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On the Debt Ceiling Deal

The protracted negotiations over the debt ceiling, as well as the final package agreed to by President Obama and the congressional leadership, show what happens when a small minority is allowed to gain control over national debate.  While polls consistently show that the vast majority of the public sees jobs as the main problem facing the economy, there has been a well-funded crusade to ignore public opinion and make cuts to social insurance programs and other spending the top priority for Congress and the President.

To further this effort, the anti-deficit lobby has been willing to rewrite the history of the downturn and the deficit.  The data clearly show that the large deficits of recent years follow from the downturn caused by the collapse of the housing bubble.  Prior to the downturn, the deficits projected for 2009 and subsequent years were relatively modest.  In fact, even with the tax cuts, the cost of the wars, and the Medicare prescription drug benefit, the debt-to-GDP ratio fell from 2004 through 2007.

By all logic, leaders in Washington should have been focused on restoring the economy to its potential.  This would be the most effective way to bring the deficit down to a manageable level.

However the anti-deficit lobby has managed to dominate public debate and essentially pushed the sputtering economy off the agenda for both the president and congress.  The cuts put in place as part of this deal will modestly slow growth in the short term and are likely to take a big bite out of the investment portions of the budget over the longer term.*  If the country does not maintain its infrastructure, its research, and adequately support education it will hurt productivity and slow growth over the longer term.

The agreement also sets in motion a process that could result in substantial cuts to Medicare, Medicaid, and Social Security to meet its debt targets.  This would hurt retirees and near retirees, many of whom saw much of their wealth eliminated with the collapse of the housing bubble.  Remarkably, there is nothing here that would increases taxes on corporations or the wealthy even as the data show a record high profit share and polls show clear public support for higher taxes to balance spending cuts in any debt ceiling deal.

At a time when growth has slowed to a near halt and unemployment rate is again rising, it is tragic that the nation’s political leadership has spent the last few months crafting a deal that is likely to slow growth further and take away supports from the people who have been hit hardest by the downturn.

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The Impact of the Budget Deal

Many readers of the NYT and Post may not have a good sense of how much $2.4 trillion in cuts over the next decade is.  Unfortunately, the major news outlets do not consider it their responsibility to tell us.

The government is projected to spend $46 trillion over the next 10 years.  This means that the proposed cuts are a bit more than 5 percent of projected spending.  However, large categories of the budget are protected.  More than $27 trillion of projected spending goes to Social Security, Medicare, Medicaid, and interest.  If these areas escape largely untouched, the projected cuts would be around 13 percent of the remaining portion of the budget.

In fact, since some other areas of the budget, like unemployment insurance, are also likely to be largely protected, the cuts to the remaining portion of the budget will be even larger.

The government is projected to spend $7.8 trillion on the military over the next decade.  If this area is largely protected, then most of the cuts would likely come from the $6.7 trillion of spending on the domestic discretionary portion of the budget.  This is the portion that includes spending on infrastructure, education, research, and other areas that are considered investment.


Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C.  He is the author of several books, including False Profits: Recovering from the Bubble Economy.  The first part of this article is a statement published by CEPR on 1 August 2011, and the second part of this article was first published in CEPR’s Beat the Press blog on 1 August 2011, both under a Creative Commons license.  Cf. “Uniquely among legislatures in the developed world, US congressional parties now post prices for key slots in the lawmaking process.  As Marian Currinder revealed in her book Money in the House, the Democratic congressional campaign following the 2008 cycle asked members ‘to contribute $125,000 in dues and to raise an additional $75,000 for the party’.  Senior politicians with committee places were expected to raise more — in some cases $500,000.  Roughly the same expectation of money raising occurs on the other side too — but unlike most retailers, though, there are never any sales.  Prices only drift up over time.  The practice makes cash flow the basic determinant of the very structure of lawmaking. . . .  Outside investors and interest groups become decisive in resolving leadership struggles within the parties.  The real rub is the way the system now centralises power in the hands of top congressional leaders. . . .  The leadership’s hold over the swelling coffers of the national party campaign committees, along with the huge fixed investments in polling, research, and media capabilities these committees maintain, provide them with the extra resources they need to cajole and threaten candidates to toe the party line. . . .  As anyone can see in the debate over raising the budget ceiling, legislative tactics also shift.  Party leaders grandstand by digging in and trying to hold up legislation.  They also push hot button legislative issues with no chance of passage, just to win plaudits and money from supporters. . . .  The Congress of our new gilded age is far from the best Congress money can buy; it may well be the worst” (Thomas Ferguson, “Best Buy Targets Are Stopping a Debt Deal,” Financial Times, 26 July 2011).




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