A Grim Prognosis for Deficit Reduction

By :: August 30th, 2011

The other day, I spent a few hours with some of Washington’s most experienced budget experts. The session was off-the-record, so I can’t tell you who they were but I can tell you what they said.

In short, don’t count on much real deficit reduction any time soon, despite this summer’s debt limit deal that, amid much angst, allegedly cut spending by $1.2 trillion over the next decade.

To these veterans of the fiscal wars, the odds are awfully long that Congress’ new budget super committee will reach a broad deficit reduction agreement by Thanksgiving—perhaps one-in-three at best. But there is worse news for those who worry about long-term deficits: Although the debt agreement requires an additional $1.5 trillion in automatic spending reductions over 10 years should the Gang of 12 fail, not one of these experts believes those cuts will ever happen.  Congress will find a way to avoid, evade, delay, or otherwise confound these spending limits. In other words, the stick that is supposed to force lawmakers to act is mostly sawdust.

It is not as if the dozen members of the super committee couldn’t reach consensus. The panel’s new staff director is Mark Prater, a veteran Senate GOP staffer who is skilled at doing deals. Nine of the 12 committee members are flexible enough to sign onto a plan that cuts discretionary spending, slows the growth of Medicare and Medicaid, reforms Social Security, and raises taxes—but only if the bipartisan congressional leadership wants them to. And, as far as I can tell, it doesn’t.

It is the same old stalemate. Democrats won’t agree to entitlement cuts unless Republicans accept new revenues. Btw, this is not a matter of equivalent intransigence. Ds are, in fact, much more likely to swallow cuts in Medicare and Social Security than the House GOP is to accept any net increases in taxes. The enthusiasm of the party’s base for presidential hopeful Rick Perry, who wants to cut more taxes, helps explain why.

Can anything break this logjam? The soft economy might, if it gets bad enough fast enough. Lawmakers home for August are getting an earful from constituents about the still-shaky recovery. And Wall Street had its own case of the vapors a few weeks ago, as traders briefly panicked over sagging prospects in both the U.S. and Europe.

It is possible that another sharp decline in stock prices combined with a worsening jobs picture could drive President Obama and Congress to a deal along the lines of what the White House is likely to propose next week: a short-term stimulus combined with longer term deficit reduction. 

Public opinion of Congress has already plunged to an all-time low. Add the possibility that the economy could become truly terrible and lawmakers’ instinct for self-preservation could—in theory-- break the gridlock long enough for such a compromise.  

That’s why the bipartisan group I met with generally agreed that a mix of short-term stimulus and long-term austerity is the best hope for a budget deal.  But neither the economy nor the markets may yet be bad enough for that.  

So the future will look something like this: The super committee will fail. The automatic spending cuts—half in defense and half in domestic spending—will be ordered but not begin until 2013. And sometime in late 2012 those automatic spending cuts will go the way of Gramm Rudman and all other past congressional attempts to force itself into fiscal prudence.  The likely sum total of deficit reduction from the debt limit deal: $25 billion in 2012 spending cuts.        

 

8Comments

  1. Michael Bindner  ::  10:11 pm on August 30th, 2011:

    What will bring the group and the leadership to consensus is a realization that in order to extend the Bush tax cuts permanently, offsets need to be found on spending. Once that connection is made explict and agreed to, progress is possible – provided Obama commits to letting all the tax cuts expire absent such consensus – either right away or when the economy recovers – assuming it can recover with tax rates on the wealthy so low that shareholders and CEOs get 85 cents for every dollar management cuts from pay, benefits and purchases (by offshoring them).

  2. Vivian Darkbloom  ::  2:24 am on August 31st, 2011:

    Without realizing it, Howard has actually hit upon a fundamental truth. Just read the following two quotes as if the second actually followed the first (without all the fluff of the original in between):

    “Although the debt agreement requires an additional $1.5 trillion in automatic spending reductions over 10 years should the Gang of 12 fail, not one of these experts believes those cuts will ever happen. Congress will find a way to avoid, evade, delay, or otherwise confound these spending limits.”

    “That’s why the bipartisan group I met with generally agreed that a mix of short-term stimulus and long-term austerity is the best hope for a budget deal.”

    Not exactly what Howard intended, but its exactly right. The stimulus would get spent and the austerity would be avoided, with our without an agreement.

  3. Brian Dell  ::  3:49 am on August 31st, 2011:

    The Cato Institute, which I was not taking very seriously before given the opposition coming from Cato to tax reform that brings in a (relatively efficient) VAT, has put up two very good posts in the past week:
    http://www.forbes.com/sites/powerlunch/2011/08/25/why-grover-norquist-is-wrong-about-taxes/
    and
    http://www.forbes.com/sites/powerlunch/2011/08/30/a-modest-tax-reform-proposal-for-the-super-committee/

  4. Budget Geeks Agree: The Super Committee’s Deficit Reduction Recommendations Won’t Mean A Thing – Hit & Run : Reason Magazine  ::  9:59 am on August 31st, 2011:

    […] Peter Suderman | August 31, 2011 Howard Gleckman of the Tax Policy Center spent time talking to experienced Washington budgeteers this weekend. What did the old budget hands think of the latest deal to reduce the deficit? Not much: […]

  5. amtbuff  ::  10:16 am on August 31st, 2011:

    There are two kinds of future austerity: promises to find spending cuts later and immediate policy changes that result in future savings. The former is illusory, because political pain will be required in the future to enact the spending cuts. The latter is real, because the political pain is experienced today.

    The only back-loaded spending cuts we should accept are those like raising eligibilty ages and means testing, or those that eliminate entire future programs like high speed rail or health reform’s insurance subsidies.

    We must presume that any difficult decisions deferred to the future will be dodged by Congress. Politicians talk the talk about making tough choices. The time to walk the walk is now.

  6. Budget Geeks Agree: The Super Committee’s Deficit Reduction Recommendations Won’t Mean A Thing | Daily Libertarian  ::  10:35 am on August 31st, 2011:

    […] Howard Gleckman of the Tax Policy Center spent time talking to experienced Washington budgeteers this weekend. What did the old budget hands think of the latest deal to reduce the deficit? Not much: […]

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