Debt Ceiling Compromise Reached (For What It's Worth)

By Chuck Sudo in News on Aug 1, 2011 2:21PM

Both houses of Congress are expected to hold their noses and vote on the debt compromise hashed out yesterday. PResident Obama announced that he and congressional leaders reached the deal yesterday, the particulars as follows:

• Immediately increase the debt limit by $400 billion, with Obama permitted to order another $500 billion increase this fall unless both House and Senate override him by veto-proof margins.
• A third installment of between $1.2 trillion and $1.5 trillion would be made available after enactment of matching levels of additional spending cuts recommended by a special joint committee of lawmakers.
• Cut more than $900 billion over 10 years from the day-to-day operating budgets of Cabinet agencies. Caps spending passed by Congress for agency budgets at $1.043 trillion in 2012, $7 billion below 2011 levels.
• Create a 12-person, House-Senate committee evenly divided between the political parties; charged with producing up to $1.5 trillion more in deficit cuts over 10 years. If a majority of the committee agrees on a plan, it would receive a vote in both the House and the Senate.
• If the panel deadlocks or fails to produce at least $1.2 trillion in additional cuts, or if Congress fails to enact its recommendations, the White House budget office would impose across-the-board spending cuts across much of the federal budget, including the Pentagon, domestic agency budgets and farm subsidies. Many federal benefits programs, however, would not be covered by this, including Social Security, Medicaid, veterans’ benefits, and federal retirement benefits.
• Require both House and Senate to vote on a balanced budget amendment to the Constitution.
• Establish “program integrity” initiatives aimed at stemming abuses in benefits programs like Social Security.
• Increase funding for Pell Grants for low-income college students by $17 billion over 2012-13, financed by curbs in student loan subsidies.

The second round of cuts don't kick in until 2013, when the Bush-era tax cuts are expected to expire. If they aren't extended, that's a serious amount of revenue coming back to the Treasury's coffers.

No one comes out of this unscathed, in particular Obama. Here's what Paul Krugman had to say about the deal:

It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

The Washington Post's Matt Miller breaks down the numbers.

The Congressional Budget Office says Uncle Sam will spend around $46 trillion over the next 10 years. Assume the committee proposes and Congress enacts a further $1.2 trillion in deficit reduction atop the deal’s $900 billion in initial cuts, and that all this is done on the spending side (though “tax reform” is supposed to be included). That means we’ll have trimmed less than 6 percent from federal spending that is already slated to increase from $3.6 trillion to $5.7 trillion by 2021.

In other words, the numbers sound big and can be sold as “historic,” but they’re not even close to what’s needed.

Some pundits are already calling the compromise a mortal wound to President Obama's reelection chances. And there was nothing in this deal to boost jobs creation, which is what this fragile economy needs to pull through. So the folks who have sacrificed the most will have to do without longer.

But hey, global stock markets are already up in reaction to the news.