What Are the Consequences of the Debt Deal for the US Economy?

[russ_watters]

Disclaimer: This will be a mixture of fact, logical interpretation and pure opinion. If anyone has any doubt about which is which, please ask...

Obama - Obama was the biggest loser here, by a wide margin. He got nothing anywhere close to what he says he wanted, has been forced to utterly reverse his primary economic strategy (tax and spend our way out of the recession - recall that last year he was pushing a second stimulus!), and worst of all, lacked leadership during the process. While he'll try to paint the right as inflexible and unreasonable (he has, at least temporarily, succeeded in that, according to polls), ultimately he caved to them without ever having provided a fully-developed plan of his own (I have a theory on that, for another thread...) for them to consider, much less reject. And in my perception, he piggy-backed onto negotiations between the House Reps and Senate Dems, helping reconcile their bills following the failure of his own attempts to reach a compromise with Republicans directly.

Congressional Democrats - As a group, Congressional Democrats lost because they, like Obama, gave away a lot more than the Republicans did, but certain ones may have won. Ie, for Harry Reid it was an ideological loss along with the rest of his group, but since he appeared to have a signficiant hand in both strong-arming House Republicans and ultimately working to craft the deal, there is a personal upside for him.

The Tea Party - The Tea Party was the biggest winner here, but ironically since they didn't evertying some wanted, some in the Tea Party will consider it a loss. But it was a win because they were strong, relevant, and mostly successful in bending the other members of Congress - from both sides of the aisle - to their will.

Mainstream Congressional Republicans - Push. Obama caved, but he mostly caved to the Tea Party and Boehner got slapped down by the Tea Party as well, when they rejected one of his bills.

The Media - the media always wins big in a crisis, as they did here. But theirs was largely a victory against journalism, which I think, is part of what is causing so many media outlets to suffer financially these days. Extremist pundits from both sides capitalized on their extremism, while those even in the mainstream chose to simply report the propaganda of the politicians without insisting on portraying the issues accurately. The most critical flaw in the reporting was the media's acceptance of the phrase "debt reduction". This is just plain a factually/mathematically wrong characterization. The debt will not go down because of this deal, it will go up - a lot. The deal simply isn't designed to reduce the debt, it is designed to increase the debt go up by less than someone's current projection. This false reporting - or, if you prefer, parroting of our politicians propaganda - helps portray a failure as a success and masks the very problem that this debate was all about. Which brings us to:

Us - We got creamed. This deal, if it even succeeds in its goal and the projections are accurate (hint: they are always, always overly optomistic), ten years from now, our debt will be somewhere around 50% above what is already a historic post-war high. The ten-year "reductions" in this deal are roughly equal to what the debt will actually be increased by over the next one year alone. Now some democrats, and probably Obama himself, are still saying/thinking that we have to tax and spend our way out of the recession, but these positions are simply mathematically impossible. The proposed taxes on the rich are too small (or, rather, there aren't enough rich people even if we soak them) and even if the spending increases, which so far haven't produced the advertised results, end up helping, they will still send us further down the path toward bankrupcy. So while our politicians slap each other on the back over this deal, our credit rating may still be downgraded and today's dire debt situation still will likely look quant in comparison with the debt increases our politicians are intending pile on our shoulders over the next ten years.

Epilogue:
When we debated the Kyoto treaty in this forum, some people agreed with me that the treaty is deeply flawed, coming nowhere close to addressing the issue it was intended to address. But, they said, it gets us thinking about it and moving in the right direction and the next treaty will be better. I've heard the same logic applied here. I disagree and I think Kyoto has provided evidence to support that. I think that when politicians craft a deal, they pat themselves on the back, then utterly ignore the issue until that deal expires, as they have with Kyoto, which expires next year iirc. The end result being that instead of opening a discussion of the issue and leading to new progress, the deal closed discussion on the issue and tabled it for years, guaranteeing that the problem would not be properly addressed and would continue to worsten for years to come. That's what I predict will happen here.

 

[WhoWee]

I think National Defense will be the big loser - when the debt committee fails to agree on cuts.

The President dodged a bullit when the deal was extended past the 2012 election - but won't be so lucky in October during budget talks. The President tried to portray himself as the moderate and Harry Reid apparently convinced him they'll get another bite of the stimulus apple for a jobs Bill?

While the Tea Party drove the debate - none seem to want to take credit? I think Michelle Bachman hurt herself overall.

Mitt Romney avoided the debate and probably did himself a favor.

Mitch McConnell didn't work as hard as Speaker Boehner - but I think they both established a foothold for future battles.

