A week ago on August 2, 2011, Washington cobbled together a last-minute "compromise" to raise the U.S. federal debt ceiling by $2.4T. Let's take a moment to reflect on the good, bad, and ugly to come from the episode.
The debt ceiling is now $17.7T or, more importantly, above 100 percent of GDP, meaning the President can take on more debt on our behalf than the sum of an entire year of the nation's income. Hard to believe it has only been a week, because since then the quality of our debt has been downgraded from the tippy-top AAA grade to merely AA+ grade. Not to mention, Friday's jobs report was disappointing (the labor force keeps shrinking) and the previous Friday's report on U.S. GDP - with huge downward revisions and "stall speed" of 0.8 percent growth in 2011 so far - shattered the illusion of recovery.
As usual, I find the media conversation upside down, but I also see some real signs on progress.
First, the media conversation has been almost entirely about the "tea party" which acted "like terrorists" in holding our nation "hostage" and risking a default on U.S. debt. The final bill is conveniently called a compromise. So let's just list the ironies, dare we say hypocrisies, involved in this narrative:
1. The media has long pined for a third party as a cure for 2-party polarization. Now they've got a legit third party. Where's the love?
2. Textbooks celebrate American checks and balances. We just witnessed a check in action -- a minority third party checking the decades-long bipartisan spending binge. Has anyone seen the phrase "checks and balances" in the MSM about what happened?
3. The deal was not a compromise. It was a successful check on higher taxes and unconditional debt increases, but a failure of a grand bargain that might have been. The need to reform entitlements and taxes could and should have been the result of this crisis, but instead it was a wasted crisis. The result is a commitment to cap spending in the future, which is as binding as tissue paper. Bill Galston has the best analysis I've read of what might have been. And CNN has a nice summary timeline here.
4. Was debt default really on the table? This is now assumed, but we will never know alternative histories. What we know is that some bills and some government paychecks might not have been paid, but most certainly the debts would have been.
5. The weak economy is no excuse. The media keeps parroting this talking point that the weakness of the economy prevented (for the last many years) more aggressive action to curb deficits. Nonsense. The S&P downgrade was telegraphed beforehand as a response to long-term structural deficits. Why has the government been AWOL on proposing how to curtail entitlements over the next century? A credible budget can certainly have projected trillion dollars deficits for the next few years, so long as it includes substantive reforms. That is our nation's weakness, not the recession.
The deal included two hugely important structural changes to the budget process.
First, though the media doesn't get this, is the idea of a "super committee" which I applauded last week. No, it not just another commission! As I've said, "Blue-ribbon commissions are excuses for inaction" such as the Simpson-Bowles farce. As good as the ideas from those groups are, the proposals almost always end up as PR material, but never get a vote as real legislation. The super committee is exactly the opposite. Its members are elected officials, not greybeards, pundits, and poo-bahs. And the super committee's work is guaranteed a vote! Shifting the budget process away from the broken legislative system in place now and towards a more independent(ish) group is genius. Forcing Congress to take up or down votes has been widely touted by its own members. I predict a triumphant outcome, and I also predict it will cement Boehner's legacy as a visionary leader.
Second, the balanced budget amendment is now a reality. Well, sort of. The LA Times reports:
A balanced-budget amendment to the Constitution, which had been crucial to attracting support from House conservatives, would be brought to a vote, but the increase in the debt ceiling would not be tied to the outcome as conservatives had wanted. However, if the amendment were approved by both chambers and sent to the states for ratification, the automatic cuts would not be triggered — a provision designed to entice Democrats to vote for the amendment.
Will Congress actually pass a BBA, or it will it be a litmus test? Well, that depends on what the text of the amendment actually says. I might was well ask if you are for or against marriage, the only answer being that it depends on the prospective spouse! Glenn Hubbard and I published a short essay in POLITICO last week, proposing a way to write the Amendment that would make it appealing to centrists and also, somewhat importantly, a good reform, Here's a long quote:
First, the annual constraint on expenditure should be defined by the median federal revenues of the last five years, not the current year. This year’s revenues are not final, and worse, will likely fluctuate with the business cycle. Conservatives rightly criticize fine-tuning federal spending when it is counter-cyclical — but they should oppose it when it amplifies the cycle, too.
Second, any amendment should be simple — focused only on fiscal balance. That balance should count accrued liabilities in entitlements, not just outlays. It should be a neutral process — not ideological. The economist James Buchanan, Nobel laureate and professor at George Mason University, encouraged conservatives to advocate for a BBA, but warned against mixing process reform with a prescribed outcome.
Smaller government is a natural end of the process of balancing the budget, if one trusts the voters, but dictating that as the means only insures liberal opposition.
Third, any new rule or BBA should use escalating supermajorities for exemptions which are universal. Let’s unpack that. Escalating means that Congress could allow higher expenditures in a given year with a supermajority vote that increases in successive years. For example, a 3/5 vote in both houses is required the first year of exemption, 4/6 the second year, 5/7 next, and so on. Universal means that exemptions are not pre-defined, such as wars or recessions. A natural catastrophe will do.
Again, trusting future Congresses to judge what is best is one way to help passage and protect the nation.
Fourth, the BBA should provide a glide path to a lower debt-to-GDP ratio. For example, after it passes, the average fiscal gap of the preceding decade should be narrowed by one-seventh per year for seven years. That will avoid sudden, perhaps recessionary, shocks.
After our essay's publication, I learned that Alex Tabarrok has similar ideas for what he called an Unbalanced Budget Amendment. Also, freshman Congressman Justin Amash has an actual legislative proposal for an Amendment with many similar features. So, for the first time in a long time, I am hopeful.
Correction: I revised the paragraph about economic reports - Employment report was last Friday, GDP report was the Friday before that. New economics mantra: thank God it's NOT Friday!