Ring the Bells and Sound the Sackbuts or Something! We Have A Deal on a Deal! Probably!

Here we go…again.

It looks like the debt ceiling circus may actually be at the end of the endgame. The President trudged to the microphone tonight and announced a debt ceiling deal with the Republicans. He also mumbled some stuff about evil rich people, but we’re pretty much ignoring that as reflex at this point. Now, we still have to get the House and Senate to approve what the White House has hammered out with the Republicans in Congress, but that should be a done deal. At this point, though, I take nothing for granted.

So, working from this PDF file Speaker Boehner sent around to the GOP Caucus, here’s what we have.

Phase One: The debt ceiling immediately increases $900 billion. The budgets for the next ten years will be $91.7 trillion less, working from the baseline, than they are projected to be now. That baseline part is important because it still means the budgets will increase. This will get us to February, 2012 (PDF Page 3).

Phrase Two: Here’s where it gets complicated. The Heads of the Great Houses of the Landsraad…err…four Congressional leaders will appoint a 12-member Joint Committee to come up with at least $1.5 trillion of deficit reduction over ten years by November 23, 2011. Now, this contains a few if/then statements, so hang with me while I try to wind through them. In each case, budget “cuts” but be equal to or greater than the accompanying rise to the debt ceiling.

– Scenario 1: If the Joint Committee finds $1.5 trillion in deficit reduction and they are “enacted” by December 23, 2011, then the President gets a second  increase in the debt ceiling of $1.5 trillion (PDF Page 5-6).

OR

– Scenario 2: If Congress votes to send a Balanced Budget Amendment to the states, then the President gets a second increase in the debt ceiling of $1.5 trillion (PDF Page 5-6).

OR

– Scenario 3: If the Joint Committee can’t find at least $1.2 trillion in cuts, then a sequestration process will kick in. The President ask for a second increase in the debt ceiling of $1.2 trillion and, if he gets it, a second wave of budget cuts equal to the difference between what deficit reduction the Joint Committee did find and $1.2 trillion kicks in. This wave will be split equally between defense and non-defense spending and will also include Medicare but will not include “Social Security, Medicaid, veterans, and civil and military pay”. So, if I’m reading this correctly, if the Joint Committee only finds $500 billion in deficit reduction, then those will go into effect plus an automatic budget cut of $700 billion will kick in, with $350 billion to discretionary programs and Medicare and $350 billion straight to defense spending (PDF Page 7).

So, to summarize, this is what I see here. We get one simple phase of ten-year baseline reductions to the budget in exchange for one short-term debt ceiling increase. Then we get a second phrase that involves more substantial deficit reduction (which is quite a different thing from a baseline budget cut from where I am in the cheap seats) or passage of a Balanced Budget Amendment in exchange for another debt ceiling increase. If neither of those happen, then the Sword of Democles falls in the form of immediate budget cuts to some pretty cherished programs.

Now, you’ll notice I didn’t say anything about tax cuts. Speaker Boehner is pretty confident, in the PDF and his statement to his caucus, that there won’t be any tax increases. The reason why is in this post by Jim Pethokoukis and hinges on the Bush tax cuts, which the CBO must score as a tax increase since they are set to expire in 2013 and that tax increase is part of the official baseline the CBO must use to score the Joint Committee’s work.

That little gimmick strikes me as a dangerous gamble, as it assumes that the Joint Committee won’t tack new taxes on top of the expiring taxes to get even more deficit reduction. The President is very intent on getting new taxes out of this deal (note the frequent references to “shared sacrifice” in the White House’s Fact Sheet) and I still don’t see the certainty in this agreement that prevents that from happening. I hope that economic and legislative minds smarter than mine can give me a couple reasons that don’t amount to “because it just can’t“.

So…what do I think? How does a solid “I honestly don’t know” sound? I like the immediate cuts to the baseline, though $100 billion dollars is just about pocket money to the federal government these days, enough to handle the yearly amount of Medicare fraud with room left over to almost cover the likely amount of fraud built into the Vote Buying Act Stimulus Bill. On the the other hand, $100 billion less is better than a relentlessly-increasing baseline, which is where the President really wanted to take us. It’s something and I think I can live with it. For now.

I’m intrigued in the “deficit reduction” phase of the deal. That’s bigger and better than a cut to the budget baseline, or even to the budget itself. There are all sorts of ways the Joint Committee could get that done (lower overall spending, Medicare or Social Security reform, real tax code reform) and bad (tax increases). I am very much worried about the possibility of tax increases but I’m willing to call this phase a good thing, if it works as planned. I’m not thrilled with an increase in debt ceiling and I’m far less thrilled that the GOP has been completely unable to push the point that a $2.4 trillion increase to the debt ceiling over several months is an immense compromise.

I suspect that the markets, here in the US and around the world, will like the deal if for no other reason than it represents some progress toward fiscal sanity, even if it’s a small amount of progress. If the markets like it, I can probably learn to live with it. I don’t have to be happy about it, though.

I need to see how this deal plays out over the next couple of months before I move off my firm position of “meh+”.

Other Posts of Interest:

• Don’t Get Excited, but We Could Have an Agreement Here (Corrected and Updated)
• Cut, Cap, and Compromise
• What Would It Take to Balance the Budget? A Lot Less Work Than We Think

Tags: Economics

Category: The Economy and Your Money