The Debt Deal: Pros and Cons

Now that the House “approved a budget agreement intended to head off a potential government default” 269 to 161, and that the Senate will likely pass the bill tomorrow, the crisis has ended exactly how the bond market predicted it would: no default.

The next obvious question is whether the deal is a good or a bad one.

The only good thing about this agreement seems to be that it prevents a default. Otherwise, it seems like the Republicans should have taken the President’s initial offer of an 83/17 spending cut/tax increase.

The best part of the bill is that it mandates $900 billion in savings over ten years by capping discretionary spending. The next best component is that the spending cuts do not phase in until 2013. This measure effectively prevents the government from pulling the rug out from under a tepid economic recovery.

That said, the bipartisan, bicameral Congressional committee the agreement forms to find another $1.5 trillion in additional deficit reduction is a bit less exciting. While the idea of forming a bipartisan committee to find more areas of debt reduction is a good one, the amount under consideration seems unbalanced.

Theoretically, all $1.5 trillion of debt reduction component could come from tax increases. As such, the prospect of a debt reduction deal in which 62.5% of $2.4 trillion in debt reduction comes from tax increases is completely unacceptable. This country has a spending problem, not a taxation problem.

If the agreement set aside $1.5 trillion in spending cuts, and assigned $900 billion to the bipartisan committee, it would be a much better agreement, because it would first and foremost cut spending.

The worst part of the agreement is that it would exempt Social Security, Medicaid, and unemployment insurance. These programs are precisely why America’s fiscal house is not in order. With this bill, Congress continues shamelessly to kick this problem down the road.

Greater men (and women) would confront this sacred cow and deal with it.

Then, of course, the agreement authorizes the President to add at least an additional $2.1 trillion to the federal debt until 2013. If $2.1 trillion in additional debt does not scare you, the open-ended phrase “at least” should.

Add me to the list of Republicans and Democrats who are not impressed or fooled by this agreement.

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About Sean Patrick Hazlett

Conservative clean energy crusader, national security hawk, financial analyst, engineer, and former military officer.
This entry was posted in Business, Defense, Finance and Economics, Healthcare, Media, Policy, Politics, Social Security, Taxes and tagged , , , , , , , , , , , , . Bookmark the permalink.

10 Responses to The Debt Deal: Pros and Cons

  1. southwerk says:

    Do you really think that creating a new branch of government safe from the voters is a good thing? This is anti representative government. It is highly unlikely that I will have voted or have a chance to vote for any of these guys. And they’re going to be making massive cuts in spending? Where did my vote go. James Pilant

  2. Scott Erb says:

    This was two groups starring into the abyss and finding a way out that accomplishes little except putting off the problem. The responses of the far left and far right are telling. The tea partiers are angry that nothing real was done. The left is furious at a President they claim has “switched parties” and brags about cutting spending to Eisenhower levels. That tells me that a bi-partisan commission with a mandatory up/down vote and threats of cuts neither side likes is the only way a deal will get passed. The partisans on each side are not in the mood for compromise, but compromise is the only way things get done. Also, the President and most Democrats recognize that the debt is unsustainable, showing that as a country and government — be it led by Obama or Romney or anyone else — is entering an era of austerity. That shift will be hard for a lot of people to take, both left and right.

    • I agree that a bipartisan commission is probably the only way to go. That said, exempting Social Security and Medicaid, practically defeats the purpose of the commission. Plus, it turns out that the $900 billion “cuts” are actually deceased in spending growth.

      The only thing this agreement did was stave off a default. Otherwise it did nothing but kick the problem down the curb as you say. The stock market’s reaction to the deal was very telling.

  3. Cody says:

    there is all this talk about how much money will be saved by all the spending cuts but the only thing i still have trouble to find a answer on is where exactly will these $1.5 trillion in spending cuts be coming from. if this money will be coming out of the hands of the average american or old people that are not capable ow working and the billionaires will not be affected at all it just don’t seem right, but it seems we don’t have a say in any of this

    • They won’t be coming from Medicare, Medicaid, or Social Security. Although they should.

      Furthermore, the money is not coming out of the hands of the people. For many of them, it wasn’t their money in the first place. They did not earn it. It is simply transferred from the productive people in society to the non-productive.

      Look, I agree that there should be a safety net that provides aid for those who most need it. But to provide Social Security and Medicare for people like Bill Gates and Warren Buffett by taxing younger, hard-working Americans who earn as much in one year as Buffett will in one hour, is absurd.

      “but it seems we don’t have a say in any of this”
      Alas, the only way out of this is if Americans simply refuse to pay taxes. Good luck with that one…

  4. “it seems like the Republicans should have taken the President’s initial offer of an 83/17 spending cut/tax increase.”

