The president’s primetime address was nothing more than an attempt to reframe the debt-ceiling debate. Nothing substantively new was offered; no new was ground broken, no new details shared about the bipartisan, bicameral negotiations. The objective was to score political points and shift public sentiment in the president’s favor, thereby strengthening his hand in the ongoing negotiations and the upcoming election.
To evaluate whether the speech was constructive or not, simply ask yourself: Were entitlements discussed, directly or indirectly? Entitlements are the greatest driver of our long-term fiscal imbalance (see Yuval Levin’s smart post on the subject); the word was used only once by the president on Monday night.
Disappointingly, the president doubled down on the argument that the debt ceiling needs to be raised by an amount that gets him through the 2012 election. While it’s an understandable political position, the U.S. government has operated under short-term debt-ceiling extensions numerous times (see Keith Hennessey’s post, or the OMB’s historical table). In many ways, the president’s decision to speak to the nation on Monday night was a last-ditch effort to 1) avoid a two-stage debt ceiling increase and 2) inoculate himself from blame if the U.S. credit standing is downgraded in the coming weeks.
On this last point, the credit rating agency S&P suggested a couple of weeks ago that the U.S. government had to trim — or show a real commitment to cut in the near future — nearly $4 trillion in deficits over the next ten years to avoid a downgrade. While I agree that the credit rating agencies — and the markets generally — would prefer a big deal (one that includes credible spending/deficit reductions in the ~$4 trillion range over ten years), I strongly suspect that the market would respond positively to an incremental approach.
The key to whether a multi-stage approach will be deemed credible (by taxpayers, international creditors, or the public at large) is if the process leads to meaningful entitlement reforms in the near future.
Let’s review the deal-scenarios that are still on the table (with some notes on how the market will probably respond):
First, it’s key to remember that financial markets are not tuned to political theater, but rather economic growth (GDP numbers), productivity, innovation, and structural reforms. One-off accounting adjustments and “claimed savings” will generally be disregarded by market participants.
Two-Step Debt-Ceiling Increase (most likely scenario): Speaker Boehner offered a $3 trillion two-stage plan this afternoon. Step one would cut $1.2 trillion in spending and increase the debt ceiling by $1 trillion. Step two would involve a new committee that would be charged with finding an additional $1.8 trillion in cuts — with a contingent $1.6 trillion debt-limit increase.
The consensus view is that markets would respond positively to this deal as long as 1) the up-front spending cuts were real (which is why Boehner has said that the CBO must verify them) and 2) the second lever is specifically directed to and successfully tackles entitlement reform.
One-Step Debt-Ceiling Increase: Senator Reid’s plan to raise the debt limit by $2.4 trillion, paired with $2.7 trillion in spending cuts, is summarized here. Boehner didn’t waste much time criticizing the plan on Monday, saying it “was full of gimmicks” and didn’t “deal with the biggest drivers … of our debt, and that would be entitlement programs.” The spending cuts proposed by Sen. Reid include $1 trillion from winding down the Iraq and Afghanistan wars, savings that are set to occur any way, and $400 billion in “interest not paid on debt not incurred.”
The key to whether the markets would respond positively to this plan is evaluating whether it would lead to structural entitlement reforms. Like Boehner’s plan, this approach would also rely on a new committee to potentially address entitlements.
The bottom line is that the mission and scope of this committee are very important. Some may argue that this is a difference without a distinction, in that Senator Reid’s committee could draft a plan that proposes reducing the deficit by the same amount through entitlement reforms. But I think the intention or premise behind each sponsor’s idea of what this committee should do is fairly clear from the two outlines. Senator Reid is aiming to keep entitlements off the table in the near term (see his note on mandatory spending cuts in the plan’s summary).
Absent some clarifying remarks from Reid, I think it’s reasonable to infer that he is trying to set up a committee process that makes it less likely (compared with Boehner’s plan) that some entitlement reform will occur before the 2012 election. Boehner, on the other hand, is trying to keep entitlements front and center — acknowledging that they are the primary cause of the long-term debt problem.
Without a doubt, there will be a bipartisan chorus of critics of both plans because they each rely on another committee that will be set to act many months from now (see the president’s fiscal commission — and how little actually came of it in the end). I sympathize with this criticism generally, but I don’t see a path forward today that’s meaningful and not incremental.
Oh, and by the way, Keith Hennessey is correct — it’s notable that the president did not reiterate his veto threat on an incremental approach. This is signal that he will sign into law a bipartisan, two-step plan.
— Christopher Papagianis is the managing director of Economics21, a nonpartisan policy-research institute, and previously was special assistant for domestic policy to Pres. George W. Bush.