With an August 2 deadline just days away, pressure is growing for Congress to pass legislation to raise the debt ceiling. Bills are moving through both the Senate and House of Representatives, yet a compromise is still uncertain. Brookings scholars offer their analysis and recommendations on the issues, including Isabel Sawhill on the impact on job creation; Bruce Katz on the need to include governors in the discussion; Alice Rivlin on the causes of the debt crisis; Robert Pozen on the effects of a default; William Gale on the politics surrounding the debate; William Galston on congressional next steps; and Jonathan Rauch on why Republicans should be willing to compromise.
Is Anyone Focusing on Jobs?
Isabel V. Sawhill, Senior Fellow, Economic Studies
In all of the brouhaha about the debt ceiling, much of the debate has been about the balance between spending cuts and revenues or about whether the ceiling should be extended for a shorter or longer period of time. Lost in the claims and counterclaims of the past few days is what all of this means for jobs.
The U.S. economy is not growing fast enough to reduce the unemployment rate any time soon. In fact, we may be on the verge of a double dip recession and even if we escape that fate, most economists believe it will be three or four years before the economy has fully recovered and people are back at work. But this already-pessimistic forecast is based on a scenario in which government doesn’t make the problem worse. If the debt ceiling problem is resolved by a last-minute compromise that splits the difference between the Reid and Boehner plans but includes a set of spending cuts that start well before the economy has recovered, this will slow the process and deepen the problem of joblessness. And if no compromise is possible, the adverse consequences for the economy will be even worse. I might add that any adverse consequences will make it far more difficult for the President to secure a second term and this simple fact gives Republicans little incentive to find a solution that doesn’t harm the economy.
What Democrats need to focus on is not just the balance between spending and taxes and the composition of any spending cuts, but the timing of those cuts. They have already lost the battle on balance and will probably have to give way on the composition as well. But they should backload any spending cuts as much as possible in an attempt to preserve jobs and keep the economy moving forward over the next several years.
It is very easy to lose sight of the issue of jobs in the contentious fights over the debt. However, as most experts have been arguing for some time, the right thing to do is to curb the growth of spending over the longer-term but in a way that does not retard the current recovery. Yet in the heat of the political battles over the debt ceiling, this issue is not getting the attention it deserves.
Be prepared not just for turmoil in financial markets but for a period of continuing high unemployment, one that could have been avoided with the right leadership from Washington.
Getting States in the Mix
Bruce Katz, Vice President and Director, Metropolitan Policy Program
As Democrats and Republicans in Congress close in on a deal (hopefully!) to raise the debt ceiling this weekend, it is clear that any deal will only be the first step towards getting the federal fiscal house in order. Both Speaker Boehner and Senator Reid have proposed empowering a bipartisan congressional committee to draw up a deficit reduction plan prior to future debt ceiling increases (in 6 months under the Boehner plan, or after the 2012 election in the Reid plan).
If we’re serious about restructuring our federal government for fiscal solvency, why limit these negotiations to the Congress?
The solution to our long-term budget crisis lies in a new federalist bargain that recognizes the critical role that states play in delivering and co-financing federal programs, growing the economy, and innovating on new, pragmatic policy ideas.
Thus, Congressional leaders should invite four governors—two Republicans and two Democrats—to join any forthcoming deficit task force. Adding state leaders to the deficit debate would have tangible benefits.
First, governors could provide a much-needed perspective on the impact of federal budget decisions on critical state responsibilities. States are co-financiers of federal programs like Medicaid and use federal funding and their own resources for critical economy-shaping investments in advanced research & development, housing, education and infrastructure. With these and other state-related programs on the chopping block in Washington, and the end of Recovery Act aid, states can help the federal government “cut smart” to minimize the impact on the sluggish economic recovery.
Second, governors could offer advice on how to restructure the federal-state relationship over the long haul. That relationship has become fractured and dysfunctional over the past thirty years.
Washington is often absent when it should be present. It has failed, for example, to set a strong platform for building a productive and innovative economy post recession.
Washington is also present where it should be absent. Federal programs are overly compartmentalized and prescriptive, inhibiting the ability of states and their metropolitan areas to innovate and tailor investments to the distinctive assets of disparate places
Getting states and governors into the federal mix could bring pragmatism back to Washington. State leaders routinely put place over party and collaboration over conflict. They are closer to the ground and more cognizant of how the real world actually works. The result: a smarter and more efficient federal government and a reinvigorated federal republic.
