A Debt Deal Won’t Save Us
The budget wars are almost over! Long live the budget wars!
On Monday night the contours of a deal to defuse the ticking fiscal bomb emerged in the Senate. The government would reopen and stay funded through January, and the debt ceiling would be increased to get the nation through February. The Affordable Care Act would remain essentially intact. The two houses of Congress would agree to hold talks about long-term budget deficits. In other words – take two delays and agree to keep arguing over the same topics in the morning.
Tuesday, the House GOP reacted to the emerging deal by throwing its usual fit. But the histrionics in that caucus are simply a prelude to an ultimate cave. In the end, as he always does, Boehner will turn to Democrats and the minority of sane Republicans to pass a crisis-defusing deal. Whether a resolution comes today, Wednesday, or Thursday, it is likely to closely resemble the nascent Senate deal.
Bondholders, government employees, contractors, and beltway types whose weekends have been ruined by incessant brinksmanship may breathe a sigh of relief. The markets were placid Tuesday morning. But don’t be mistaken. Even if this deal passes, it won’t represent a major breakthrough. And we are likely to get more of the same – government-imposed austerity, uncertainty, excessive focus on short-term deficits, and brinksmanship that kills confidence and harms the real economy.
The great irony of this episode, in which Republicans have engineered a massive crisis in the name of confronting deficits, is that we are living in a Golden Age of Deficit Reduction. The August 2011 debt ceiling stalemate set into a motion a set of actions that would lead to deficit reduction – the Budget Control Act, the sequester, the fiscal cliff resolution. Those measures, combined with continued sustained growth and increasing taxes, have helped pare the deficit.
The Bureau of Fiscal Management is closed, so we don’t have the final report on just how much the deficit shrunk in the fiscal year that ended just as the shutdown began. But it’s likely it came in at about $700 billion in fiscal 2013, down from $1.089 trillion in fiscal 2012. There are more people working at slightly higher wages and paying more taxes. Spending on defense and unemployment benefits has come back dramatically. The housing recovery has pushed Fannie Mae and Freddie Mac back into profitability, and they pay huge dividends to Treasury every quarter. The annual deficit has essentially fallen in half in real terms over the past few years, and is falling more rapidly as a share of gross domestic product.
But here’s the thing. We’ve gone about a big chunk of deficit reduction in stupid, herky-jerky ways. Rather than rationalize the tax code, or reform entitlements, the government has taken a cleaver to discretionary spending. Spending on research, education, and infrastructure has been starved. And in the past few weeks, we’ve saved a lot of money by simply shutting down the government.
All this has been damaging to the real economy. A study released Monday by Macroeconomic Advisers, commissioned by the Peter G. Peterson Foundation, concluded that “crisis-driven government and the resulting fiscal policy uncertainty has directly harmed the economy by increasing the unemployment rate by .6 percent, or the equivalent of 900,000 jobs.” Further, the sharp reductions in discretionary spending have “reduced annual GDP growth by .7 percent since 2010 and raised the unemployment rate .8 percentage points, representing a cost of 1.2 million jobs.” That’s extraordinary.
The study suggests we’re two million jobs short of where we should be thanks to fiscal decisions (or non-decisions). And before you dismiss the study’s conclusions as partisan talking points, keep in mind that Macroeconomic Advisers is one of the straightest-shooting forecasters out there, and that the study was commissioned by a foundation associated with one of the biggest advocates of fiscal reform.
And that’s just past damage that can be quantified. The latest round of brinksmanship, which is still not over, is likely to prove very damaging to the economy. Hundreds of thousands of people have been thrown out of work, all sorts of businesses that are only tangentially related to the government can’t function at full capacity, and consumer confidence has continued to fall dramatically– just in time for the Christmas shopping season. Reopening the government won’t reverse that damage instantly.
Worse, the deal being discussed doesn’t really put these issues to rest. In the new year, Congress and the White House will be arguing, again, over spending levels and the debt ceiling. And there’s no reason to believe that a new round of negotiations on long-term fiscal issues will produce a result that is any different from the last several efforts. One party – the Republicans -- will not accept increased revenue in any way, shape, or form. And the other party – the Democrats – won’t accept a destruction of New Deal and Great Society social insurance. Besides, the Republicans, who are now the party of the aggrieved elderly, don’t really want to reform Social Security and Medicare ---- at least not for current recipients.
In general, all the calls for commissions, supercommittees, bi-cameral talks, and grand bargains amount to a great deal of hand-waving. Given how Washington is currently constructed, there is simply no common ground on which Democrats and Republicans can meet. It can’t be said enough times: Rep. Paul Ryan, the leading Republican light on fiscal matters, who voted for the prescription Medicare drug benefit without a funding mechanism, and for every Bush budget and tax cut, voted against the recommendations of the Simpson-Bowles Commission – of which he was a member.
So let’s have one cheer for a potential resolution. But investors shouldn’t relax. The shutdown isn’t a mere economic blip. The economic data over the next few months is likely to be disappointing. And while the climactic battle of October 2013 may be ending with a whimper, the skirmishes will continue for the foreseeable future, with the potential to ignite into a broader, all-out war at any time.