President Obama and congressional leaders Sunday night reached a compromise to raise the federal debt-limit that includes curbs to government spending but no new taxes, breaking the partisan brinkmanship that nearly resulted in a government default. Over the past several weeks, lawmakers in Washington have been consumed by a self-created crisis that has shaken the entire nation – Main Street and Wall Street. The U.S. Treasury is set to run out of cash to meet its obligation on August 2 if Congress fails to approve a routine increase to the federal debt-limit that would allow the government to continue borrowing, avert a credit default, and avoid the economic consequences from no action.
I joined Republican lawmakers on a private phone conference to learn more about the mechanics of the debt-limit agreement and its implications on the country. The one-hour phone call revealed that the debt compromise has something for everyone to hate, which means in my opinion, that the deal is a good compromise.
President Obama is authorized to increase the $14.29 trillion debt-limit in two stages by at least $2.1 trillion and possibly as much as $2.4 trillion, eliminating the need for further increases until after the 2012 elections. Congress would immediately increase the federal debt-limit $900 billion in exchange for immediate 10-year discretionary spending caps of $917 billion; balanced between defense and non-defense spending. U.S. Treasury would gain access to $400 billion in fresh borrowing capacity immediately. The other $500 billion would come later this fall, barring two-thirds of the members of both chambers of Congress do not object. Secretary Geithner will have cash to pay bills through early 2012.
Rightfully, lawmakers did not front load the caps in government spending, so the impact to the fragile economy will be less than significant. However, the plan would reduce domestic discretionary spending to the lowest level since the Eisenhower Administration, including cuts of $350 billion to the Pentagon – the first defense cut since the 1990’s. Extending the debt-limit beyond the election cycle will remove economic uncertainty, reduce the probability of a credit downgrade, and eliminate a key headwind to the economic recovery.
Bi-partisan committee of twelve Republicans and Democrats tasked with identifying an additional $1.5 trillion in deficit reduction over 10 years, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011 and Congress is required to vote on Committee recommendations by December 23, 2011. If the Committee fails to agree to a “balanced deficit reduction” plan, then an automatic “trigger” will reduce government spending beginning in 2013 by at least $1.2 trillion beyond the discretionary caps – split 50/50 between domestic and defense spending. The automatic trigger would exclude coveted programs such as Social Security, Medicare beneficiaries, Medicaid, and any low-income schemes.
The automatic “trigger” built into the plan will provide a strong enforcement mechanism to lawmakers from both sides of the aisle. If the bi-partisan fiscal committee approved no action, the “trigger” would automatically add nearly $500 billion in defense cuts on top of the previous cuts to the Pentagon, at the same time, the “trigger” would make deep cuts to infrastructure and education spending. That outcome would be unacceptable to Republicans and Democrats. One key point is that the fiscal committee’s failure to develop a bi-partisan plan would not automatically “trigger” revenue increases; however the Bush tax cuts are set to expire January 1, 2013, the same date the “trigger” would go into effect. I anticipate these two combined events will force lawmakers to reduce the deficit and balance spending priorities.
Other less notable features in the agreement were included to “sweeten” the pot. In an effort to win support from tea party-aligned conservatives, Democrats agreed to stage a vote on a balanced-budget amendment. Republican leaders agreed to include funding to protect Obama’s commitment to financial aid for college students; the compromise provides specific protection in the discretionary budget to ensure that sufficient funding will be available. President Obama failed to secure other top priorities from Republican deficit hawks, including a fresh round of stimulus to revive the waning economy and an end to tax breaks for “big oil” and “corporate jet owners”.
Undoubtedly, the compromise to raise the federal debt-limit is a victory for those fighting to reduce the size of government. In the past, raising the cap on the public debt was a routine exercise, but conservatives placed the issue on center stage by refusing to increase the debt-limit without meaningful curbs to the size of government. Moreover, conservative deficit hawks achieved their objective with no immediate tax increases, no small achievement when you consider that Democrats control the Senate and the White House.
Many to the far right will denounce the deal without considering that the plan makes the biggest dent in government spending in 15 years, with more cuts likely next year. Liberals will howl about the reductions to government agencies and programs. Personally, I believe more needs to be done to restructure Social Security, Medicaid, Medicare, and our antiquated tax code. However, Washington is fundamentally broken, and you cannot fix everything at one time. Republicans and Democrats should pass this bi-partisan plan, avoid credit default, and continue the challenging work of developing a fiscal austerity program that places the country on a sustainable path to economic stability and growth.