The Debt Ceiling: An Artificial Crisis
Alice W. Rivlin, Senior Fellow, Economic Studies
“We got into the mess of the debt ceiling because in our polarized politics the newly-elected members of the House were very intent on changing the federal budget and on trying to make the federal government smaller, and the debt ceiling seemed to be an opportunity to hold the administration and the rest of the government hostage to their particular views. So we have an artificial crisis. We don’t need to have a debt ceiling. We shouldn’t have a debt ceiling. I think we are the only country that does have a debt ceiling. But it is being used as an artificial crisis to makes changes in the budget…”
The Implications of a Default
Robert C. Pozen, Nonresident Senior Fellow, Economic Studies
A few politicians have said that a default on U.S. Treasuries will not be a big deal. With all due respect, they are wrong.
On an immediate basis, a default in U.S. Treasuries will cause havoc in the short-term borrowing market, where they are the main form of collateral. These financing problems will deter already jittery corporate CFOs from hiring more employees and building more plants.
In the long term, investors – especially foreign holders – will demand higher interest rates on U.S. Treasuries if they are no longer seen as totally risk free. Over the next few decades, these incremental interest payments will exceed the spending cuts included in the two leading plans to increase the debt ceiling.
Nevertheless, Congress is at a stalemate because of the ideological rigidities of both parties. Many Republicans are against all revenue raisers though, as I have recently shown, certain provisions of the tax code are difficult to justify. Some Democrats are against any change in Social Security though, as I have recently argued, the reform of this program is critical to any multi-trillion dollar package to reduce federal spending.
Politicians of both parties fear that if they compromise on a plan to lift the debt ceiling, they will be pushed out by angry voters in the next election. However, most voters will be even angrier if the political in-fighting results in a U.S. default on its Treasuries.
Voters expect their elected representatives to be pragmatic, rather than ideological, in order to avoid a disastrous default on U.S. Treasuries. Instead of applauding such a default as a vindication of a particular ideology, most voters are likely to turn against all politicians in Washington, D.C.
The Politics of Debt Negotiations
William G. Gale, Senior Fellow, Economic Studies
The current debt reduction talks are inspiring political theater. So, while I offer the explicit caveat that my expertise is economics, I offer a few comments on the politics of the recent discussions and the overall debate.
First, while the current debate is difficult and sometimes ugly, it is easy to forget how much progress has been made in changing the discussion in the past year. Much credit goes to the Bowles-Simpson and Rivlin-Domenici commissions. A year ago, people would compare deficit reduction plans to the status quo. Now, they compare deficit reduction plans to each other. That is a huge step in the right direction—it is called dealing with reality. It is not sufficient to solve the problem, but it is necessary and it has been lacking for a very long time, even though analysts like me and many others have been warning about fiscal issues for over a decade.
Second, the original discussion was about what share of the deficit reduction plan should be tax increases versus spending cuts. Democrats wanted a combination of tax increases and spending cuts. Republicans members of the House and the Senate, almost all of whom have signed the “no new taxes” pledge, wanted the deficit reduction to come entirely from cuts. Even though polls show that a strong majority of Americans favors a combination of spending cuts and tax increases to resolve the deficit problem, the Democrats have conceded every major point here. Democrats keep offering so-called “reasonable” compromises that move further and further to the Republican position—the Democrats are negotiating with themselves and, as a result, have basically taken taxes off the table for this round of negotiations. The plan President Obama advocated last week (which led Speaker Boehner to walk out of negotiations) actually involved even less tax revenue than the “Gang of Six” plan. The current plan offered by Senate Democrats offers no changes to the tax side of the ledger. All of the deficit reduction comes from spending cuts. Apologists for the Democratic approach say that Republicans won’t agree to tax increases so we have to take them off the table, but that seems to me like a step that should occur in negotiation over competing plans and when receiving something in return, not a unilateral decision taken with no compensation.
Third, now that the debate about tax increases is effectively over in the current debt reduction talks, Republicans have pushed for far stronger restrictions – spending caps, balanced budget amendments, etc. None of these are very good ideas, but by pushing harder and “acting unreasonably,” the Republicans may well gain further concessions from the Democrats. Certainly, their consistent position on no new taxes has worked in this round, even if Democrats and many others (myself included) feel the pledge is problematic. (For more on this, see the paper I wrote in 2004, showing that signers of the pledge also overwhelmingly voted to expand Medicare, finance the war in Iraq, and reauthorize the highway bill at that time. Whatever one thinks of having no new taxes, it is impossible to see how raising spending and committing to no new taxes is a sustainable policy.)