I agree WE will suffer as tax hikes are used to offset the additional $6Trillion to $8Trillion in spending that won't be cut.

 

[AlephZero]

Any "10 year plan" in a political system with fixed 4-year and 2-year electoral cycles is a fairytale. But at least this kills the illusion that somehow the US had changed its national character in November 2008, if anybody ever really believed that.

Maybe it also illustrates the problems of making politics work with more than two parties - even if by the standards of some countries, your 3 parties are the Far Right, the Extreme Right, and the Lunatic Right.

 

[Ivan Seeking]

The country won.

This separates the debt ceiling crisis from the budget arguments. You can't cut a deal when extreme elements of both parties are holding a gun to your head. By moving this ahead, the real arguments can begin. We have only just begun. My guess would be this was Obama's plan as soon as the tea party rejected the $4 trillion debt reduction deal in favor of billionaires.

In fact polls show that a majority of Americans approve of a balanced approach to debt reduction - tax increases and spending cuts. Once the voters have time to understand the issues in their proper context, the tea party position will be irrelevant. The gun has been kicked out of their hand.

Score, Obama.

 

[WhoWee]

The country won.

This separates the debt ceiling crisis from the budget arguments. You can't cut a deal when extreme elements of both parties are holding a gun to your head. By moving this ahead, the real arguments can begin. We have only just begun. My guess would be this was Obama's plan as soon as the tea party rejected the $4 trillion debt reduction deal in favor of billionaires.

In fact polls show that a majority of Americans approve of a balanced approach to debt reduction - tax increases and spending cuts. Once the voters have time to understand the issues in their proper context, the tea party position will be irrelevant. The gun has been kicked out of their hand.

Score, Obama.

This poll doesn't seem to support all of your conclusions?

http://www.newsmax.com/Headline/deb...r/2011/08/02/id/405789?s=al&promo_code=CBFE-1

"Asked for their opinion of the overall job performance of the House, the Senate, and the president in their efforts to raise the national debt ceiling, nearly three-quarters of respondents — 73 percent — say they disapprove, while just 23 percent approve."

 

[Mech_Engineer]

In fact polls show that a majority of Americans approve of a balanced approach to debt reduction - tax increases and spending cuts.

What polls show that, and how was the question worded?

 

[mege]

I think that the President is actually a big winner in this. He was able to pass his only real agenda: postpone any further debate regarding the overspending that he's overseen until after the next election. The forever Presidental-Candidate Obama.

 

[czelaya]

Spending is still going to increase substantially. There is practically little being done to curb the debt. A decrease in spending is still spending. Until we see it, it's just more Washington speculation.

Democrats: Complete and utter lost.

Republicans: Complete and utter lost.

The country: See above.

The debate continues in political ideology of R. vs. D. Many will debate that Democrats support the poor and hate corporatism (however, GE & GM did get special privileges from the Obama administration). The Democratic party hates war-Obama inflates our military presence into Afghanistan and begins bombing Libya. Bails out failing companies and blindly ignores contracts to share holders. Obama, like Bush, states we need to live within our means but like the formers president spends frivolous. Oh yes, doesn't do anything to increase personal freedoms (signing statements, The Patriot Act,... ). We're still in Iraq.

Bush, the same as the above, it doesn't matter. You know: Medicare Part-D, Iraq War, TARP(doesn't go to housing markets in the method that it was intended for), No Child Left Behind(Wow! That really worked)..."insert more intervention were the tax payers pay the bill,

No change in Washington. Spending, spending, spending,... inflation, inflation, inflation,...

 

[russ_watters]

The country won.

This separates the debt ceiling crisis from the budget arguments. You can't cut a deal when extreme elements of both parties are holding a gun to your head. By moving this ahead, the real arguments can begin.

I think it is spectacularly naive to believe that "real arguments [will] begin." I'm predicting (maybe I'll start a thread on that too...) that not even the base "reductions" of this deal will be achieved, much less any additional reductions beyond the deal. Debt reduction deals have happened before. If this one pans out, much less is exceeded, I'm pretty sure that would be a first.

In fact polls show that a majority of Americans approve of a balanced approach to debt reduction - tax increases and spending cuts.

I'd be very interested to see what such polls actually ask, since it is pretty meaningless to support things that are mathematically impossible. That said, I'm a big fan of Santa Clause.

Once the voters have time to understand the issues in their proper context, the tea party position will be irrelevant. The gun has been kicked out of their hand.

Score, Obama.

IMO, this is naive wishful thinking. But we'll see...

