YES: The spending cuts won’t harm growth and will offer the chance to fix long-term problems.
By Timothy Geithner
It was a terrible process, but a good result.
Now that Congress has reached a compromise to move toward restoring fiscal responsibility, what have we achieved and what challenges remain?
The agreement creates room for the private sector to continue to grow, without the threat of default and the burden of higher interest rates.
It locks in at least $2 trillion in long-term savings from cuts in government spending, but those savings are phased in gradually to avoid hurting the economy in the near term.
The initial savings, which total roughly $1 trillion over 10 years, require cuts in security programs and savings across the rest of annual discretionary spending. Changes must be made in how government works, and some programs will be scaled back to make room for those that are essential for the future, such as education and innovation.
The agreement sets up a powerful mechanism for agreement on tax reforms to strengthen growth, and entitlement reforms to strengthen programs such as Medicare. A congressional committee with fast-track authority will have a Nov. 23 deadline to recommend a balanced package of long-term reforms to produce $1.5 trillion in additional deficit reduction.
The agreement creates a strong incentive to compromise: If the committee fails to reach agreement or Congress fails to act on the recommendations, government spending will automatically be cut by $1.2 trillion. These across-the-board cuts, evenly weighted between the defense budget and domestic programs, would take effect in 2013.
These broad, automatic cuts, timed to coincide with the end of the Bush tax cuts, will make it harder for Congress to choose inaction over compromise.
The agreement removes the threat of default and lowers the prospect of using the debt limit as an instrument of coercion. It should not be possible for a small minority to threaten catastrophe if the rest of the government decides not to embrace an extreme agenda of austerity and the dismantling of programs for the elderly and the less fortunate.
Beneath all the bluster, the prospects for compromise on broader and deeper reforms are better than they have been in years. Leading Republicans have begun talking about tax reforms that will raise revenue and help reduce the deficit. Democrats recognize that we have to find savings to preserve programs for the elderly, the middle class and the poor, and to create room to help rebuild the economy.
Already, some are asking if we cut too much. Others want to know if we did enough about the long-term problem of a rising debt burden.
This agreement is the beginning of restoring fiscal sustainability. It is a substantial down payment, but not the end of the debate. The government’s ability to make smart, long-term budget choices has long been broken. This gives us a chance to fix it.
The near-term cuts in spending will not materially add to the pressures on the economy. The direct effects of the cuts — using estimates by Macroeconomic Advisors — are about one-tenth of one percentage point of annual GDP growth, far less than the damage that would have been caused by a prolonged impasse, by adopting the budget proposed by Republicans or, certainly, by default.
And by locking in long-term savings, Congress will have more room in the fall to pass additional short-term measures to strengthen the economy — such as extending the payroll tax cut, which provides an average of a thousand dollars to the after-tax incomes of working Americans; extending unemployment benefits; and financing infrastructure investments. After all, strengthening growth and putting more Americans back to work are among the most important things we can do to improve our fiscal situation today and over the long term.
Timothy Geithner is secretary of the Treasury.
NO: By ducking entitlements, the deal ensures deficits that are unsustainable.
By Peter Morici
In the debt ceiling melodrama, the president and tea party each had political objectives and national interests to serve. Politics won out.
Nowhere did I hear the politicians — of either stripe — address the genuine nature of the deficit problem.
The American private sector may be the most efficient on the planet, but the U.S. federal government is woefully uncompetitive.
Compared to other large prosperous democracies, like Germany and Japan, Americans have reasonable expectations of their federal government — effective law enforcement, protection from abusive business practices, a well-functioning infrastructure to support commerce, a reasonable measure of income security in these uncertain times, a minimum standard of health care for all citizens, and a dignified retirement.
The problem Americans face is that they pay so much more than citizens in other countries to get comparable benefits — hence, Washington has budget deficits that no amount of tax increases can erase.
During the past four years, federal spending has swelled an additional $1.1 trillion, when inflation required only $200 billion, and the budget deficit jumped ten-fold to $1.6 trillion.
Consequently, now the federal government simply costs more than the economy can bear.
To point: increasing everyone’s taxes 50 percent would still leave an annual deficit of nearly $1 trillion.
The deficit reduction compromise reached by the president and Congressional Republicans makes spending cuts of about $1 trillion over 10 years across all areas of government except the two areas creating the biggest problems — Social Security and accelerating Medicare and Medicaid costs. The deal establishes yet another blue ribbon panel of senators and representatives to find another $1.5 trillion, mostly in those two problem areas.
If successful, the federal government still would be left with annual deficits much greater than $1 trillion a year — more than increased taxes can erase and certainly big enough to ensure a downgrade by credit rating agencies.
The panel will play some quick tricks with Social Security, like lowering the inflation formula, even though the current formula shorts grandma on annual adjustments to Social Security.
The panel will shift some health care costs onto the states, employers and the well-to-do elderly.
That only will accelerate health care price increases by expanding the market drug companies — and other health care monopolists — can bludgeon.
Social Security will never be fixed until President Barack Obama steps up to the podium, stops denying the retirement programs’ impact on future budgets, and tells Americans, “we are living longer so we will have to work longer, otherwise the system will go bust and not be there for our kids.”
Don’t hold your breath waiting for that act of courage.
Americans spend 19 percent of GDP on health care, while the Germans and Dutch, with private systems and similar outcomes to the United States, spend 12 percent.
Americans can’t hope to compete and create jobs if businesses must pay so much more in premiums and taxes to finance employee health care benefits.
This week, the president and the tea party got their victories, but Americans will remain besieged by slow growth, high unemployment, stagnant wages and a government too expensive for its citizens to bear.
It reminds a lot of the old Soviet Union — which if you will remember, quit the business of governing when it ran out of money.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.
