Monday, August 1, 2011

Initial Reaction to the Debt Ceiling Bill

I've been reading details about the debt ceiling bill that's been agreed to by most of the moderate congresspeople and is expected to pass.

Basic details as I understand them, cutting the politically symbolic stuff (balanced budget amendment, etc)  -

Stage 1: Functionally, a 900 billion debt ceiling increase. 917 billion in cuts over the next 10 years, mostly backloaded. This is 50% defense cuts, and the rest is mostly discretionary spending cuts, but it does not cut a number of programs popular with progressives. Medicare providers will take a hit, as well.

Stage 2: Another 1.2 trillion debt ceiling increase. Could go higher, up to 1.5 trillion based on a) a balanced budget amendment that won't happen or b) if the reduction in the next part exceeds 1.2 trillion, but for now, likely 1.2 trillion. A bipartisan, bicameral Congressional panel must identify 1.2 trillion in deficit reduction (from taxes or cuts) and submit it for passage. If it's not passed, it comes out evenly from defense, discretionary programs excluding stuff popular with progressives, and payments to Medicare providers, up to a 2% cut in Medicare payments.


1) all future deficit recommendations are relative to "current law", so the Bush tax cuts expiring is considered baseline. It will make extending the Bush tax cuts a tax "cut" by definition of the committee, and makes them less likely. This strikes me as a victory of proponents of letting them expire - it's a way to raise taxes without having to say you raised taxes.

2) The real compromise here is that the Republicans didn't have to raise taxes and set the size of spending cuts, but Democrats functionally got to entirely design the composition of spending cuts, conditional on their size. The cuts are backloaded into out-years, exclude a bunch of welfare state programs (including social security, medicaid and actual welfare), and 50% of all cuts come from defense while barely touching entitlements.

3) It's going to be difficult to get the committee's recommendations passed, realistically. The committee will almost certainly look at tax reform - eliminating deductions in exchange for lower marginal rates, ultimately creating something revenue neutral. The committee will also probably look at entitlements - Social Security, Medicare, Medicaid, etc. Most Democrats won't vote for this, when the alternative is to have 50% of further cuts come from defense, and mostly spare entitlements.

So in my opinion, the best way to look at this deal is:

1) Bush tax cuts probably expire.

2) Defense spending slashed about 30%.

3) Medicare spending is slashed 2%

4) Discretionary spending on non-progressive departments is cut 30% - this is places like agriculture, energy, epa, etc.

5) No tax reform, no entitlement reform (social security, medicaid, medicare)

A lot of people are trying to call this a "huge Republican win". I disagree. This was a real compromise - numbers 1, 2 and 5 strongly favor Democrats.

I do hope that tax reform can get done, but I'm not optimistic.

I'm happy the debt ceiling was raised and I'm happy about a number of the spending cuts (both defense and discretionary), but excluding entitlements is a big deal, and tax reform remains an important piece for me. I'm neutral to slightly positive on this.

No comments:

Post a Comment