    Any elected Republican who said that would be labeled a RINO and thrown out of the party.

    “While the idea of forming a bipartisan committee to find more areas of debt reduction is a good one, the amount under consideration seems unbalanced.”

    Yeah, I can see that, and is there an up-or-down vote on their proposal? That’s a lot of power in one group. What’s more, because no Republican can ever propose or accede to any revenue increase, it’s hard to see what on earth that panel is going to agree to.

    “This country has a spending problem, not a taxation problem.”

    Well, that’s a legitimate political preference, but we’re not actually a high-spending country: http://lanekenworthy.net/2011/04/18/to-spend-is-to-owe/

    “The worst part of the agreement is that it would exempt Social Security, Medicaid, and unemployment insurance. These programs are precisely why America’s fiscal house is not in order.”

    Well, that is flatly not true. Medicaid is the big driver of our long-term debt problem; but Medicaid does a better job controlling costs than private health insurance. The long-term problem with Medicaid is the long-term problem with the economy generally: already astronomical, and still skyrocketing, costs of health care. (Incidentally, that’s why the Ryan/GOP plan is so unserious– it simply shifts the burden for those rising costs onto seniors. That’s dodging the policy issue).

    As to our current debt, it is largely due to Bush-era programs like the occupation of Iraq and changes to income tax levels.

    • “Any elected Republican who said that would be labeled a RINO and thrown out of the party.”
      Unfortunately, you are probably right. That said, it was a much better deal for the Republicans. What the country actually got was awful. Even the $900 billion in cuts aren’t really cuts. They are cuts in spending growth.

      “Yeah, I can see that, and is there an up-or-down vote on their proposal? That’s a lot of power in one group. What’s more, because no Republican can ever propose or accede to any revenue increase, it’s hard to see what on earth that panel is going to agree to.”

      And no Democrat will support cuts to entitlement programs. In the Army we would call this a “Charlie Foxtrot.” You can fill in the blanks…;-)

      “Well, that’s a legitimate political preference, but we’re not actually a high-spending country.”
      True, but the reason we are not is we don’t have the same crazy income tax rates they do in Sweden and Norway. That said, we still waste billions of dollars.

      Well, that is flatly not true.”
      It most certainly is true. Social Security, Medicaid, and Medicare will consume 40% of the budget or 9.4% of US GDP in FY2011 — and only roughly 1.2 percentage points lower than this year’s deficit. Security spending accounts for only 24% of the overall budget. In additional to health care cost increases, there is also the retirement of the baby boomers which is fueling this mammoth consumption of tax payer resources. To take these items off the table is nothing short of dereliction of duty by Congress. Furthermore, an increasingly smaller number of workers will now be supporting an increasing number of gray-haired dotterers, many of whom are independently wealthy.

      Furthermore, whether or not Medicaid is more efficient than private insurance is not the point. My taxes don’t pay for private insurance, but they do pay for Medicare and Medicaid. I simply find it unconscionable that the wealthy aged can so brazenly rob the poorer young.

      “As to our current debt, it is largely due to Bush-era programs like the occupation of Iraq and changes to income tax levels http://www.poisonyourmind.com/2011/08/the-republican-party-created-the-deficit-and-the-debt/ .”

      I’ve seen this self-serving, cherry-picked chart somewhere before. Forgive me if I cut and paste my rebuttal from Moe’s site here:

      The problem with this analysis is that it does not bake in future policies, which President Obama is sure to institute during each budget cycle. This of course, is impossible to do, but the NYT did not let it stop this person from publishing this editorial.

      The problem with these projections is that they are subjective. For instance, they don’t include policy changes like the Afghan surge, the Iraq withdrawal, the GM bailout, or the Libyan War. As of March 30th or so, the Libyan War cost $550 million. Not much, but extend this commitment for another 5-6 years and it adds up (another subjective judgement call, obviously). The GM bailout looks to be roughly $80 billion, yet that is not reflected in the numbers (I suspect the author lumped it in under Bush, since the TARP ended up costing tax payers $25 billion net. Her figure is almost 10x higher — I suspect it is in “other charges”, whatever that means). For the Afghan surge, I have seen estimates that it would cost up to $40 billion a year. Yet the author makes zero attempt to include these costs in her estimate.

      If someone has an agenda, they can pick whatever figures they want to include to get the result they want to see. The fact is that the NYT is presenting a very subjective analysis as objective fact. I find this to be extremely irresponsible.

      • And no Democrat will support cuts to entitlement programs.

