Commentary

Beyond the Debt Ceiling Rhetoric

There is a lot of rhetoric being thrown around Washington, many victim cards are being played, and enough victory is being claimed to satisfy even the most morose Charlie Sheen. You might say that we all won because there was no default. Not that it was necessarily guaranteed if we didn’t raise the debt ceiling. And in theory our triple-A rating could still get downgraded. But we don’t have to find out. And at the end of the day the deal was more or less a political wash since there were no major new policy changes added in the bill. But from a political perspective there is a lot of misinformation to be filtered through in determining who won and lost in this strung out fight:

Democrats

  • $2.8 Trillion in Increased Revenue: A popular, free publication from the Washington Post handed out to rush hour riders on the Washington D.C. metro this morning featured a donkey with steam coming out of its ears and a headline about the frustration of liberal democrats. Why? This deal is over a projected 10-year time frame so it includes the Bush tax cuts expiring at the end of 2013, which will increase revenues by an estimated $2.8 trillion.
  • Military Spending was Cut: In as much as there were cuts in this deal, defense didn’t get spared. This has long been a priority for the left (and with good reason). The Boehner Bill last week didn’t have any defense cuts but the final bill didn’t pull that punch. A tax hike would have been a rhetorical win for Democrats, but this is too, so how is the deal unbalanced?
  • Little Reduction in Stimulus: Many are complaining that the deal didn’t include some kind of economic stimulus (we needed to spend more?) and that the reduction in government spending will derail the recovery. First, what recovery? Second, the cuts are so back loaded we won’t even start to feel them until 2014. In the first two years we’ll only see $72 billion of the guaranteed $917 billion deficit reduction.

And to top it all off, the debt ceiling will cover us through the next election, so President Obama doesn’t have to worry about a debate over fiscal responsibility getting in the way of his November 2012 victory. That is a huge win for the White House.

Republicans

  • They Get the Edge in Super-Congress Negotiations: The 12-member committee created by the debt deal has to propose at least $1.5 trillion in deficit reduction by Thanksgiving and that bill has to be voted on by both chambers by Christmas. If the committee doesn’t deliver then $1.2 trillion more in discretionary and direct spending will be automatically cut from the deficit, spread out evenly between 2013 and 2021. This gives the Republicans the advantage in negotiating the committee’s proposal. They get big cuts in liberal programs no matter what. Naturally they’d like to cut entitlements more so they have incentive to get something done, but the proposal will certainly not included new tax hikes since that would be guaranteed to fail the house and thus trigger the big cuts.
  • They Got Discretionary Spending Caps: Sure the GOP had to bend a knee to military spending being included in the discretionary spending caps, but they got their caps in place. And that basically means no more fiscal stimulus down the road.
  • Boehner Kept Control of the Tea Party: Well, mostly. The Tea Party certainly was dictating how things went down in the House. But Boehner was able to negotiate with them, to get them on board (mostly) with his plan last week, and probably didn’t have to spend all of his political capital in the process.

Ultimately, if the goal of the debt ceiling debate was to achieve substantial fiscal reform, then this failed. But if the goal was to just avoid a chance of default and get some savings in the process, then it succeeded.

Also see my comments yesterday on the terms of the deal.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

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