Little by little, Washington seems to be “solving” the budget crisis that loomed big just before New Year’s—or at least pushing it to the side of the road where it likely won’t cause another financial crisis soon.
The biggest piece, “the fiscal cliff,” was taken off the table in the ugly New Year’s deal cooked up by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-Ky). That made the Bush tax cuts permanent for household earnings below $400-450,000 but raised taxes back to Clinton Era rates for every dollar a household earned above that.
Then, Republicans agreed to extend the debt ceiling until mid-May, and House Speaker John Boehner indicated there would be no repeat of the 2011 debt limit debacle when Standard & Poor’s downgraded the US’s sovereign debt from AAA and Republicans got the blame.
And finally, House Budget Committee chairman and 2012 GOP vice presidential candidate Paul Ryan said Republicans would not shut down the government when the latest budget resolution runs out and that the automatic spending cuts enacted in 2011 (the so-called “sequester”) will probably stand.
That means, essentially, no “grand bargains” on the budget are in the cards this year, but no dramatic confrontations are, either.
Let’s look at the sequester first. As part of the 2011 debt limit deal, Congress set up a bipartisan “supercommittee” to find more than $1 trillion in spending cuts over the next ten years. If it failed, that same amount of cuts would take place automatically.
The sequester’s meat ax approach, which chopped from domestic and defense spending alike, was supposed to put the fear of the Lord into both parties and theoretically make them compromise on a more sensible plan.
That underestimated how dysfunctional Washington really is. The supercommittee failed, the sequester kicked in and now the clock is ticking. Automatic spending cuts start March 1st, and Republicans seem steeled for it, although they don’t like cuts in defense spending, including the dramatic removal of an aircraft carrier from the Persian Gulf.
President Obama pleaded for more time to come up with a broader deal, but The New York Times noted that even the president realized “a broader deficit agreement is unlikely to be reached by the March deadline.”
There’s a good reason Republicans and Democrats alike prefer automatic spending cuts to ones they’d have to vote on, as Chris Cillizza of the Washington Post pointed out:
What does the sequester’s move from close-to-unimaginable to close-to-unavoidable prove? That most basic rule of Washington: The politically easiest path is the one politicians prefer to take.
Indeed—and that also means the upcoming budget battles are likely to be drawn-out affairs with lots of sound and fury, signifying nothing. Democrats have promised to put out a new budget including more tax increases through reducing deductions and exemptions. Ryan has pledged to write a budget that’s balanced in ten years, which could include draconian cuts.
Neither party will vote for the other’s proposals, so both are DOA. I think it’s far more likely we’ll get more continuing resolutions funding the government at currently reduced levels than a deal between Republicans and Democrats.
So, the $600 billion in tax increases from New Year’s and the $1.2 trillion in spending cuts from 2011 are about as grand a bargain as we’re going to get. That will likely shrink GDP growth by 0.7% this year, but I see no crisis in the months ahead.