The debt ceiling package passed the House this evening by a surprisingly large margin–over 100 votes–and is headed to the Senate tomorrow. Assuming no filibusters, or other procedural delays, it should pass the Senate as well. Then, finally, this entire spectacle will come to a brief end–until we start arguing about cuts in the future.
But I will take a brief end, because I think that the debt deal is a good one, and because I believe it gives us a good chance of avoiding a credit downgrade (I really hope I am right about that, but even if we have a downgrade, it will be a small one, as opposed to the massive one that we would suffer if we were to default on our debt), while at the same time obtaining significant deficit reduction.
Regarding the deficit reduction issue, I give you the analysis from the Congressional Budget Office:
CBO estimates that the legislation—apart from the provisions related to the joint select committee—would reduce budget deficits by $917 billion between 2012 and 2021. In addition, legislation originating with the joint select committee, or the automatic reductions in spending that would occur in the absence of such legislation, would reduce deficits by at least $1.2 trillion over the 10-year period. Therefore, the deficit reduction stemming from this legislation, including savings in debt service costs, would total at least $2.1 trillion over the 2012-2021 period.
Those amounts are relative to CBO’s March 2011 baseline adjusted for subsequent appropriation action. CBO has also calculated the net budgetary impact if discretionary savings are measured relative to its January baseline projections. Relative to that baseline, CBO estimates that the legislation would reduce budget deficits by at least $2.3 trillion between 2012 and 2021.
That ain’t chicken feed.
“But what about the cuts in spending that will harm near term economic growth,” ask the Keynesians amongst you. Let’s turn the microphone over to Josh Barro, who–like me–favors the deal:
The deal includes a lot of spending cuts, but it’s important to understand how backloaded these cuts are. The headline figure is $2.5 trillion in cuts over ten years, but less than 1 percent of those cuts will come in FY 2012. The near-term fiscal changes are so small that they will matter very little for the economy. The long term changes will be subject to revision by future Congresses and will hopefully come when the economy is healthier—and the parts that do go into effect will probably not be that different from whatever fiscal adjustment we were going to have to enact sooner or later.
There are two parts of the spending cuts in this package that really do matter. One is the cuts that will apply in Fiscal Year 2012. There probably won’t be very big; there will be $22 billion in spending cuts compared to the baseline for 2012, or about 0.15 percent of GDP. (That’s out of the $1 trillion in cuts that will be agreed upfront.)
A “Super Committee” will be charged with finding a further $1.5 trillion in deficit reduction, and we can expect that the cuts it recommends will again be backloaded. (Indeed, if the Super Committee deadlocks, we will go to an automatic “trigger” process which involves no cuts at all until FY 2013). Discretionary spending cuts that come out of the Super Committee process will again be subject to the whims of future Congresses. Any changes to mandatory spending that come out of the Super Committee are more likely to be sticky—that’s the second part of the cuts that matters—but I’ll believe we’re getting meaningful entitlement reform when I see it.
So, liberals who are upset that this deal is destimulative, or who expect it to tank the economy, are off base. Suzy Khimm cites a study finding that a 1 percent of GDP fiscal consolidation implies a 0.5 percent reduction in GDP after two years—or a reduction in the growth rate of 0.25 percent each year. That points to a hit to annual GDP growth of roughly 0.04 percentage points from the FY 12 changes in this plan—an effect that will be impossible to pick up amidst the noise.
The consolidations get larger in later years. But an eventual fiscal consolidation is inevitable—we can’t run deficits over 5 percent of GDP forever. If the economy remains terrible in 2014, it is likely the cuts will be delayed.
Finally, I would note that the president called for a “balanced” approach to fiscal adjustment, and this is one. We now have $2.5 trillion in automatic, scheduled spending cuts* over the next 10 years. That comes on top of $2.8 trillion in automatic tax increases that are already scheduled through the year 2022, due to the expiration of the Bush tax cuts at the end of 2012. Indeed, Republicans have a good case that the automatic deficit reduction plan is not balanced but a bit tax-heavy.
So, the overwhelming bulk of the cuts are delayed to the out-years, when presumably, we will have more economic growth to cushion the blow of any fiscal contraction. There is, as a consequence, no reason whatsoever for Keynesians to be upset about this deal, though I am sure that they will find a way to be upset about something.
“But how can we be sure that the cuts will actually take place in the out-years,” cry the non-Keynesians amongst you. Well, that certainly is an issue, but the debt ceiling package provides a clear legislative path towards the enactment of those cuts. The following flowchart showing how the debt ceiling legislation works was put out by Senate Republicans:
Can the mechanism outlined in this flowchart be subverted by a future Congress? Sure; there is no way that the present Congress can irrevocably bind any future Congresses. But that is the case for all legislation. We might be concerned that in the future, a piece of legislation that we like now may be changed into something that we don’t like, but that is the risk we run with any legislation that we pass, and if we are going to let that fear and concern keep us from passing any legislation whatsoever, then we would miss out on the enactment of a lot of good policy. That’s a plainly unrealistic outcome. No one denies that work needs to be done to ensure that the terms of the debt ceiling deal are enforced, but I don’t see future enforcement responsibilities as an excuse for not signing on to the deal, and since the debt ceiling deal does provide a workable enforcement mechanism, I am willing to give this plan a shot. I admit that part of the reason I am willing to sign on to the plan is that it is really late in the game, and we need to pass some kind of deal in order to ensure that we raise the debt ceiling before August 2nd, and before we run the risk of not being able to pay a large portion of the 80 million bills that we pay every month, but this does not detract from the strong points in the bill.
“But I want the trillions of dollars of cuts to occur now, so that we don’t have to worry about what happens in the out-years,” the non-Keynesians insist. Well, that would be nice, but while Keynesian stimulus is a crock of an idea, the fact remains that government is a very significant player in the national economy, and if we massively frontload cuts, then that will bring about a negative economic effect. Let’s face it: Government spending does have an effect on the economy, and while that certainly doesn’t justify a temporary Keynesian stimulus that won’t have a chance of taking care of any long term economic problems–as we have seen with the $787 billion stimulus package passed in 2009–it does mean that we need to make sure to spread out the cuts in order to spread out the pain that does come from fiscal austerity. And it also means that we need to be careful about near term cuts when the economy is growing slowly at best, and when there remains a chance that we may slip back into recession.
I recognize, of course that writing all of this means that I run the risk (again) of getting called a “RiNO,” or “CiNO” (again) by people averse to any bargaining whatsoever. To which my reply is that whatever their level of zealotry, politics is the art of the possible, and if you think that it is possible to frontload trillions of dollars of cuts in the current economic climate–or even when we are rocketing along with 3-4% GDP growth–you don’t know much about politics. Again, do we need to be vigilant to ensure that cuts take place in the out-years? Sure. But the debt ceiling legislation gives us a way to be vigilant, and the fact is that in the out-years, the deficit and debt will become even more pressing policy issues than they are now. And that means that there will likely be even more pressure in the future to cut spending in order to bring our fiscal house in order; something that will help deficit hawks (like me) effect our favored budgetary policies.