The Trigger and the Debt-Ceiling Deal

by Veronique de Rugy

As always, I think Yuval gives a very good explanation of the various triggers in the deal and how they will or won’t work. I have to say, however, that I am skeptical about the whole deal. It could have been worse, but I’m not sure how it will actually end up cutting spending.

First, why would the special commission have an incentive to cut $1.5 trillion? After all, they can settle for $1.2 trillion in cuts and still avoid the trigger.

Also, it was a mistake to use the Gramm Rudman Hollings Act as a model. That commission failed back then, and I assume it will fail again. Here’s why: The Balanced Budget and Emergency Deficit Control Act of 1985, commonly referred to as the Gramm Rudman Hollings Act, set maximum amounts for the federal deficit; if the deficit limits were exceeded, the president was required to cut spending by a uniform percentage across the board to bring the budget back into balance, a process called “sequestration.” The idea was that the deficit targets would decrease each year until the budget became balanced in FY 1991.

Depending on the year and the administration, some parts of the budget were exempted from such cuts. In fact, by 1990, it became very clear that Congress had put into place so many loopholes and exempted so much spending from sequestration that the entire framework was falling apart. By then, the budget exceeded the deficit limit by nearly $100 billion and the deficit targets would have required that the few programs still on the chopping block be cut by about one-third. Considering how much is off the chopping block this time around, the same is likely to happen.

I also think it is a gigantic mistake to have the committee made up of members of Congress. One reason the BRAC Commission was effective in closing military bases was that it was an independent commission composed of independent experts with no political careers to protect. Also, the commission was not tasked with reaching an equitable solution. (Here is a really good paper by my colleague Jerry Brito about the BRAC commission. It’s really worth reading, because it helps you understand why this debt-ceiling-deal commission is unlikely to produce the expected results. There’s also a four-page version.)

Finally, I have a question: Whatever happened to the dollar-for-dollar cuts promise in exchange for the debt-ceiling increase? The debt ceiling will be raised in the short term by some $2 trillion, and in the absolute best-case scenario, we may get some $2 trillion in “savings” over nine years. That doesn’t sound like dollar-for-dollar to me.

Based on the CBO’s score, the deal cuts spending by $21 billion in 2012. That’s half of 1 percent of spending. Also, a majority of the Boehner cuts don’t kick in until the last five years. Without some sort of constitutional rule, do we really believe that lawmakers in five years will feel constrained by these caps?

All of that being said, the deal could be worse.

Update: After reading the comments, I would like to say that I can see one way, the only way, how this deal could end up being a relative success. That is if, by some miracle, the Commission decides to tackle Social Security, Medicare and Medicaid spending seriously, meaning in a way that changes the long term fiscal outlook of this country.

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