international analysis and commentary

The debt deal: sound and fury, signifying nothing


It turns out that the recent debt-limit agreement between Congress and President Obama was the political equivalent of a Seinfeld episode:  cynical humor mixed with cringe-inducing behavior, ultimately about nothing.  Not that there’s anything wrong with that….

After all, while polls say that the majority of voters are happy with the compromise, if not the process of getting there, within most political circles the deal is viewed as somewhere between unpalatable and repugnant.  These views all share one false assumption: that something meaningful happened.

The deal’s bottom line reduces federal spending by between $2.1 and $2.4 trillion.  Out of an annual federal budget of $3.7 trillion, this sounds pretty bold.   But these numbers represent aggregate cuts over a decade – and during that decade, federal outlays are scheduled grow by about two-thirds.  That means that, on an annualized basis, these cuts are small beer – amounting to perhaps 5%.  To put that in perspective, in my work advising state and local governments it is common to find 5-6% savings in annual operations just from trimming unnecessary expenditures in a non-ideological way; there is no reason to think that equivalent savings cannot be had at the federal level.  These purportedly epochal cuts are anything but.

Yet, that’s not the real problem.  Rather, these whopping 5% savings don’t really kick in until 2014 (except, of course, for those that savage programs for the poor or scientific research … you know, those out-dated, oh-so-20th Century notions), providing plenty of time to override them – just like the supposedly automatic expiration of the Bush tax cuts.   In fact, the House vote on the bargain wasn’t even concluded before Republicans began asserting that the promised defense cuts – which are supposed to make up half the future reductions – will not stand.  (In one of the rare examples of true bipartisanship, Defense Secretary Leon Panetta has issued almost daily warnings since that our national security will crumble.) 

For his part, the President started claiming before the ink was dry on his signature that the new pact allowed for tax increases as part of the second round of deficit-reduction due by Christmas – something it’s certain Republicans did (and will) not agree to.  In fact, the only saving grace for most Democrats of this deal – really, of Obama’s handling of the entire budget dance with Republicans since the mid-term elections – is that the Bush tax cuts will finally expire automatically right after the 2012 elections.  Of course, that depends upon the notion that Obama will hold firm against their further extension; past performance casts considerable doubt. 

In short, after months of histrionics, all that both parties really have agreed to is to postpone any real effort to address the country’s future.  Sure, there are some immediate cuts in “discretionary domestic spending” – including anything that might represent an investment in the future – but everything else is deferred to after the next election.  This might present the uplifting prospect of a great national debate over priorities – cut defense, cut other spending, or raise taxes to pay for them – to be settled by the voters in 2012, as should be the case, except for one thing:  Both parties have made clear that they have no intention of forthrightly addressing the largest budget driver – entitlements.

Democrats insist that nothing change about the unsustainably-huge portion of the country’s budget devoted to entitlements.  At least, Republicans finally have admitted their real objectives – they really do want to end Social Security, Medicare and Medicaid as the last (mild) vestiges of wealth and income redistribution: Eric Cantor, the second-ranking Republican in the House, could barely wait until the day after the debt agreement’s enactment to announce that young Americans simply had to accept that Social Security and Medicare weren’t going to be there for them.  But the inevitability of the demise of entitlements is, in their telling, due to not so much demographics (more elderly, costlier care) as Democrats (Obama’s stimulus and Affordable Care Act).  This gets both the cause and the solution – preserve entitlements for Baby Boomers nearing retirement, but end them for 21st Century Americans – exactly backwards.

For a generation, Americans, like their counterparts in other prosperous countries, have spent too much on current consumption and invested too little in the future.  This is a spending problem – not just a government spending problem – after all, household debt relative to income stands at the same unsustainable ratio as government debt to GNP.  There are only two ways to pay these debts and square our accounts: spend less, or earn more.  We can have a valid debate over whether making the investments that would enable us to do the latter – modernizing our nation’s transportation and energy infrastructure, and, above all, educating our children to out-compete China and India in the 21st Century – is better done by the public sector or by private companies acting in their own interests (although it’s unlikely that even government-hating Americans would choose the latter in these cases of classic public goods).  But, whoever should make these investments, failing to do so in the near-term will only result in a lower-income America in the decades ahead, and that really will mean curtailing entitlements – but not for today’s younger Americans.  There really isn’t a long-term problem with these retirement programs:  The imbalance between too few workers and too many retirees that the Baby Boom produced – and, hopefully, between a culture of entitlement and the willingness to pay for it – will flip in the next generation.  Rather, the problem is that the Baby Boomers, who currently enjoy peak wealth and income, will need someone else, for up to the next 50 years, to pay for the Social Security, private pensions, and personal savings we failed to fund ourselves.  If we continue to refuse to invest in their futures now, these younger Americans simply will be unable to pay for our mistakes later.  That pretty well defines the contours of the real deal that, alas, is still waiting to be made.

And – Seinfeld notwithstanding – yeah, there is something wrong with that.