 

[edward]

Working people lost. There was nothing passed that will create jobs. There is nothing that will improve the economy to the point where companies will want to expand.

(I got a bit of that from an interview with an employer on the evening news.)

 

[edward]

In fact polls show that a majority of Americans approve of a balanced approach to debt reduction - tax increases and spending cuts.

I'd be very interested to see what such polls actually ask, since it is pretty meaningless to support things that are mathematically impossible. That said, I'm a big fan of Santa Clause.

So if a combination of debt reduction and increased revenue doesn't work out mathematically, what does??

 

[lisab]

Working people lost. There was nothing passed that will create jobs. There is nothing that will improve the economy to the point where companies will want to expand.

(I got a bit of that from an interview with an employer on the evening news.)

Yep, that sounds about right to me...sigh. I guess we working stiffs just slog on through this damn recession while the buffoons in congress do their little skits, mostly for each other.

 

[russ_watters]

I think that the President is actually a big winner in this. He was able to pass his only real agenda: postpone any further debate regarding the overspending that he's overseen until after the next election. The forever Presidental-Candidate Obama.

That's a fair point. He did indeed fight hard for that and won it. I'm a little surprised the Republicans gave in on that one. Still, I don't think the issue is going to disappear.

 

[apeiron]

1) What kind of productivity growth would be needed to pay down US debt to sensible levels?

2) On their respective track records, what have Republican and Democratic administrations historically delivered?

3) What, given some Tea Party extremist free market pro-growth policies, would be the theoretical national growth rate? (A figure based on some kind of rationale rather than wishful thinking of course).

The US seems to be behaving like some DotCom start-up existing on fantasies about future profits being able to repay today's stock price. Quite simply, the country is living beyond its means and everyone needs to take a massive pay-cut.

But if the hope is instead still to outgrow its problems, then what kind of sustained productivity growth is actually possible if people had a free hand with policies.

There are plenty of subsidiary questions.

Such as how much social inequality can a society tolerate before the "frictional feedback" cuts into laisser faire profits?

I can speak for New Zealand where we went in for the most extreme switch from protectionist to free market policies (known as Rogernomics, then Ruthanasia, both way more extreme than Reagonomics or Thatcherism). We are now also extreme in levels of social equality and are now running into blowback issues like not being able to afford the bill for the new prisons we require.

For the neo-liberals, there is also going to be the question whether their pro-growth policies are correctly pricing in risk.

Again, citing NZ experience, we embraced the Chicago School with wild enthusiasm. But the changes depended for their success on tight priors - estimates of risk/blowback that presumed reality is narrowly gaussian in the surprises that it will throw at you. One of the results is "leaky buildings", bad construction that resulted from deregulation, privatisation and performance-based standards designed to encourage innovation. You think the US had problems with its $90 billion bank bail-out? Leaky homes will cost NZ (or mostly its housebuyers) ten times that eventually!

I need hardly mention limits to growth such as peak oil (it has now officially peaked say EIA, even if there is still the gas and coal plays). Or water. Or climate change.

So who won, who lost? Clearly the usual candidates - the short term over the long term.

It would indeed be nice to see some informed debate about the realities of growth being able to surmount debt here.

 

[ParticleGrl]

The country lost. Right now our problem IS NOT DEBT. Up until this manufactured crisis, real rates on treasuries were NEGATIVE.

The real problem is unemployment. Forcing the government to fire people isn't going to help raise employment.

Firing people will slow economic growth, so these spending cuts will reduce revenue and increase unemployment/medicaid spending. Hopefully the multiplier is small (I can't find estimates in the economics literature), or else these spending cuts will make the deficits worse! It would be something like an inverse laffer curve. If your taxes are high enough, cutting taxes increase revenue. If your unemployment is high enough, cutting spending makes your deficit worse.

We've never had high enough taxes that reducing them raised revenue. We will soon find out if we have found the unemployment/GDP growth rate where cutting sending increases deficits.

 

[Astronuc]

1) What kind of productivity growth would be needed to pay down US debt to sensible levels?

Probably greater than 10% - in real wealth development, as opposed to shifting wealth around, or borrowing as is the current situation.

2) On their respective track records, what have Republican and Democratic administrations historically delivered?

How far back? What have had for the past 3 decades is a "false sense of prosperity". The robust growth never materialized.

3) What, given some Tea Party extremist free market pro-growth policies, would be the theoretical national growth rate? (A figure based on some kind of rationale rather than wishful thinking of course).

Somewhere between -10% and -20% in the near term.

