September 1, 2014

Debt-Limit Deal Avoids Default But Does Not Solve Fundamental Fiscal Problems

In this debt-limit game of musical chairs, the music has stopped and it’s time to grab a seat. The only one available is the deal worked out by congressional leaders and the Obama administration over the weekend. It is not a solution to our nation’s fiscal problems and is far from the “grand bargain” needed to put us on a sustainable path. However, a debt-limit deal needs to get done. This one at least avoids a self-inflicted wound caused by the government’s defaulting on its obligations, and it gives proponents of a grand bargain another turn at bat.

The main flaw in the agreement is that it reflects the continued refusal of our political leaders to confront fiscal reality. Once again, they are leading with discretionary spending cuts while leaving the biggest problems -- entitlement and tax reform -- for another day.

If this is what they have to do to pass a debt limit increase, so be it. But no one should pretend that they have solved anything other than an artificial political crisis. The fundamental fiscal crisis is pretty much unchanged.

A positive element is the proposed special congressional committee charged with finding deficit reductions beyond the initial trillion-dollar down payment. The committee is the only aspect of the agreement that has the potential to be a game-changer. All options are on the table for this round, meaning that the committee could come up with a comprehensive plan similar to the Bowles-Simpson or Rivlin-Domenici recommendations. And there is nothing to preclude the committee from finding even more deficit reduction than the $1.2 trillion to $1.5 trillion called for in the deal.

Much will depend on who is appointed to the committee and how they approach their task. If they accept appointment with pledges to keep revenue increases or entitlement cuts (including benefits) off the table, they will not be able to get the necessary savings or votes to reach their goal. If they approach it with an open mind, all things are possible – even a grand bargain on fiscal sustainability.

But the committee may not be able to reach consensus, or the Congress may reject any recommendations it does reach. So the fail-safe “trigger” mechanism is very important.

Triggers have an appropriate role in deficit reduction plans, but this one has some design flaws that could prove to be very problematic.

First, the trigger fails to include any revenue consequences. All of the penalty for inaction would be paid on the spending side of the budget. With no revenue increase on the trigger menu, those who favor spending cuts alone have an incentive to run out the clock on the committee.

A related issue is that the trigger exempts a large portion of spending, such as Social Security, Medicaid and Medicare benefits. With revenues also exempted, the main blow would once again fall on discretionary spending. The scale of cuts that would be required from these programs, including defense, may prove to be so great that Congress and the President would not allow them to go into effect. This would be the troublesome "doc fix" on steroids.

Finally, let’s suppose everything works as planned. We still end up reducing projected deficits over the next 10 years by only $2.5 trillion – far short of the $4 trillion or so in the grand bargain that the White House and congressional leaders were at one point contemplating. Total deficit reduction of $2.5 trillion also falls short of the recommendations of various bipartisan panels. 

In the end, what’s remarkable about this debt deal is that it does so little to address the root cause of our debt problem. Nothing in the agreement actually forces Congress, the President or the American people to confront the growing structural mismatch between entitlement spending and revenues.

So grab the chair; vote yes. But don’t get too comfortable. There is a long way to go in this game.