Grading the Plans

by Douglas Holtz-Eakin

Speaker Boehner has been quoted as saying that his proposed plan to raise the debt ceiling is “not perfect.” Okay. How, then, does it stack up as a matter of policy? And what about the Reid alternative?

Timing. A timely increase in the debt limit is imperative. (A video is worth 10,000 words.) The Boehner plan is a way to meet the need to raise the debt limit. Moreover, the Boehner plan forces Congress to address entitlements sooner (six months) rather than later. Good on both fronts.

Size. I have never been a member of the “size matters” club. Instead, I think that markets are more interested in the quality of the policy addressing the debt problem. The projected debt explosion is fundamentally a spending explosion, so policies that address growth will be more convincing to markets than a “large” deal that is dominated by a futile attempt to tax away the problem.

Composition. By the standards of historic budget agreements, the Boehner plan is off the charts. See the chart below from the Congressional Research Service.

First, there is not a single dime in taxes. David Addington at the Heritage Foundation has argued that the Boehner plan “greases the way for tax hikes.” This is truly unhinged. The Boehner plan envisions a “select committee” of six Republicans and six Democrats that would require a majority vote — that is, seven votes — to propose entitlement reforms for an up-or-down vote in Congress. The six Republicans (and any Democrats who are not renting their brain from an amoeba) can easily stop any notion of tax increases. And there is simply zero chance that the House would pass such an increase if it did emerge over the next six months.

Second, there are real cuts in FY2012 discretionary spending, caps on future spending, and an enforcement process for those caps. One might argue for more aggressive cuts up front and there will be concerns over the ability of future Congresses to slip the discretionary caps. But on the whole, this is as good a package of discretionary spending controls as can be written.

Third, the “select committee” process ties future debt-limit increases to entitlement reform. Since the heart of the debt problem is broken entitlements, this linkage is entirely appropriate. While less ideal than actual reforms themselves, the committee forces future action on the most pressing policy issue facing the United States.

Comparison to Reid Plan. The plans are quite similar. Indeed, the best way to think about the Reid plan is that it is simply the Boehner plan with fake cuts (largely war spending) added on. Put differently, executing the Reid plan is the same as executing the Boehner plan and then adding an unrestricted debt limit increase on at the end. Since so-called “clean” increases are a signal to markets that the U.S. cannot address its fundamental problems, this is extremely dangerous and undesirable.

The bottom line. The ideal debt-limit package would combine up-front discretionary cuts with medium-term discretionary controls and real policy changes to entitlement programs that address the spending explosion and display to international capital markets the ability of the United States to address the debt threat. The Boehner plan is not ideal, but certainly is a strong B+. The Reid plan, in contrast, is a gentleman’s C at best. And, of course (see here), those who fail to turn in their homework get an F.