 

[AlephZero]

The leader in today's Financial Times says nobody won - except of course the poitical lobbyists, who got a new committee to work on.

Interval in the debt ceiling pantomime

...
This months-long pantomime may call to mind Winston Churchill's remark that Americans can always to counted on to do the right thing, after all other possibilities have been exhaustd. That judgement would be too kind.

Avoiding default had become the overriding priority, and that has been achieved. The deal fails to put US budget policy on a sustainable path, however: ... the fiscal adjustment is modest and by no means guaranteed. The budget quarrels will go on - in a political atmosphere more poisonous than before, if that were possible.

The debt ceiling agreement is complicated and opaque. Critics in both parties complain that after frantic private negotiation among a handful of participants, Congress was prevented with a fait accompli. Voters should feel equally aggrieved. This was the very opposite of the public debate that the US needs on budgetary ends and means.

As for the details ... if [the 10-year plan is] achieved in full, it is only a little more than half of what is required to stabilize the ratio of public debt to GDP at a safe level.

Worse, most of these cuts are still unspecified. The second instalment is a mere instruction to a new bipartisan committee of Congress to propose deficit reductions to meet the target ...

This calls to mind another Churchillian maxim: however beautiful the strategy, occasionally look at the results. What reason is there to suppose, if both parties face deep cuts in programmes they especially wish to protect, that Congress will let the automatic mechanism proceed?

What Congress gives, Congres can take away. The designers of the trigger say their deliberately unacceptable automatic cuts give both sides an incentive to reach agreement ... Maybe. But if the committee fails, both sides of Congress have an even bigger incentive to cancel the trigger.

And one can be reasonably confident that the committee will indeed deadlock ... Renewed paralysis is about to be designed back into the process. ...

Neither side has yet turned serious attention to where it belongs - comprehensive tax reform.

In one way, it is a blessing that the deal is timid, especially in 2012 and 2013. With the economy showing worsening signs of weaknes, medium term fiscal consolidation should have ben combined with short term stumulus: renewed payroll tax-relief and extended unemployment benefits. ...

One could go on. The labours of the past several months have avoided what would have been the greatest unforced error in the history of economic policy. Congratulations on that. But they have settled almost nothing, and have prepared the way for more of the same. It is a dismal and confidence-sapping prospect.

President Barack Obama and the parties' leaders in Congress should stop and think. What the world has witnessed is a serious failure of governance. If the US cannot mend what is broken in its politics, the consequences for itself and the world will be grave.

 

[WhoWee]

The country lost. Right now our problem IS NOT DEBT. Up until this manufactured crisis, real rates on treasuries were NEGATIVE.

The real problem is unemployment. Forcing the government to fire people isn't going to help raise employment.

Firing people will slow economic growth, so these spending cuts will reduce revenue and increase unemployment/medicaid spending. Hopefully the multiplier is small (I can't find estimates in the economics literature), or else these spending cuts will make the deficits worse! It would be something like an inverse laffer curve. If your taxes are high enough, cutting taxes increase revenue. If your unemployment is high enough, cutting spending makes your deficit worse.

We've never had high enough taxes that reducing them raised revenue. We will soon find out if we have found the unemployment/GDP growth rate where cutting sending increases deficits.

Other than potential cuts to the military if the committee can't find common ground - how many employees of the federal government are scheduled to be fired? The anticipated cuts are designed to slow the growth of future spending - reduce the growth of the debt from (approximately) $10.5Trillion to $8Trillion.

IMO - apeiron asked the correct question:
"What kind of productivity growth would be needed to pay down US debt to sensible levels?"

 

[BobG]

What polls show that, and how was the question worded?

Reuters/Ipsos Poll conducted by Ipsos Public Affairs. July 25, 2011

"As you probably know, the U.S. budget deficit is currently about 1.4 trillion dollars. There are a number of different solutions being discussed for reducing this deficit. These are cutting existing programs, raising taxes, or some combination of the two. Which approach do you think is best?"

              Cut existing programs     Raise taxes     Combination     Neither (vol.)     Unsure/Refused 
     
  7/25/11                19                   12                 56                    8                         6 
  6/3-6/11               26                   13                 46                   12                       3 
  5/5-9/11               27                   9                  52                   10                       2

CNN/ORC Poll. Aug. 1, 2011 - http://www.pollingreport.com/budget.htm (and complete Reuters poll is further down)

My favorite question:

"In general, do you think the elected officials in Washington who have dealt with the debt ceiling in the past few days have behaved mostly like responsible adults or mostly like spoiled children?"

77% believed officials acted like spoiled children.

