Posted by: Schuyler R. Thorpe | August 27, 2011

3 Things The Debt Deal Accomplished

3 Things the Debt Ordeal Accomplished

Maybe Winston Churchill’s aphorism still holds, and Americans can indeed “be counted on to do the right thing… after they have exhausted all other possibilities.”

In several ways, the virulent debt-ceiling battle between Democrats and Republicans revealed Washington at its worst. There was no obvious reason, other than raw politics, that negotiations had to go down to the last second, threatening the whole U.S. economy; rational policymakers could have come up with the same plan months ago.

Tea-party conservatives showed their stripes and proved they’re willing to impose considerable economic pain on the country in pursuit of principles the majority of Americans don’t agree with. As for President Obama, he may ultimately benefit from a deal that makes him look like the only adult in Washington, yet he too frittered away several chances to handle the problem in more opportune, less damaging ways.

Still, the deal to cut more than $2 trillion in government spending over the next decade and extend the government’s ability to borrow until at least 2013 amounts to a few grudging achievements. Here are three:

It surfaced a vital economic issue. The national debt has long been one of those sleeper issues that most Americans know is important but pay no attention to; it always seems like a problem we can worry about manana. Republicans deserve credit for forcing it onto center stage, since it will only get worse the longer it’s left untended. The national debt, about $14.3 trillion right now, has been on an unsustainable course and will suffocate the whole economy if not reined in. Both sides have talked about fixing the problem for years, but there was no serious action until now.

Note to voters: If you’ve finally started paying attention to the debt problem, stick with it. A lot more is coming. While the recent deal will reduce defense outlays a bit and cap “discretionary” spending on things like highways, energy, arts, science, and many other nice-to-do things, it won’t touch three big programs that account for a huge chunk of government expenditures: Social Security, Medicare and Medicaid. Reforming those programs is so touchy that Congress won’t take up any changes till after the 2012 elections.

But those programs soak up so much money that change is coming no matter what, and it will affect most American families one way or another. Social Security requires minor reforms, such as fewer benefits for wealthy seniors and a later retirement age. Medicare and Medicaid are the real budget-busters, because healthcare costs are rising so fast that they threaten to bankrupt the government. There will be huge fights over those programs in the future, because nobody in Washington has yet come up with a way to curtail the skyrocketing cost of healthcare–or cut the benefits given to seniors and the needy, without getting bounced from office.

It cuts spending a little. And that’s better than a lot, at least for now. One big worry of economists was that ham-fisted legislators engaged in a manhood contest over shrinking the government would cut spending so dramatically that it might trigger another recession. We seem to have avoided that self-inflicted wound. The deal will begin with spending cuts totaling just $25 billion in 2012 and $46 billion in 2013. That’s a big disappointment to some Tea Partiers who wanted far deeper cuts–but it’s a sigh of relief to many investors and economists. Forecasting firm IHS Global Insight estimates that the fresh spending cuts will knock just 0.2 percentage points off GDP growth by 2013. Some economists think that knocking anything off of already-weak growth is foolish right now, but the initial pill could have been much more bitter.

Another set of cuts is supposed to be determined by the end of the year by a special panel of Congress whose plan, theoretically, will be binding and not open to revision by unsatisfied factions in Congress. Those cuts are supposed to be slightly larger than the first round, but since they come later, they may also go into effect later. So we might get to 2013 or 2014 before serious cuts start to kick in. If nothing awful happens in the meanwhile, the economy ought to be more robust by then and better able to absorb a shrinking federal government. Predictability will help, too.

It clarifies the role of government. Republicans made huge gains in the 2010 midterms, presumably because Americans bought into their message about the need to shrink government. But there was a disconnect in that outcome, because most government spending goes toward programs like Medicare and Social Security, which are popular, or toward national security, which Americans regard as a reflection of their own well-being. So Americans voted, essentially, to cut a government that they actually like in reality.

The fight over big government has now gotten clearer: There’s no huge slush fund or do-nothing agency that we can painlessly cut to keep taxes low. Cutting government means cutting programs that will cause pain for somebody. The more you cut, the more pain you cause. If that’s what voters want, they’ll have another chance to send that message in 2012.

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