On August 3, expert Ron Haskins answered your questions on the immediate fallout from the debt limit deal in a live web chat moderated by POLITICO. The transcript of this chat follows.
12:30 Erika Lovley: Hi everyone, let’s begin the chat.
12:30 [Comment From Mike Beyer: ] What do you think the public does not understand about the government debt and […]the debt limit that prevents them from universally endorsing its increase? Several polls still show that a sizable number of Americans think we should not raise it, which seems to indicate that the public is very uninformed and/or very conservative with regards to what the government does with its money.
12:31 Ron Haskins: I think the public has a poor understanding of what the debt ceiling is. For example, I have talked with many people who think they can control spending by not increasing the debt ceiling. They don’t seem to understand that the spending that pushes us by the debt ceiling has already been obligated. Raising the debt ceiling is about keeping promises lawmakers have already made. As always, the way to control the deficit is to reduce future spending or increase future revenues. But the public seems to have a firm understanding of the two most important deficit issues — first, we have a huge problem and must do something soon; second, don’t cut Social Security or Medicare. Good luck dealing with the nation’s debt if we can’t reform Social Security or Medicare.
12:31 [Comment From Martha Paschal: ] What’s the appetite on the Hill for a widespread reform of the tax code?
12:36 Ron Haskins: Conventional wisdom is that Democrats want to raise taxes and Republicans don’t. The conventional wisdom in this case appears to be correct. However, both parties say they want to reform the tax code to broaden the base (by eliminating tax expenditures) and lower rates. The Republican position seems to be that they are willing to broaden the base and lower rates as long as none of the money is used to increase federal revenues. However, Senators Coburn and Crapo have already publicly indicated they’re willing to have new revenues produced by this process and I expect other Republicans to follow. If Democrats are willing to make serious reforms in Medicare and Social Security, there would be a lot of pressure on Republicans to increase revenues from taxation. Let’s see if the new super committee is brave enough to propose such a bargain — as the Bowles/Simpson Commission was in fact bold enough to do.
12:36 [Comment From Denise Chrispim Marin: ] Are you convinced that this deal on the debt ceiling was the best possible solution? Who won this battle? Was the deal driven according the radical Republicans preferences, in your opinion?
12:40 Ron Haskins: While realizing that most people are trashing the deal, let me ask you this question: How many times has Congress taken an action that reduces spending by nearly $1 trillion. Now, if the super committee produces another $1.5 trillion, especially if they do it through a combination of revenues and spending cuts, we will have made serious progress. Not enough, but serious progress nonetheless. But then, I think most folks familiar with the ways of Washington assumed that this process would involve many steps. If we get to $2.5 trillion this year, it would be a huge achievement — and much more than a mere down payment on our problem. Look carefully at the rules the super committee will operate by and you will conclude, I think, that if they produce something good, it will have an excellent chance of passage.
12:41 [Comment From mb: ] How economically helpful are the Republicans’ economic policies with regards to the effects of cutting government and slashing taxes to upper-income and corporate entities? Does this type of deficit reduction really hold any promise of helping our economy?
12:45 Ron Haskins: There seem to be two views on how the deficit problem can impact the economy. One view is that government spending can be used to drive the economy. The other is that if the government is moving toward balancing its books, the relief business people and investors will feel about the future will increase both business activity and investment, both of which are necessary to reduce unemployment and to grow GDP. So far, the first approach was tried with limited success. If we get $2.5 billion or so in deficit reduction after the super committee acts, we’ll find out if the second approach works.
12:45 [Comment From Edgar Morrison: ] Why does President Obama believe that military aid to Pakistan, accelerated depreciation of corporate jets, and continued wars in Iraq, Afghanistan and Libya are “better targeted” towards winning the future than aid for US citizens pursuing graduate education?
12:49 Ron Haskins: I don’t think the president believes that. We have had few presidents who talk more about investment in education than Obama. Rather, he wants to tax corporate jets and lots of other property or activities enjoyed by rich people in order to make more investments in education — and of course many other government activities. In many respects, Obama appears to be a traditional liberal who would tax the rich to, among many other activities, help the disadvantaged. Although we already have one of the most progressive tax codes in the world (the bottom 50 percent of earners pay zero federal income taxes), Obama never mentions that the rich already pay most of the federal income taxes.
12:49 [Comment From Denise Chrispim Marin: ] The agreement reached by Congress leaders yesterday was partial. It can avoid the default right now. But, can it also restore the market confidence on the capacity of US government pay its debt? It can also provide enough confidence for consumers and investors at this moment of weak economic recovery process?
12:52 Ron Haskins: The implication of this question is surely correct—few investors are going to say the federal government took strong action to contain its spending and deficits. Until yesterday we had two problems: the threat of a default and a long-term deficit crunch. We solved the former and made a tiny down payment on the latter. In other words, as it almost always does, Congress avoided a serious set of actions and left the big problem to solve another day.
12:52 [Comment From Michael N.: ] What impact is this deal and the future of the economy going to play on local municipalities?
12:57 Ron Haskins: Yesterday’s deal and all future deficit reduction deals will have enormous impacts on state and local government. States like Maryland and Virginia where lots of federal employees live will have less total earnings to tax; reduced federal spending is likely to have effects on overall economic activity; and many similar direct and indirect effects. In the future, one of the biggest impacts on state governments is likely to be changes in the Medicaid program. The feds pay more than half the costs of Medicaid and it appears nearly certain that sometime over the next several years federal spending on Medicaid will be reduced. The buck will be passed to states and they will either have to raise taxes to make up the difference, cut other programs, or reduce services. This is just one example. There are major changes ahead for state and local government.
12:57 [Comment From Jeff: ] After the $2.4 trillion of “cuts” via the debt ceiling deal…what will be the projected deficit out 10 years from now…$7.5 trillion cumulative?…and what will our debt/gdp numbers look like?…do you know what the most important metric is that the rating agencies look at?…odds of a downgrade within 6 months?
1:00 Ron Haskins: The point made by this question is correct. Our debt is so big, and our annual structural deficits are so huge, that even saving $2.4 trillion over the next decade will not prevent the total deficit from increasing. Many experts have recommended that a fine solution to the deficit problem would be to cut annual deficits to the point that the ratio of the total debt to GDP is held constant at about 60 percent. To achieve this goal would require about $4 or $5 trillion in savings over the next ten years.
1:00 Erika Lovley: Okay, that’s a wrap. Thanks everyone!
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.