        Well, that is not true. The Democrats, first off, are a big tent party including non-liberals like Jim Webb and Ben Nelson. They aren’t into the purity purges that the GOP is. Second off, Pres. Obama is reported to have included SS cuts in discussions over the debt ceiling. Not that it would ever be the centerpiece of what he wants to do, but Dem officials are perfectly willing to bargain, somewhat to the chagrin of some rank-and-file Dems.

        In additional to health care cost increases, there is also the retirement of the baby boomers which is fueling this mammoth consumption of tax payer resources.

        That’s really not true.

        Here’s the chart showing our long-term debt problem: http://www.cbpp.org/images/cms/01-12-10bud-f2.jpg

        It’s Medicare & Medicaid, not SS.

        And what’s the problem with Medicare and Medicaid? It’s not aging, it’s our already-over-twice-OECD-average and still-skyrocketing health care costs, which Medicaid does a better job controlling than do private insurers. Again, from the CBO: http://static1.firedoglake.com/1/files//2008/07/800px-medicare_and_medicaid_gdp_chart.png

        Security spending accounts for only 24% of the overall budget.

        And about 50% of the world total. Our war spending is this high out of inertia, not out of a look at the actual threat. That said, we still waste billions of dollars.

        As to the charts showing that Pres. Bush & the GOP added $5-7 trillion to the debt, you say that you think that another $160.5 billion or so should be attributed to Pres. Obama. Even if so, that’s ducking the larger issue here: the Republican Party created the debt, mostly by changing tax rates and by invading and occupying a country for no reason (or, in your view, by lying to the public about its secret true reason).

        The larger point here is, no one who cares about the deficit is left in the Republican Party.

        • Well, that is not true. The Democrats, first off, are a big tent party including non-liberals like Jim Webb and Ben Nelson. They aren’t into the purity purges that the GOP is.

          Tell that to Joe Lieberman or Olympia Snowe.

          “Second off, Pres. Obama is reported to have included SS cuts in discussions over the debt ceiling. Not that it would ever be the centerpiece of what he wants to do, but Dem officials are perfectly willing to bargain, somewhat to the chagrin of some rank-and-file Dems.”

          Yet it did not end up in the bill. The President has an amazing ability to tell people what they want to hear, but the actions he takes never quite live up to what people thought he said he was going to do. Frankly, I admire his ability to phrase things just so that people think he is giving them what they want, when he ultimately is giving them nothing. Talk is cheap. Only action counts.

          It’s Medicare & Medicaid, not SS.

          That’s not true. Re-read your chart. These three programs are the only ones that increase as a share of GDP. SS just increases at a slower rate.

          “And about 50% of the world total.”

          And Medicare, SS, and Medicaid are equivalent to 83% of the world total of military budgets. So what? It is irrelevant. Saddam spent billions on his armed forces, and our military ran through sh*t through a goose.

          “Our war spending is this high out of inertia, not out of a look at the actual threat. That said, we still waste billions of dollars.”

          I agree.I also agree that we need entitlement reform. Why can’t we do both? The two add up to 74% of our budget.

          “As to the charts showing that Pres. Bush & the GOP added $5-7 trillion to the debt, you say that you think that another $160.5 billion or so should be attributed to Pres. Obama.”

          No, I said at least that amount. There are other amounts that are simply unknoweable, but large. The author smugly assumes that the Healthcare Bill will save money. My view is that it will actually cost a substantial amount. The CBO can project these things, but projections rarely meet reality, because things change. These policy projections also assume that the Iraq withdrawal and the surge cost NOTHING, which of course is patently absurd. It also assumes President Obama will not implement any future policies. My point is that the analysis is clearly biased and heavy-handed. The author clearly cherry-picked whatever data she needed to support her preconceived notions. She doesn’t even include the Detroit bailout. Additionally, it ignores the fact that Bush added $0.5 trillion per year to the debt while in office, while Obama added $1.8 trillion per year. Obama’s run-rate is nearly 4x Bush’s.

          “Even if so, that’s ducking the larger issue here: the Republican Party created the debt, mostly by changing tax rates and by invading and occupying a country for no reason (or, in your view, by lying to the public about its secret true reason).”
          Last time I checked, a better way out of a deficit situation is through economic growth. Democrats waste their time trying to divided the pie through taxes and income redistribution, when a better solution is to support policies that grow the overall pie for everyone. Until this President gets a clue, we will continue to go through this Sisyphean exercise of class warfare and income redistribution with an end result of nothing but anemic or negative economic growth. Look around you. The President’s policies are not working. He had two years of control of two branches of government. The Republicans have controlled one lower house of Congress for 6 months. It is time to lay the blame where it is due.

          “The larger point here is, no one who cares about the deficit is left in the Republican Party.”
          Yet the Democrats do. C’mon?

          Both parties have their wing nuts, and both have serious leaders.

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