Small Matters: Deal just puts off the inevitable end

Sen. Patty Murray (D-Wash.), who will cochair a committee responsible for identifying $1.5 trillion in cuts or tax hikes, with Senate Majority Leader Harry Reid (D., Nev.).
Sen. Patty Murray (D-Wash.), who will cochair a committee responsible for identifying $1.5 trillion in cuts or tax hikes, with Senate Majority Leader Harry Reid (D., Nev.).
Posted: August 15, 2011

Congress finally made a deal. How does it stack up? Compared with the deficit challenge we face, it was just a kick of the can down the road, again.

Everything is discussed in 10-year blocks, so when politicians say they cut spending by about $900 billion, that's $90 billion a year. How much does the federal government spend in a year? That would be $3.5 trillion, so that's not much of a cut.

And, a "cut" is not a cut from current spending levels. It is a cut from what spending was projected to be if nothing was done.

So spending still goes up. The legal debt ceiling was raised by $2.1 trillion, so that means more spending and more borrowing, and somebody has to pay for it. Interest of 3 percent on that debt would be about $70 billion more for taxpayers to pay. That's about $200 per man, woman, and child in the United States. Just some rough numbers, more at higher interest rates, of course.

A special committee (six Republicans, six Democrats from the House and Senate) is supposed to identify an additional $1.5 trillion in cuts or tax hikes and get the House and Senate to vote it up or down later in the year. A down vote triggers prespecified, across-the-board cuts, which neither side likes.

The media misrepresented the debt-ceiling "crisis," no surprise, and got lots of help doing so by the various parties advancing their special interests. With only about $270 billion in interest to pay and $2.5 trillion in tax revenue coming in this fiscal year, interest on the debt is easily paid and all the existing debt coming due could be rolled over into new debt without hitting the limit.

There are only two months left in this fiscal year, so roughly all but about one-sixth of the $1.4 trillion deficit for this year has already been borrowed. That leaves about $250 billion the government must have promised to someone somewhere, and it would not have had enough money to do so unless it could borrow it. Somebody wouldn't get paid, but it wouldn't be our debt-holders. There would be no default.

The U.S. Treasury would have decided who got paid and who did not. Small businesses with government contracts might not have been paid in a timely manner. National parks might have closed, noncritical government employees might have been laid off (apparently, striking state workers in Minnesota were not missed, although one disappointed daughter of a friend of mine couldn't get her learner's permit on her birthday).

To make political points, Social Security checks might have been delayed to stir up anger against whomever should be blamed (the camp that wants government spending reduced and budgets balanced or the camp that suggested business as usual, pick your side).

All that said, the Washington frenzy was a major shift in the discussion, as more people now realize the day of reckoning is much closer and tax reform and entitlement reform are closer to happening. Needless to say, if we don't do it, markets will impose a correction on us that will make the last financial crisis look like a picnic. It will take some time to see how this is all perceived.

Measures of consumer and small-business-owner sentiment were taken right up to the end of July by a number of organizations. The deal was done over the first two days of August, so at the end of the month, we'll see how consumers and businesses view the solution: a path to an improved economy, or something else.

So far, the markets don't see much of a solution from the White House and Congress, and the S&P downgrade of U.S. debt played havoc. All of this, and more, will tell us how investors, consumers, and business owners see the future. We'll take another look at the end of August.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at dunk@temple.edu. Read more of his columns at www.philly.com/dunkelberg.

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