The President and leaders in Congress have basically thrown in the towel.
Democrats are unwilling to endure the political risks of agreeing to sorely needed spending cuts. House Republicans are holding out against revenue increases. The final deal announced Sunday includes just $1 trillion in cuts to discretionary spending, with an increase in the debt limit sufficient to carry through next year. Thus, this deal achieves far too little by way of spending cuts, keeps open the possibility of new taxes, and hikes the debt ceiling substantially — all of which constitutes a clear and predictable kicking of the can past the November, 2012 elections.
The deal, therefore, does not reduce the economic uncertainty that is keeping the country mired in recession. The major deficit drivers — Medicare, Medicaid and Social Security — are not addressed. That task is dispatched to a special committee of 12 senators and House members to be convened by congressional leaders. The joint committee is to report back by November 23, 2011 on further deficit reduction measures. But its members may be unable to agree on sensible deficit-cutting measures, or its recommendations may be voted down by Congress. If that happens, deficit reduction will be triggered through automatic and haphazard cuts to discretionary programs — but Social Security, Medicaid, defense, veterans programs, and civilian and military pay will remain walled off. That leaves a lot of red ink completely off the negotiating table, and spending on two out of the three major deficit drivers will continue to escalate.
In related news, credit ratings agencies have signaled that that a small deal — which this is — is unlikely avoid a downgrade of U.S. Treasury securities. If a ratings downgrade actually occurs, the negative economic fallout will interrupt this deal's framework of achieving spending cuts — by forcing future lawmakers to renege on the cuts. Today's failure to deliver deeper spending cuts will then be correctly viewed as the missed opportunity that it is.
The media is calling this deal a victory for Republicans, especially for the Tea Party. How so? None of the targets of the House Republicans' Cut, Cap, and Balance legislation is included in it. It does not remove tax increases from consideration by the new joint committee. Republicans also were not able to push through their preferred shorter-term increase in the debt limit to hamper President Obama's re-election effort. Finally, although the deal schedules a vote on the Balanced Budget Amendment after October, 2011, nothing — not even a future debt-limit increase — is contingent upon it. Thus, a crucial element of guaranteeing fiscal discipline beyond 2021 has been bargained away.
The deficit cutting debate will now be pushed under the rug until the joint committee concludes its deliberations. That committee is charged with recommending deficit reduction to the tune of only $1.5 trillion over the next 10 years. As I've noted elsewhere, even cuts of $4 trillion over 10 years that were under consideration earlier would be insufficient to prevent the federal government's fiscal condition from worsening by 2021.
The "Skirmish on the Precipice" that we just witnessed yields little by way of long-term fiscal discipline, contrary to the claims of the Obama administration and congressional leaders. We seem trapped in a particularly vexing Catch-22: the current Congress is bound to pay the bills incurred by past Congresses, but it is unable to bind future Congresses to rules that would guarantee continued fiscal discipline.
It's been a frustrating two months watching politicians alternately squirm and spin only to achieve a damp squib of a deal. But that frustration will pale to insignificance when all of us are reeling in the vortex of a continuing economic decline, from which this deal appears unlikely to rescue us. The President is being excoriated for failing to lead. But if this deal is enacted, conservatives would also deserve some blame for a failure of resolve — to win more concessions on spending cuts and substantively redirect the nation's wayward fiscal course.