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A Debt Deal That Offers Little Economic Oomph

A Debt Deal That Offers Little Economic Oomph

By Alexis Simendinger - August 1, 2011

It is entirely possible that President Obama and congressional lawmakers spent months wringing out a debt-deficit compromise that worsens the national problems Americans most want Washington to fix -- the stalled economy and a scarcity of jobs.

"The economy is right at stall speed, and this deal does not provide some dramatic acceleration," a former senior administration official said in an interview. "The unemployment rate is likely to remain elevated."

Sure, averting default also averts a severe economic pummeling, assuming the nation's $14.3 trillion cap on borrowing is lifted in time as a result of a legislative deal to lower deficits by up to $2.4 trillion over 10 years. (The House approved the measure, 269-161, Monday evening in a vote that was equally notable for an appearance on the House floor by Rep. Gabby Giffords. The Arizona Democrat was making her first public appearance since being shot in the head last January. The Senate will now consider the bill, which is expected to pass.)

As everyone appears to agree by now, default on U.S. obligations would raise borrowing costs for the government and every American, with dangerous implications for an already teetering economy. Some economists, especially after examining the recently revised government growth statistics in the first half of 2011, believe default could pitch the country back into recession.

But avoiding economic catastrophe, as the debt deal announced Sunday night would do, is not the same thing as aiding economic growth and fostering job creation. However brief the relief on Wall Street and around the country that catastrophe may have been avoided, few Americans will experience the dramatically concluded pact as a boon to the way they live, or as a benefit as they struggle -- at least not before the next election.

The debt-deficit deal "is definitely a negative, the only question is how much," said economist Dean Baker, co-director of the Center for Economic and Policy Research. "The economy desperately needs additional stimulus and everything here goes the wrong way," he told RCP in an email. "It really is a question of how much harm it does."

The framework deal, as yet to be approved by Congress, would lift the debt ceiling through 2012, giving the Treasury Department breathing room until the next election, and mirror that new borrowing with companion deficit reduction of at least $2.2 trillion over 10 years. Equivalent spending cuts would be accomplished in two waves, the first including up to $1 trillion in discretionary cuts (already agreed to) over a decade, and a second wave potentially offered by a new bipartisan legislative panel tasked to produce $1.2 trillion to $1.5 trillion in additional deficit reduction over 10 years as part of a report to Congress by Nov. 23. Congress would have a month to vote those proposals up or down, and if Congress does not adopt the changes, automatic spending cuts would be triggered to slash discretionary and entitlement programs as a fallback.

Some economists point out that the benefits of long-term deficit reduction are keyed to reducing the nation's level of debt as a percentage of its gross domestic product. The president set his minimum aspirations on that score at $4 trillion in deficit reduction over 10 years -- the so-called "grand bargain." That goal was not met in the deal announced Sunday, leaving open the question of how the country will constrain its reliance on debt in the years ahead.

Similarly, Standard & Poor's, one of the three credit rating agencies, threatened to downgrade U.S. debt below triple-A if significant deficit reduction, which it identified as $4 trillion over 10 years, could not be achieved. Sources said Monday that even without a default, rating agency downgrades, particularly by S&P, remain a possibility in the months ahead.

The nation's battles over the role of government, levels of taxation, affordable entitlements and spending across the board will continue regardless of whether Congress and the White House enact the announced deal in time to avert default. In that way, uncertainty -- pegged by Obama and others as a significant hindrance to job creation and economic growth -- will not fade away.

As he announced a framework compromise Sunday night, Obama promised that it would "begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy."

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Alexis Simendinger covers the White House for RealClearPolitics. She can be reached at asimendinger@realclearpolitics.com. Follow her on Twitter @ASimendinger.

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