Fourth, it will be fascinating to see whether the Republicans go with the victories they have already won, or whether they stick to asking for the far more extreme “cut, cap and balance” approach. If they do the latter, it will also be interesting to see whether their intransigence causes further concessions from the Democrats or sinks prospects for a deal and gets them blamed for a default, which would be a national embarrassment as well as an economic problem.
The End-Game: Next Steps on Passing a Debt Ceiling Deal
William A. Galston, Senior Fellow, Governance Studies
The next acts in the long-running debt ceiling melodrama are becoming clearer. What is not yet clear is how it ends.
With the addition of language guaranteeing a floor vote on a balanced budget amendment, House Speaker John Boehner now has the support he needs to pass his version of a bill to raise the debt ceiling. If it passes promptly, Senate Majority Leader Harry Reid will move to table it as soon as it comes across the rotunda. This action requires only a simple majority and is non-debatable, so it would occur in a matter of minutes after it is introduced. Reid would then bring his own debt ceiling bill to the floor, and unless Republicans choose obstruction or delay, it should pass. The Senate then will have passed a bill that can’t pass the House, and vice versa.
At that point, the end-game begins. This is when a handful of veteran legislators will find out whether their skills of negotiation and compromise, honed over so many decades, are still relevant in this age of party polarization. It’s easy to list the principal issues in dispute. Will the projected deficit be cut enough to equal the increase in the debt ceiling? Using whose accounting? Will it take one or two votes to get past the 2012 elections? Will there be a new budget commission with the power to force up or down votes on its recommendations? If so, what will be the “trigger” in case the commission deadlocks along party lines? And finally, will Senate Democrats accede to House Republican demands for a guaranteed floor vote on a balanced budget amendment?
It’s easier to list these issues than it is to guess how they will be resolved. One thing is clear: with uncertainly over a possible default piled on top of astonishingly weak economic growth numbers for both the first and second quarters of this year, conditions are ripe for a bone-shattering plunge in global markets. Congressional leaders had better come up with something well before the end of the weekend. If not, we risk a repetition of the collapse that occurred right after the defeat of the first TARP resolution.
Dogmatic Cliques: Lessons the Republicans Can Learn from Palestine
Jonathan Rauch, Guest Scholar, Governance Studies
Here’s a reason House Republicans should stand down from their purism and go for a debt-limit deal, preferably without firing their speaker in the process. According to a new poll conducted by Greenberg Quinlan Rosner Research and the Palestinian Center for Public Opinion, Fatah leader Mahmoud Abbas has a 70 percent approval rating among Palestinians, which is about the same as Hamas’s disapproval rating.
What does that have to do with the debt limit? The country needs the debt-limit crisis ended, but so do Republicans, because they’re in danger of Palestinianization.
Palestinians need a peace deal with Israel (and Israel needs one with them, but that’s another story), but Hamas acts as a spoiler. Given Hamas’s effective veto power, Palestinians can’t say yes to anything, or at least to anything that has any chance of getting past even the most compromise-minded of Israeli governments. Which means, as Abba Eban once said of the Arabs, they never miss an opportunity to miss an opportunity.
The same dynamic is at work with Republicans on the debt limit. They’re terrified that any deal they make will draw fire from their right. No, I’m not likening the Tea Party, morally or substantively, to Hamas. But I am pointing out that Republicans passed up an extraordinary offer–$4 trillion in bipartisan deficit reduction, mostly spending cuts and including Medicare, which would have taken away Democrats’ most powerful campaign weapon–because of a dogmatic clique’s rejectionism. I suspect they will one day feel about letting that deal get away the way liberals came to feel about their torpedoing of Nixon’s proposed guaranteed annual income (“We did what?”).
Dogmatic cliques can’t govern. Palestinians are figuring that out about Hamas and are tilting their support strongly towards Fatah. Americans will figure out the same thing about House Republicans if they can’t say yes to something soon.
SEE ALSO:
Optimism in the Debt Ceiling Chicken Game
Bill Frenzel, Guest Scholar, Economic Studies
After several weeks of increasing pessimism over the real possibility of a federal default, it appeared for a time yesterday that there were grounds for optimism as the House seemed poised to vote on John Boehner’s proposal to raise the debt ceiling. Any solution that avoided its expiration has become the best choice, and that seemed possible.
Alas, the vote was delayed as Boehner worked to round up conservatives, but his bill may yet squeak through the House soon. The Reid bill, its Senate counterpart, seems likely to do the same in the Senate. And if this comes to pass, because the bills appear to be similar, but not nearly identical, a House/Senate conference committee should be able to reconcile the two pieces of legislation swiftly.
Read the full article on CNN.com »
Commentary
Around the Halls: The Debt Limit Clock Runs Out
July 29, 2011