The debt ceiling bill seems like a Republican win, but there is still plenty to worry about.
Examine the political math of the debt ceiling/spending-reduction bill and it adds up to a Republican win. Examine the green eyeshade math, however, and there is plenty to worry about in the near future.
When Democrat Senator Charles Schumer whines and a Tea Party official says, “We got rolled,” you know that compromise—the essence of the American legislative system—has worked. When House Speaker John Boehner says, “We got two-thirds of what we wanted,” you also know that the Republican House has succeeded in changing the language of debate. Now, instead of the prevailing Democrat theme of “let’s-spend-whatever-we-to-need-for-this,” everyone is now scrambling to find ever more things to cut.
No wonder. To get the compromise, Obama and the Democratic Senate had to agree to the creation of a select committee of six Congressional Democrats and six Republicans that must come up with an actual $1.5 trillion list of cuts by fall, beyond some $900 billion in initial cuts. If they fail, an agreed-upon advance list would be triggered for automatic cuts.
The compromise and the select committee process are all triumphs for the Republicans and, for that matter, the Tea Party. Lurking in the background of the debate was the Tea Party and its focus on cutting government spending and debt. Some of the House members it helped elect last year voted against the compromise package because it didn’t go far enough.
While the package certainly wasn’t everything the Congressional Republicans wanted, it moved the argument from “spend” to “save.” This is remrarkable because the Republicans control only one-third of the levers of legislative power in Washington. The Democrats still control the other two.
Thinking back to the early spring, Mr. Obama and Sen. Harry Reid were calling for a straight-up-or-down vote extension of the federal debt ceiling. Then they moved to the mantra of a “balanced” approach. That was code for tax increases on the “very rich” (i.e., anyone earning $250,000 or more a year). Then, “tax increases” morphed into “revenue enhancements,” code for tax code adjustments (cutting out some deductions and exemptions in exchange for reducing tax rates). When that did not pass muster, taxes were dropped from the final package.
Now for the green eyeshade math. Though the bill calls for an initial cut in spending of close to $1 trillion, it may not actually reduce the deficit by a dime. Here’s why: The package is based on the Congressional Budget Office’s projection of 3.1 percent growth in Gross Domestic Product this year and 2.8 percent next year. Alas, in the first half of this year, the GDP grew by only 0.8 percent. It would take a massive increase in economic activity to meet the CBO’s projection for the year. The Office of Management and Budget says that if the economy’s growth comes in one percentage point off that projection, it could lead to an increase in cumulative federal deficits of $750 billion over ten years.
One private sector banking unit, Barclay’s Capital, thinks that actual results below the CBO projection could vaporize the expected cuts from the recent legislative deal, while increasing federal debt as a percentage of GDP to nearly 90 percent (versus 82 percent estimated in the debt-ceiling package).
That increases the burden on the Congressional special commmittee to come up with even more cuts to compensate for an annual growth that will almost certainly be well below the CBO’s rosy projection.
It also means the Tea Party must keep up the noise and the presssure, and House Republicans must continue to more than hold their own in the negotiations. Despite Obama’s obsession with “millionaires and billionaires,” if the federal government were to confiscate everything all of them earn for the year it would only put a small dent in the spending and debt totals. The special committee must reform entitlements and reduce more domestic spending.
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