In the Nation's Interest

Here’s the Deal

There is muddling through, and there is kicking the can down the road.  Although neither is conclusive, the former is more purposeful.  The budget deal announced yesterday – the “Bipartisan Budget Act” – challenges judgment with respect to its classification between these two pigeonholes.

There is some good news here.  The press has reported that the deal eliminates the risk of a government shutdown either this year or next.  That is not correct, at least not literally.  The government will shut down on January 15, 2014, and then again on October 1, 2014, if the Congress does not pass, and the President does not sign, appropriations bills (in addition to this deal) to keep the government funded and open.  However, unless and until this deal becomes law, the two Appropriations Committees of the Congress do not have the agreed-upon targets such that they can even try to pass those bills.  There are indications that the Appropriations Chairs have had significant input to the numbers in the deal, and that those Chairs are therefore now prepared to write those bills.  If so, then we are at least positioned to avoid government shutdowns, even though we have not yet done so.

The economy is shaky enough that it really does not need another shutdown shock.  Making a real step toward avoiding a shutdown crisis (although not fully accomplishing that goal, which this piece of legislation could not possibly do) for the next 22 months is clearly a positive.  Chalk one up for the Bipartisan Budget Act.

Also give the negotiators credit for standing close enough together to fit in one television shot.  Very little has been accomplished or even attempted on a bipartisan basis in Washington in recent months and years.  Budget chairs Ryan and Murray will catch a fair amount of flak within their own parties for even appearing to work together, so kudos on this front too.

Furthermore, the deal provides some relief from the budget “sequester” in this fiscal year and next, which are arguably the worst-affected years in the next eight that are covered by that irrational budget mechanism.  There is plenty more pain and irrationality to come in succeeding years – and even with the sequester fix these two years are not great either – but still, this relief is unquestionably welcome.  The deal “pays for” that sequester relief with savings that will arrive later, and this timing makes sense from the point of view of managing the nation’s macroeconomic policy.  So that is another positive.

That said, do not forget that the potential January 15 shutdown was not the only pending early-2014 crisis.  We go on debt-limit watch again on February 7 – and the debt limit is a more malignant issue by far than a government shutdown.  As an Act of Congress, this deal, at least in theory, could have increased the debt limit and taken that risk off the table.  It did not.  This is not to lay personal responsibility on the budget-deal negotiators; they may not have been given a green light on the debt limit by their leaderships.  But failing action in the budget deal leaves the larger dark cloud hanging over the economy, even while it dissipates the smaller.  You certainly should enjoy your holidays, but please do not put your guard down just yet.

The Bipartisan Budget Act has been credited in press releases with achieving “real deficit reduction.”  “Real,” well, yes; “significant,” certainly not.  The estimated net budget savings over the next 10 years total to $23 billion.  Prior to the deal, the Congressional Budget Office’s estimate of the budget deficits over those ten years came to $6.340 trillion – or about 276 times as much.  Few insiders even hoped for a big bite out of the long-term budget deficit problem from this negotiation, and the insiders have been proved correct.  Real correct.

One might also be underwhelmed by the sources of that deficit reduction.  Of the $23 billion of net savings, $28 billion comes from extending the sequester of mandatory (or “entitlement,” as opposed to the more-often cited discretionary or annually appropriated) programs – a simple across-the-board cut – for two more years, over 2022 and 2023.  The merit and staying power of such coarse spending reductions almost a decade out are at least questionable.  Yes, these are “real” savings – but nobody believes that we could “across-the-board” our way to a rational, sustainable budget.

The other savings come from an array of barnacles on the bottom of a budgetary boat that has been out to sea for some years.  The next biggest item is aviation security fees; then higher premiums for the Pension Benefit Guaranty Corporation (which is a tricky program to fund, given that premiums charged to struggling underfunded firms make it harder for those firms to fund their pension commitments in the first place); then customs user fees.  You may notice that some decry these items as “tax increases,” and may wonder whether they are.  Empirically, on the basis of long experience, what determines the answer to that question is who proposed them.  If the other guys proposed such policies, they are tax increases.  If your team proposed them, then they are business-like charges for commercially oriented operations of government, and possibly even reductions of “corporate welfare.”  You will not find that categorical criterion in any textbook, but it has functioned with 100 percent accuracy over a period of decades.  (Yes, the textbook does provide criteria for whether such fees are sound policy, and that should be the controlling question.  In this instance, on balance, they probably are.)

The next biggest source of savings is increased federal government employee retirement contributions, and decreased under-age-62 military retirement cost-of-living adjustments (COLAs).  These are probably the most painful policy changes in the package.  They are arguably justified.  They clearly come from the pot of potential savings that could be used for an ultimate and complete budget fix, if such ever should be on the table.  If we reach that stage, and these constituencies find themselves asked for still more blood, they surely will complain that they already gave at the office.

All of these “cats and dogs,” and the smaller kittens and puppies that add to them to reach an $85 billion gross savings total (which after funding $63 billion of sequester relief plus middle-aged rounding – or more precisely, the 10-year difference between budget authority and outlays – leaves the net deficit reduction of $23 billion), could have been a part of an ultimate grand bargain.  But they could not have driven it.  They do not touch the fundamental sources of our budget problem, and they are not even of a scale such that they could buy significant time to address that fundamental problem.  They merely keep us out of the ditch for another one-and-a-fraction years.

In sum, if the judgment on this deal is a binary plus or minus, an up or down, then the balance probably is favorable.  But the judges surely would leave the arena in a much better mood if they walked into it with limited expectations.  That the negotiators spoke to one another at all is more encouraging than what they said.  And what was achieved substantively in this process does not make it any more likely that we will see significant progress on the budget problem before the 2014 elections.

We have been given a period of grace by the budding economic recovery, which will reduce the deficit for the next few years.  But the period of grace will be finite, and this budget deal does not make it any longer.  Indeed, if the deal creates any sense of complacency, we will soon enough find ourselves closer to the edge than we are now.  We do not need immediate budget savings; but an immediate plan, recognizing the near-term shakiness in the economy, would do a world of good.  Now that the two sides have exchanged telephone numbers, they should begin a serious conversation about how to reconcile their differences over the real budget issues.

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