I'd be very interested to see what such polls actually ask, since it is pretty meaningless to support things that are mathematically impossible. That said, I'm a big fan of Santa Clause. IMO, this is naive wishful thinking. But we'll see...

I don't understand. Increasing taxes alone won't eliminate the deficit. Cutting spending alone will eliminate the deficit. But doing both simultaneously, cutting spending and increasing taxes, won't eliminate the deficit? Or did you misread the post?

 

[russ_watters]

I think you misread Ivan's post, not mine. If that's the poll he was referring to, he mischaracterized "some combination..." as "balanced". This is why I said I wanted to see the poll...

 

[mege]

I think you misread Ivan's post, not mine. If that's the poll he was referring to, he mischaracterized "some combination..." as "balanced". This is why I said I wanted to see the poll...

I'm definitely in favor of a balanced approach if it means eliminating green/ethanol tax subsidies.

Casting a vote for 'Balanced' doesn't mean that 50% of the country is in favor of 'bleeding the rich' like I think some are implying.

 

[russ_watters]

"Balanced" implies balanced to me... that half of the "reduction" would come from tax increases.

 

[WhoWee]

"Balanced" implies balanced to me... that half of the "reduction" would come from tax increases.

As long as those tax increases are "balanced" (reduced EITC and making work pay for instance).

 

[BobG]

"Balanced" implies balanced to me... that half of the "reduction" would come from tax increases.

Ah, I see. I didn't see balanced as necessarily meaning 50/50, since it usually doesn't (not even on a see-saw unless you're looking at the product of both mass and distance and not just mass or distance exclusively). I might have a strange way of looking at things, though. :rofl:

 

[russ_watters]

I'm an engineer: I'd sum the moments.

 

[SteveL27]

"Balanced" implies balanced to me... that half of the "reduction" would come from tax increases.

In Washington, words don't mean what you think they do.

For example, I bet many people think those "cuts" are actual reductions in spending. Not so. The "cuts," always in quotes, are reductions in the amount of projected increases. In other words, in Washington a "cut" is a reduction in the first derivative of the spending. The spending itself NEVER goes down. It's like the log of x. It goes to infinity, just not quite as quickly as it some politicians projected it to!

People might not realize that because of all the anguished yelping from the left. But the so-called "conservatives," also in quotes, voted to borrow and spend another $7T over the next ten years.

The spending and borrowing continues nonstop. If that's conservativsm, I'm against it. And with the left screaming about "the end of life on this planet," I'm not for them either.

This deal is a complete disaster for the American people, who are about to experience the real world consequences of a government running six wars on credit, promising massive social programs without generating the income to pay for them; and calling a continuation of the insane spending and borrowing, "austerity."

Grrrrrrrr.

 

[WhoWee]

In Washington, words don't mean what you think they do.

For example, I bet many people think those "cuts" are actual reductions in spending. Not so. The "cuts," always in quotes, are reductions in the amount of projected increases. In other words, in Washington a "cut" is a reduction in the first derivative of the spending. The spending itself NEVER goes down. It's like the log of x. It goes to infinity, just not quite as quickly as it some politicians projected it to!

People might not realize that because of all the anguished yelping from the left. But the so-called "conservatives," also in quotes, voted to borrow and spend another $7T over the next ten years.

The spending and borrowing continues nonstop. If that's conservativsm, I'm against it. And with the left screaming about "the end of life on this planet," I'm not for them either.

This deal is a complete disaster for the American people, who are about to experience the real world consequences of a government running six wars on credit, promising massive social programs without generating the income to pay for them; and calling a continuation of the insane spending and borrowing, "austerity."

Grrrrrrrr.

It's actually worse than that - the projections are based on GDP growth above 2% - not sure when adjustments will be made - maybe when we double-dip?

 

[mheslep]

The country lost. Right now our problem IS NOT DEBT. ...

Annual net interest outlays on the debt with the current spending baseline and a AAA rating:
2010:~$200B.
2020:~$800B.
http://www.cbo.gov/ftpdocs/119xx/doc11999/12-14-FederalDebt.pdf

http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUnitedStatesofAmerica_AAAA_7_14_11.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243932109521&blobheadervalue3=UTF-8" :

We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon. If Congress and the Administration reach an agreement of about $4 trillion, and if we [were] to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.
...
If such an agreement is reached, but we do not believe that it likely will stabilize the U.S.’ debt dynamics, we, again all other things unchanged, would expect to lower the long-term ‘AAA’ rating, affirm the ‘A-1+’ short-term rating, and assign a negative outlook on the long-term rating.