The Debt Debacle: A Phony Solution to a Phony Crisis
If the news from Washington has been making you anxious, rest easy: The economy won’t collapse—at least not today—because policymakers have come to an agreement. And the crisis was fake, anyway.
Despite all the drama, the debt-default crisis was a manufactured one. While it's true that, absent an increase in the government's legal borrowing limit, the danger of an economically disastrous debt-default was very real, there was no particular reason for that limit to be in place: The U.S. can borrow cheaply today, and while the country's current balance sheet is out of whack, an actual crisis is years, not days, away. No other developed countries limit their government borrowing the way the United States does.
This crisis came about because resurgent Republicans were determined to force Democrats to negotiate on their terms. Republicans exploited a legal technicality—one designed, ironically, to make it easier for the government to borrow money—to threaten a default on spending they'd already approved unless President Obama and his party agreed to drastically cut spending without increasing taxes.
So where are we now? The solution that the Senate is set to vote on in a matter of hours has little to do with those problems, either the unsustainable mismatch between taxes and spending, or even more pressing challenges like too many people out of work and too little growth in the economy. All it's done is buy the two parties another six months to struggle for the political upper hand.
The immediate deal targets the government’s annual spending, cutting it by nearly trillion dollars over the next ten years—a big number, but small compared to what was under discussion just weeks ago. The cuts will dampen economic growth, and they won’t help keep the government in the black over the long term, since automatic spending on health care and social insurance combined with historically low taxes means we'll continue to pay out a lot more than we bring in until we pass more ambitious reforms.
How did we get here? It’s hard not to look at the last six months and shake your head.
Republicans, their image tarnished among independents, were largely aiming to please their most conservative, Tea Party-loving constituents—and they just might succeed with this deal. While they are loathe to admit it, any economic damage will make it easier for Republicans to oust the president in 2012, when the most important factor in the campaign will be voters' perceptions of their financial security.
Obama, meanwhile, saw an opportunity to shore up his credibility as a bipartisan dealmaker, and went looking for a deal, though the deadline left little time for the kind of comprehensive overhaul that would constitute a real solution to the country's economic problems.
In Washington terms, the score is pretty straightforward. Republicans get an early win—a big-sounding spending cut—and Democrats protect their sacred cows (like Medicare) in the short term while gaining a chance to push their priorities for the next six months. Should all else fail, they can allow President Bush’s tax cuts to expire on schedule next year.
The real costs to the public aren't so much in the deal as they are in what wasn't done: Efforts to create jobs, invest in the future, and fix broken and outdated systems weren't undertaken at all as the capital was consumed with the debt crisis. Not coincidentally, public opinion polls show that the image of everyone in Washington has suffered significantly for the debate.
What's next? Congress will have a second bite at fixing the country’s finances through a new “super committee” empowered to find and fast-track another $1.5 trillion in savings from the whole budget by the end of the year. If it fails, a penalty phase enacts $1.2 trillion in across-the-board cuts split between defense spending and the rest of the annual spending.
We’ve seen the "super committee" before: The president put together a similar commission last year to deal with fiscal issues. It came up with a fairly balanced plan of tax increases and spending cuts, the same compromise supported by most experts—a plan that was boycotted by nearly all Republicans because it included tax increases. Expect a replay of that fight, though Democrats hope that this time around the threat of deep cuts in defense spending will force Republicans to cave on some tax breaks for the wealthy and corporations and produce a balanced deal.
The deal also includes a vote on a constitutional amendment to mandate balanced budgets. The proposal, demanded by conservatives, would end government's ability to borrow money in response to economic shocks and unexpected costs like wars and disasters. Even the House Republicans' budget, which dramatically reshapes the government through spending cuts, wouldn't meet the standards of the amendment, and it is unlikely to pass Congress.
In the meantime, President Obama will hang his hat on the fact that he’s laudably protected the United States’ credit rating with a minimal amount of immediate spending cuts, consolidating his forces in the hopes of finding more favorable ground to push his own agenda forward in the future. It’s an impressive rear-guard action for the president. But even the most organized retreat is just that.
Image (cc) via Flickr user Digiart2001