn't going anywhere.
We needed to solve our growth crisis first and our debt crisis second (or at least simultaneously, by front-loading stimulus into a long-term balanced deficit reduction deal). Instead, by getting out in front of our debt crisis, we risk deepening our growth crisis ... which, ironically, means deepening our debt crisis!
3. Does it increase our odds of planning smart and sustainable growth in the future?
Not really. The deal establishes a Bipartisan Joint Committee to find an additional $1.5 trillion in savings before December through further cuts, entitlement reform, or tax reform. It's hard to imagine we'll get a center-left deal on taxes and entitlements after this right-right bargain on spending cuts. If the House refused higher revenues in July, they won't roll over for higher revenues in December with 2012 that much closer.
Meanwhile, tax revenues as a share of total income are at levels not seen since the 1950s. Effective tax rates on the wealthy are at their lowest levels since the 1970s. It makes little sense to cut deeply into domestic spending, including basic research, education, public health initiatives, job training programs, infrastructure, food banks, homeless shelters, community service grants, and more, while claiming that no family in America deserves to pay one cent more in taxes. Rather than protecting these hallmarks of government investment, they're first on the chopping block.
There is room to cut in government. At least $1 trillion dollars in domestic cuts has been a part of practically every deficit reduction package I've seen. But the best plans pair those cuts with progressive tax reform and fair entitlement reform. This Congress has one more shot at the latter.
So, who's feeling optimistic?
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