Updated | August 1 | 2:02 p.m.
In the end, it was the deal that seemed obvious all along: A measure that would raise the nation’s statutory debt limit and allow more borrowing to fund government programs, all while cutting about $1.2 trillion in discretionary spending immediately and setting up a bipartisan commission to seek another $2 trillion in cuts over the next 10 years. President Obama announced the deal in a statement Sunday night from the White House, calling the process “messy” and adding that the compromise “will allow us to avoid default, it will allow us to pay our bills, it will allow us to begin to reduce our deficit in a responsible way.”
The deal came amid a deluge of depressing economic numbers and deepening anxiety among investors. On Friday, the Commerce Department reported anemic economic growth, and signs that the nation’s meager economic rebound had actually been even slower than initially thought. Some economists warned that those numbers could indicate a second wave of recession, or a “double dip.” The Congressional Budget Office, meanwhile, reported a widening wealth disparity between the working and middle classes and the nation’s highest earners: Annual household income for the bottom 80 percent of Americans has remained stagnant since 1980, while it has doubled for the top 20 percent and quadrupled for the top one percent, according to the CBO.
Those high earners were the very people Democrats had initially sought to tax at higher rates as part of a deal to reduce the deficit. Republicans, however, opposed those tax increases, as well as efforts to close loopholes such as a tax break for corporate jet owners or the “carried interest” loophole, which allows managers of hedge funds and other financial partnerships to have their bonuses taxed at the lower capital gains tax rate rather than the standard rate for personal income. Critics call such loopholes intellectually indefensible given America’s widening wealth gap, but Republicans say the tax breaks help create jobs.
In the end, the final deal contained none of the proposed tax loophole closures, nor did it contain any of the assistance measures Democrats had sought for working and middle class Americans, including an extension of unemployment benefits for the jobless and an extension of a payroll tax holiday scheduled to expire at the end of 2011. According to Power Point slides released by aides to House Speaker John Boehner, a provision in the debt limit deal would also require further deficit reduction to be scored against current law, which they contend would make future tax increases impossible, though that assertion was disputed by the Washington Post’s Ezra Klein, among others. The White House, meanwhile, cautioned that the bill would, in fact, allow for tax increases and other measures to raise revenue, according to talking points obtained by the Washington Post’s Greg Sargent.
Some economists and investors warned that the lack of revenue and deep cuts to spending could ultimately inhibit economic growth. Mohamed El-Erian, the CEO of PIMCO, a global investment firm and one of the largest buyers of bonds in the world, said in an interview with ABC Sunday that the budget agreement “does nothing to restore household and corporate confidence. So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise.”
Nonetheless, as the framework of a deal came into focus Sunday night, just days before the government was set to run out of money, a great sigh of relief seemed to wash over investors and Capitol Hill. What had been keeping Democrats and the Republicans apart, apparently, was political brinkmanship, and a restive Republican caucus riven by internal divisions. Boehner, for his part, had struggled all week to avoid a damning vote of no confidence from conservatives affiliated with the Tea Party, furiously whipping votes until the last minute and bolstering measures in his own bill that would require, for example, Congressional approval of a balanced-budget Constitutional amendment. Democrats in the Senate immediately killed that bill, only to have their own proposal filibustered by Senate Republicans and rejected by the House.
The final deal, in the end, was seen by many, especially on the left, as a major victory for Republicans. It contained none of the revenue-raising measures that President Obama and Democrats had initially sought as part of a “grand bargain” with Republicans to reduce the deficit by about $4 trillion. Notably, the final deal also did not include what little economic stimulus provisions would have been included in the compromise President Obama initially envisioned.
Those measures initially proposed by Obama would have pumped as much as $160 billion into the faltering economy, by extending jobless benefits for the unemployed and promising additional funding for highway construction and infrastructure investment. Those provisions were ultimately dropped by Democrats who, liberal bloggers and activists argue, capitulated too easily on key policy demands: First they acquiesced on stimulus; then on tax hikes; and then on cuts to Medicare, which will most likely be in the cross hairs of a new bipartisan committee that will convene to cut another $2 trillion from the deficit next year. The deal reached by Obama and Republicans requires that committee to be set up by November and establishes certain “triggers” that will automatically cut spending to sacred cows, like the Department of Defense, if the committee can’t agree on what cuts to make.
Of course, as President Obama warned in his announcement, “we’re not done yet.” The leaders of the House and Senate will present the compromise framework to their members on Monday morning, with the goal of approving the measure later in the day to ensure that the U.S. government can continue meeting its obligations through August 2, when it will run out of money if the debt limit is not raised. Many have argued, of course, that the damage is already done: Markets are jittery and global financial institutions, such as ratings agencies and the International Monetary Fund, have warned of the dire consequences of the political gridlock over raising the debt limit. The U.S. government still faces the possibility of a credit rating downgrade, for example, which could significantly increase its borrowing costs.
Most importantly, many economists have argued that cutting spending rather that stimulating the economy with continued investments in infrastructure and help for middle class families threatened by unemployment and foreclosure could inhibit the already anemic recovery. The debt ceiling fight, they say, was simply a manufactured disagreement, and the wrong one to be having right now — lawmakers should be arguing about how to cut the unemployment numbers, not the deficit, they say. President Obama seemed to acknowledged as much in his statement Sunday. The debt limit deal, he said, “Will allow us to avoid default and end the crisis that Washington imposed on the rest of America,” adding: “And it will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy.”