It’s been long and ugly, but it looks like we’ve averted a debt crisis and default. As I’ve noted here before, there wasn’t a crisis about our debt — investors around the world have been more than happy to buy up American debt in their certainty that our country can and will pay its bills. Even as we seemed heading toward a manufactured but very real crisis in recent days, the bond markets never showed much strain.
I think the best coverage of the debt crisis has been provided by Ezra Klein at The Washington Post. He seems in tune with the politics of all this, but also with the economics of it. He’s great on many topics; for example, already today he has a great graph of per capita health care spending that shows that U.S. spends more than three times as much on hospital care as other developed countries and dramatically more on administrative costs.
Anyway, Klein has been all over the debt negotiations, providing one of the most concise summaries I’ve seen on the web, which reads in part:
The downside is that we actually haven’t come that far: we’re still pretending that a deal a few months from now will somehow be easier than a deal today, we’re moving to austerity budgeting — note that neither unemployment insurance nor the payroll tax cut are extended — while the economy remains weak, and we’re putting off the decisions about what to cut and how to handle taxes.
And that gets to the truth of this deal, and perhaps of Washington in this age: it’s all about lowest-common denominator lawmaking. There are no taxes. No entitlement cuts. No stimulus. No infrastructure. Less in actual, specific deficit reduction than there was in the Simpson-Bowles, Ryan, or Obama plans, and even than there was in the Biden/Cantor or Obama/Boehner talks. The two sides didn’t concede more in order to get more. They conceded almost nothing in order to get a trigger and a process, not to mention avoid a financial catastrophe.
Klein is also one of the few who seems to realize that, while the House Republicans were in control of this debate, it’s Obama who will be in control of the big tax debate of 2012. From his post Democrats will lose now. But they can win later.:
On Dec. 31, 2012, three weeks before the end of President Barack Obama’s current term in office, the Bush tax cuts expire. Income tax rates will return to their Clinton-era levels. That amounts to a $3.6 trillion tax increase over 10 years, three or four times the $800 billion to $1.2 trillion in revenue increases that Obama and Speaker John Boehner were kicking around. And all Democrats need to do to secure that deal is…nothing.
This scenario is the inverse of the current debt-ceiling debate, in which inaction will lead to an outcome — a government default — that Democrats can’t stomach and Republicans think they can. There is only one thing that could stand in the way of Democrats passing significant new revenues on the last day of 2012: the Obama administration.
If Boehner and other Republicans in Congress had taken any of the tax proposals on the table in recent weeks, they could have made a bargain that would have kept the majority of those Bush tax cuts. They could have allowed higher rates on very high earners, eliminated some loopholes and deductions while simplifying the code, and lowered rates across the board on the middle class. And that’s exactly the deal that Obama will put on the table during the 2012 election. Republicans will oppose it, even though higher taxes on the wealthy is the only serious debt reduction policy that polls consistently well among Americans.
A few other thoughts on the debt deal:
- The spending cuts will hurt our fragile economy, but it doesn’t look like many of those cuts will be in the very near term.
- The lack of tax increases is good news for the economy in the short term. A tax increase right now would have been a drag.
- The final package comes nowhere near what we’ll have to do over time to reduce the deficit.
So even with the debt deal moving through Congress as I write this, the Dow is down 1%. The Institute for Supply Management’s manufacturing index reported very weak numbers for July — no surprise there. We’re still in growth mode, but very slow at 50.9 (any number above 50 indicates expansion). The new orders index fell below 50 for the first time in over two years. In a tweet this morning, Nouriel Roubini put the odds of a double dip at 30%. It’s pretty clear that policymakers aren’t going to do anything to boost the economy, though it’s conceivable the Fed could shift course and launch a third round of quantitative easing (I thought they should have done so a couple of months ago).