Wednesday, August 3, 2011

Obama Got His Debt Ceiling Deal

President Barack Obama has gotten his "compromise" debt ceiling deal, and has now gotten it passed through both houses of Congress. The House of Representatives passed is yesterday evening (Monday), the Senate passed it today (Tuesday), and the President immediately signed it. Everything happened fast.

The markets issued their judgment fast, too. The US markets said unequivocally that no deal would be better than this deal. The foreign markets agreed, too.

And it looks like my analysis of last week was spot on. Apparently there's almost no cut in spending till after the presidential election. But the spending takes place immediately, and House Majority Leader says it will be eaten up by the time we reach 2013. (That's a continuing $1.6 trillion per year deficit through that time, though the White House had previously claimed the deficits would be reduced — just like the unemployment rate.) It really is a case of "I'll gladly pay you Tuesday for a hamburger today."

There is a way to fix this, and it ties in with the "supercommittee" that will have to develop most of the spending cuts in this deal. The key issues are that we really need to cut spending — or at least stop its increase rather than merely reducing the rate of increase — and we need to avoid raising taxes and shoving the economy back into recession.

So here's what we do and how we are told the Congressional Budget Office (CBO) will score it relative to the current profligate baseline spending level (remembering that spending has increased by $1 trillion per year since Obama took office — and that is now part of the baseline).

  1. Immediately freeze spending, cancelling all programmed automatic spending increases. (Cutting spending — perhaps to where it was when Obama took office — would be better, but we'll take what we can get.) We are told the CBO will score this as a $9 trillion cut in spending over the next ten years.
  2. Immediately block the impending tax increase that's the largest in US history, now labeled as stopping the end of the Bush tax cuts. This will prevent a new/repeated/continued recession. We are told the CBO will score this as a $5 trillion debt increasse in the coming decade.
The combination of these two (a) actually stops spending increases, (b) avoids shoving us into recession, and (c) scores out as a $4 trillion debt reduction over ten years. An additional $1 trillion in new spending for the same period can be avoided by repealing Obamacare. That would be an appropriate initial step toward getting the federal government's profligate spending under control.

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