Evaluation of U.S. Debt Crisis Deal

Yesterday saw a deal reached to raise the U.S. debt issuance limit, potentially averting a fiscal crisis.  Here is my evaluation of the U.S. debt crisis deal.

Details:

• Amount of the deal: $2.4 trillion in debt ceiling rise and $2.4 trillion in spending cuts
• Debt ceiling is lifted in two stages:
  • Stage 1: spending cuts of $917 billion over 10 years
  • Stage 2: a Congressional committee of both 6 Republicans and Democrats must find $1.5 trillion of additional deficit reduction; will come from:
    • Tax overhaul
    • Changes to entitlement programs
• If the bi-partisan committee doesn’t find $1.2 trillion in cuts, or if Congress doesn’t approve its proposals, then pre-set spending cuts automatically kick in

Analysis:

Before saying anything else, I have to point out that House Republicans have to vote on this plan and they have proved to be a motley, unruly bunch.  So all of the finagling may have been for naught.

I am a fan of this plan in the following ways:

1. It raises the debt-ceiling which will mitigate, if not entirely avert, a sovereign U.S. debt crisis
2. That each dollar of a rise in ceiling was accompanied by a dollar of spending cuts
3. It does roughly what I had hoped a “short-term” plan would do: lift the debt ceiling and provide a framework for dealing with long-term issues going forward.

I am not a fan of this plan for the following reasons:

1. This plan doesn’t address the long-term fiscal health of the United States.  After months of wrangling in which both parties looked prepared to have a substantive discussion about how to right the U.S. fiscal ship, both parties, due to intransigence, punted.  So the scope went from broad to narrow: let’s find a way to raise the debt ceiling limit.  Frankly, this response from Congress is European-like in its lameness.  It is strong proof that the government of the United States is gridlocked and impotent.
2. The plan specifically doesn’t include a balanced budget amendment – something that I think is critical for the long-term viability (20+ years) of the United States.  A balanced budget with a provision that allowed for an unbalanced budget in the event of TRUE crisis, such as war, or economic depression, will do a lot to ensure the long-term health of the United States’ economy.
3. The plan doesn’t address the long-term revenue side of the equation at all.  As I wrote last week, U.S. taxes are currently their lowest in 61 years, and lower than they have been under any President, Republican or Democrat in that time.  Yet, the fiscal situation in the U.S. is about the worst it has been since World War II.  The “Tea Party” and “Trickle Down Economics” thinking goes that low taxes equal strong economic growth, yet economic growth is anemic.  As I also wrote about last week, tax policy seems to have no measurable difference on the economic health of the nation.  But I do know that a viable, fiscally sound government does have a profound effect on economic sustainability and health.  So why not raise taxes and begin to resolve the U.S. fiscal situation?
4. The plan doesn’t address the hard questions about spending going forward.  For example, when Social Security and Medicare were imagined the life expectancy in the United States was about 67 years.  So entitlement programs were basically only going to be exercised on a small proportion of the people.  Now life expectancy is much longer, so shouldn’t the age when benefits kick in be raised from 65?  This is the type of hard question that needs to be addressed.

In short, I think that the U.S. political leadership has more than mildly failed – not a colossal failure, but more than a minor one, too.  Primarily, the government has damaged much of the small amount of trust that it had remaining from the U.S. public and investors worldwide.  Unfortunately, trust takes a long time to rebuild.

Importance grade: 9; that the debt ceiling was raised, pending a likely affirmative vote today, is the most important thing.  That there was so much fuss over, what was ultimately a “punt” is despicable.

Jason