In the face of a $1.1 trillion budget deficit, a $14.3 trillion official debt, and a real indebtedness of more than $120 trillion, Congress has just voted to increase the debt ceiling to roughly $16.8 trillion through 2012 while allowing the national debt to eventually rise to some $21 trillion by 2020. That it otherwise would have reached $23 trillion is scant comfort. With our country careering toward a fiscal cliff, Congress has chosen to tap on the brakes, not change direction.
The deal was very likely the best that Republicans could get under the circumstances, but it does frighteningly little to solve our long‐term fiscal problems.
In theory, the deal starts with a spending reduction of roughly $935 billion over the next ten years. That would be an average cut of just under $100 billion per year, or a bit less than the federal government will borrow this month. But wait — that’s not actually a $935 billion reduction in spending. It’s a reduction from the planned baseline increase in spending. What the deal does is to constrain spending at a somewhat slower rate of growth. Moreover, about $160 billion of the $935 billion actually comes not from reductions in programmatic spending, but from interest savings. And, of course, most of the purported reductions are pushed well out into the future. It will cut barely $21 billion from the 2012 budget, about 1.5 percent. Since it is impossible for this Congress to bind future Congresses, there is ample reason to be skeptical about whether cuts scheduled to take place long after most of these lawmakers have retired will ever occur.
What about the second stage of cuts? As has been much discussed, the budget deal did something that Washington has never before considered — it created a committee to propose an additional $1.2 trillion to $1.7 trillion in spending cuts or tax increases. Here’s what makes this idea truly unique. It won’t be just a committee; it will be a supercommittee. Yet, even before the members of the committee have been appointed (Do they get a cape and a big red S on the front of their suits?), nearly everyone in Washington agrees that they are not going to be able to reach agreement. Republicans won’t — and had better not — agree to any tax hike. And without a tax hike, what incentive is there for Democrats to agree to entitlement reform?
In that case, there would be automatic cuts of about $1.2 trillion, split equally between domestic programs and defense. However, those cuts would not go into effect until 2013, after the next election, leaving plenty of time for the Congress to rewrite, reduce, or eliminate them.
More troubling, the deal fails to deal with entitlement reform. It is the entitlement programs — Medicare, Medicaid, and Social Security — that are driving this country towards insolvency, but this plan does not include any structural reform of these programs. They are exempt from the first round of cuts, and the level of cuts that can be proposed by the supercommittee are far too small to encompass anything like the Medicare reforms that Rep. Paul Ryan proposed early this year. Both Social Security and Medicaid are exempt from the across‐the‐board cuts that kick in if the committee’s cuts do not occur. Medicare could be trimmed, but only in terms of further reductions of reimbursement to providers, not by reducing benefits or requiring seniors to pay more.
It could be worse. President Obama started out the year calling for an increase in government spending. Instead, the deal included cuts or at least reductions in the rate of spending growth. And, Republicans stood firm against any tax increase. Putting defense cuts on the table is long overdue. And a precedent has been set. Call it the Boehner Rule: Future increases in the debt ceiling will almost certainly have to include additional spending cuts.
But as far as serious debt reduction, we might as well not have bothered.