What do we do now that President Barack Obama and Congress have brokered a debt deal? We've avoided the calamity of default, but what of our future? Let's take stock of where we are, how we got here, and what we face going forward. • The deal calls for a reduction in government spending of $2.1 trillion spread over 10 years. In brief, this somewhat convoluted deficit-reduction plan calls for further negotiations to iron out the specifics and, in the event that these future negotiations fail, a spending reduction formula will automatically be implemented to accomplish the reduction. Since the economy will generate roughly $170 trillion in gross domestic product over those 10 years, these cuts seem quite manageable. However, a couple of economic realities should be noted.
The agreement spans 10 years, and during that time, there will be expansions and recessions in the United States and world economies. These events will require stabilization policies to limit their negative impact. However, nothing in the current deal addresses this reality. In fact, the deal would restrict the ability of government to help those hurt by the current and future recessions, and impede efforts to hasten an economic recovery.
This seriously deficient plan does not address the causes of the deficit, which are: (1) tax rates, in effect since 2003, which are too low to yield a balanced budget even at full employment; (2) wars fought with borrowed money; (3) reduced tax revenue caused by the recession itself; and (4) recession-fighting expenditures for the relief of the unemployed and for job creation initiatives.
This plan does not address the causes of our current deficit, nor does it deal with the fundamental cause of projected future deficits: health care costs. Just as Bush policies are recognized as the underlying cause of past deficits, health care costs are recognized as the major driver of future deficits.
The rising costs of Medicare and Medicaid are being blamed on the programs themselves rather than the growth in the cost of the health care services that these programs insure against. Because the costs of the health care system are skyrocketing, the costs of both private health insurance and government health insurance are rising at unsustainable rates. Unless health care costs can be contained, sustainable premium rates will not prevail in either sector.
In addition, the deal does not address the more immediate and urgent problem of jobs. With unemployment stuck at 9.2 percent, this is no time to remove government spending from the aggregate spending stream of the economy. Mainstream economists are calling for more spending to employ otherwise unemployed people and equipment; the Federal Reserve is keeping interest rates low, putting more cash into the economy through a policy of "quantitative easing"; and its chairman, Ben Bernanke, is advising Congress not to cut spending at this time.
Yet the president and Congress are proceeding as if a cut in spending is just what the markets need to build confidence. They have missed an opportunity to fight the recession, as well as to educate the public as to the causes of our short- and long-term economic problems. Instead, we have a plan that does not resolve our current deficit problems and, in all likelihood will help usher the economy into a second dip recession. Should that occur, consumers will react by spending less, and with a fall in consumer spending business confidence will fall as will business investment spending and worker hiring. Ironically, the deficit-reduction package will make the deficit larger.
We should count our blessings that the economic ignorance that has led us to this point has at least not led to default. Hats off to those politicians whose efforts helped us avert the disaster of default. Now we must take our coats off and address the problems that got us here in the first place.