September 2, 2014

Topic A: Who Won and Lost in the Debt Deal?

Chief economist at the Concord Coalition and blogger at EconomistMom.com

The process leading to the debt limit deal exposed how dysfunctional our political system has become. Thank goodness we will avoid defaulting on our debt, but, on the other hand, it’s hard to conclude that we’ve restored the reputation of U.S. Treasurys as a “risk-free” investment.

Democrats are understandably upset that the agreed-upon deficit reduction in this round is entirely through spending cuts — and that the triggered policy changes if the second round fails will be entirely on the spending side. But it’s probably good news for Democrats that they didn’t do the whole big deal this time around, or taxes would have come off the table for good. This way there’s another chance to raise revenue while giving both sides “cover” on the issue.

House Speaker John Boehner has spelled out that the next round of negotiations will allow tax policy changes that are measured relative to the “current law baseline.” That is progress. Given that current-law revenue levels assume all of the Bush tax cuts expire as scheduled at the end of 2012, a tax reform that maintains this baseline would be consistent with deficit reduction relative to current policy (both sides’ standard all along) and revenue neutrality (“no new taxes”) relative to current law. Policymakers finally would be holding the Bush tax cuts to a strict pay-as-you-go requirement. This would mean both higher revenue and more deficit reduction — a more substantial and “balanced” package — than what President Obama himself has ever proposed.