August 1, 2014

Go Long

 

This originally appeared on The American Square at http://theamericansquare.org/profiles/blogs/go-long

President Obama says he wants to jettison the short-term focus that has guided recent budget negotiations in favor of a more comprehensive fiscal sustainability plan. This initiative could be the beginning of a major new phase in negotiations between the administration and congressional leaders. On the other hand, it could prove to be just another false start, designed for “positioning” rather than results. It will take more than one or two meetings to know the difference.
 
In any event, we seem to have come full cycle. This is where negotiations should have started several months ago when the President presented his original budget. But even if precious time has been wasted, the right goal is finally in view.
 
Our fiscal challenges demand an ambitious approach. Ratings agencies Moody’s, Standard and Poor’s, and Fitch have all warned the United States that its coveted Aaa credit rating will be reevaluated if swift and comprehensive action is not taken to get its fiscal house in order. Political gridlock featured prominently in these warnings. As Moody’s puts it, “…the degree of entrenchment into conflicting positions has exceeded expectations.”
 
It has become clear that the essential compromises that must be made for any plan to be politically viable are not any easier whether the goal is a short-term debt limit increase or a more ambitious multi-year plan. Since negotiations on short-term objectives have gained little traction, a football analogy is apt: go long.
 
To be sure there are risks with this approach, most notably the lack of time to negotiate, draft and enact major legislation before the debt limit hits. But if progress can be made on a larger agreement, raising the debt limit to accommodate the time needed to complete the process should not be a problem.
 
My pitch to the negotiators would be:

  • Begin by agreeing that the debt limit must be raised to avoid a default in one form or another.  It is not in the nation’s best interests to flirt with default in any form. Pretending that the markets won’t notice if we “prioritize” our bills (i.e., refuse to pay them all) is self-delusional. As Fitch warned, this process “would damage perceptions of US sovereign creditworthiness and signal growing financial distress.”
  • Attach conditions to the debt limit increase designed to improve the long-term fiscal outlook.  Instant austerity is not required, and would not be helpful to the economy. What is crucial, however, is to immediately enact a substantive, credible, plan to demonstrate that we are serious about getting our fiscal house in order.
  • Subject all parts of the budget to scrutiny. This includes entitlements, discretionary spending, including defense, and revenues. Preconditions set by one side will simply encourage preconditions by the other side. Neither side will fully engage unless it thinks the other is willing to bend.
  • A credible enforcement mechanism with targets and triggers should be enacted to ensure that assumed savings actually occur.  A good model for this is the Bipartisan Policy Center’s Save-As-You-Go plan (SAVEGO).