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Fallout from the Great Budget Deal

Joe Minarik
Vice President, Committee for Economic Development
January 16, 2014

When you have a budget deal as big as the Ryan-Murray agreement with a Congress that's as divided as this one us you will end up with policies in both directions.  Democrats got some spending restored, and Republicans restricted how it could be used. A reduction in veterans' pension benefits passed as part of it, but, now, members of Congress are falling over themselves in a rush to undo it.

The long-term debt problem remains.  As Rep Lee Hamilton once said, reducing the federal deficit is the second highest priority of every member of Congress.  We don't need 535 deficit reduction programs. We need one that can get majority support.

We're close to the bottom of the barrel in cutting discretionary spending.  We have already squeezed most of the government. We have forced grantees to be more efficient.  The Veterans Administration is our largest employer. Its caseload has been rising and won't permit more cuts.  The IRS has been cut to the point where there is no one to pick up the phone. In addition, October's 16-day government shutdown delayed IRS tax refunds by one week.  Infrastructure maintenance has been deferred. We've been looking under the street lamp because that's where the light is, not because that's where we dropped our keys.

The debt limit presents one more manufactured crisis we ought to avoid. Suggested Treasury payment prioritization is hopelessly naive because you're operating with a highly uncertain cash flow.  The risk of a narrowly defined default becomes much too high.  

The deficit is declining. It always does when you enter recovery. Health care costs are slowing. Bob Bixby of the Concord Coalition noted that US policymakers are reacting like households confronted by teaser mortgage rates. They don't anticipate the future rise in interest rates. In December of 2007, the Congressional Budget Office predicted the public debt would hit 60% of GDP in 2022. It now stands at 73%, the 7th highest debt burden in the OECD.  Nariman Behravesh recently said "We're the best looking horse in the glue factory."

At some point interest rates will rise. Since March 2001, $2 out of every $3 of Treasury debt has been purchased by foreigners. Most is short term, so rising rates will quickly impact the federal budget. Our net borrowing costs will quintuple in 10 years under CBO's benign interest rate forecast.

So, how much debt are we willing to carry?  Current levels are too much.  We need a deficit reduction plan to restore fiscal balance, but it should take effect two years from now to allow full economic recovery.  However, last December's budget deal was Congress's way if taking a year off from the budget process.  We will look back on this year as the time when we could have tamed our budget deficits.

Joe Minarik has been a Vice President at the Committee for Economic Development since 2005.
He served as the chief economistof the Office of Management and Budget for all eight years of the Clinton Administration.  Previously, he worked closely with Senator Bill Bradley on his tax reform efforts, which culminated in the Tax Reform Act of 1986. He served as Chief Economist of the House Budget Committee in 1991-92 and 2001-05, and staff director of the Joint Economic Committee in 1989-90. Minarik earned his Ph.D. in Economics from Yale University in 1974 and his B.A. from Georgetown University in 1971. Minarik writes a regular post at CED's BackInTheBlackBlog.org.

Rapporteur: Pete Davis