The announcement of a last-minute agreement to raise the national debt ceiling offered relief to increasingly nervous investors. The agreement also included spending cuts, an important first step in instituting fiscal restraint. Unfortunately paltry cuts are unlikely to fully appease the rating agencies, raising the potential for a downgrade and ensuring continued debate.
Some will say it was better than the alternative, but I assume they are comparing the last minute debt ceiling agreement to a government default. The truth is that a default never appeared to be even a remote possibility. Use of the word in the media and Capital Hill was inappropriate at best.
The real alternative was a larger deal, one that seriously addressed the fact that we are not only at least $14.5 trillion in debt but also spending $4 billion a day more than we have. It would have tackled entitlement programs in earnest and laid out a clear path of fiscal responsibility for years to come. A decisive, long-term plan had the potential to address a lingering cloud of uncertainty that has now become a trademark of this administration. Perhaps there was also a possibility of alleviating the concerns of the agencies that assign the nation’s debt rating by passing $4 trillion in spending cuts, but I’m skeptical. That type of agreement seemed unlikely when some Republicans were defiant in their refusal to discuss the tax code as a means of generating revenue and a few radical Democrats apparently believe the debt crisis can be solved without cuts to Social Security and Medicare.
Instead the agreement successfully raised the debt ceiling for the 79th time in the past 50 years and while greeted with much relief a mere day before the apparent deadline, the expected savings only amount to $2.5 trillion, almost 40% less than what the credit agencies requested. As a result Americans will find talk of the national debt analogous to a bad penny. It simply won’t go away because we’ve done very little to meaningfully address the issue.
Tonight Obama announced that the cuts as agreed upon are not going to create “a drag on a fragile economy.” I beg to differ. Any cuts to government spending are going to be a drag to the economy. The only question is the timing. By all indications the economy will be as fragile a year from now as it is today, if not more so. What Obama probably wanted to say is that the spending cuts associated with this agreement aren’t likely to be a “drag on his reelection,” a reference to the fact that the steepest cuts aren’t expected to be enacted until after the November vote. That may be partially true, but it still seems somewhat dismissive of the fact that budgets and markets are forward-looking.
We’ve avoided default and a plethora of disruptions that would have accompanied such a fiasco. For that the market is somewhat relieved. More importantly, we’ve also taken our first step towards austerity, a process that is critical to the nation’s economic health.
Unfortunately the past weeks confirm that right-sizing government spending will be fraught with controversy. It is possible that the latest negotiations were even more painful than necessary as politicians jockeyed for the spotlight. It also didn’t help that a prolonged debate disrupted the President’s lucrative fundraising calendar, a fact not lost on the other side of the aisle. Nevertheless, even in the face of a well-publicized deadline Congress couldn’t reach an agreement on a meaningful figure and still have yet to identify specific cuts. In that context it is difficult to be optimistic about the pace and civility of future discussions.
The tug of war with the current cast of characters will continue for at least the next 15 months, but debate concerning the most pressing of issues has been largely postponed. It’s apropos that a national election stands in the interim, requiring politicians to pose their solutions for large-scale, radical reform to the democracy most affected in the coming months.
The prudent investor has long recognized the unpopularity of austerity measures. Recent events simply serve to reinforce realistic expectations and the need to plan accordingly.