The situation is changing rapidly. Ratings agency downgrades of U.S. debt in 2011 may have triggered a rethink among Republicans and, at the same time, prompted Speaker John Boehner to separate the debt‐limit issue from the fight over Obamacare and short‐term federal funding. He could allow the debt limit to be increased through a separate vote in the House. Senate Democrats would probably go along with this strategy.
But increasing the debt limit is only likely to push forward the day of reckoning by a few months.
Naturally, people are wondering what new tricks Congressional leaders will devise to resolve the stalemate on federal funding but avoid political blame. We could be witnessing the solution already with the government shutdown — the indefinite closure of “non‐essential” government operations may be acceptable to Republicans.
The late Cato economist, William Niskanen, frequently declared the “starve the beast” strategy of reducing the government’s size by disallowing tax increases to be woefully ineffective. The only remaining option, then, is to close federal non‐essential services directly. After all, under the current stalemate, the most highly politically sensitive federal services such as Social Security, Medicare, Medicaid payments, food stamps, unemployment benefits, Obamacare exchanges, the Judiciary, military, air‐traffic controllers, and so on, will remain up and running.
The burden of showing that “non‐essential” government operations are “essential” is now on Democratic lawmakers.
That leaves the debt limit issue, which remains a concern even if it is pushed ahead by a few months. Resolving it will require a grand bargain between the two political parties on eliminating long‐term federal budget imbalances – especially those built into entitlement programs.
Social Security, Medicaid and Medicare remain the secular drivers of U.S. government debt and it’s clear that periodic increases in the debt limit cannot be the answer. For example, federal debt increased by $2.41 trillion since the previous political clash in April 2011. In contrast, the nation’s GDP has increased by just $1.4 trillion. Austerity‐phobes such as Paul Krugman argue that sequester cuts are themselves to blame for the slow GDP growth. But anti‐austerity arguments are not applicable to long‐term structural budget imbalances. Those must be resolved through a grand bargain on taxes and spending.
Entitlement reforms must remain a priority no matter the outcome of the current fight over funding “non‐essential” federal programs. The Congressional Budget Office has clearly warned of the negative consequences of accumulating debt under current entitlement policies. CBO projections show that continuing to fund entitlements under current laws – by increasing taxes as needed – would increase the federal government’s control over the nation’s economic output to unacceptably high levels, and increase investment and work disincentives to unprecedented levels. The answer is to combine expenditure cuts with program reforms to restore work and investment incentives.
So how can lawmakers, especially Republicans who claim to favor fiscal restraint and small government, lock in long‐term fiscal reforms? They could try yet another super‐committee with a gun to its head in the form of entitlement spending cuts. Of course, entitlement program changes contrived under pressure from federal funding and debt‐limit crises will likely not yield good policies. Substantive and carefully designed structural changes are needed to restore entitlement programs to their proper functions, respond to increasing human longevity, remove anti‐work incentives, and require shared‐sacrifice by well‐off seniors. But like the sequester cuts that the previous super-committee’s failure triggered, imperfect adjustments may be better than no changes at all.
It may be the only way elected officials can surmount the political hurdles before a “grand bargain” solution. Convoluted as it sounds, Congress must ultimately convene yet another guaranteed‐to‐fail super‐committee under threat of entitlement spending cuts. We should be prepared to hold our noses yet again.