I recently returned to the gym after a long hiatus. It was a nightmare to behold, and I ached for days. It’s easy to be critical for what I haven’t been doing, but it was good that I went. Something to build on.
So too with last night’s fiscal package announced by Patty Murray and Paul Ryan. It is too easy to criticize the deal for what it did not do: this isn’t a grand bargain, and it doesn’t address our critical long term deficits—fiscal, education, infrastructure and the like. Critics on the right will dislike the new revenue, and the left will be dismayed that public workers have been hit again and that extended unemployment benefits lost its best vehicle for renewal. It doesn’t even take another shutdown off the table, though Chris Krueger of Guggenheim Securities reduces the odds of a shutdown in January to 15 percent. He has a good discussion of the deal here and a summary of the deal is here and here.
My ambition for the negotiations at the start was modest: do no harm, and give markets and the general public some breathing space. Honestly, I didn’t expect agreement on funding levels till the January 15 deadline when the current continuing resolution expires. Instead, we have a deal that increases spending this year by $45 billion and next year by nearly $20 billion, significantly more than I expected. There are a few points worth noting.
- The deal freezes discretionary spending at slightly over $1 trillion for the next three years. Assuming we continue to have divided government, it is hard to see much change. The negative is that the burden of deficit reduction has fallen too heavily on discretionary spending. The positive could be stability and an exit strategy from repeated crises. In real terms, this means fiscal policy will be a continuing, though diminishing drag on the economy in coming years.
- The added spending was partly paid for through having federal workers hired after December 31, 2013 pay more toward their retirement. This approach, which differentiates future beneficiaries from current ones, isn’t formally an entitlement reform (the pension is the entitlement, not the premium), but it is close enough to give a sense of the discussion to come. Similarly, having businesses pay higher premiums to the federal government to guarantee their pension benefits, and reducing cost of living increases for those under age 62 who retired from the military, seem to cross formerly bright red lines.
- Both Murray and Ryan in their comments tried to change the terms of the taxes versus entitlement debate, with Ryan talking of success at addressing the recurring spending. Further, about half of the savings come from additional revenue, though both sides have agreed to call it “fees” and “contributions,” not taxes. This looks like good politics, if it works.
Next up is the debt limit, which is locked on February 7. If Treasury fully uses a high cash balance and the extraordinary measures available to them, they should be able to extend the debt limit (the “X date”) to May or June, at which point Congress is likely to provide another short-term extension to beyond the mid-term elections.
This deal is what governing looks like. If approved, it provides breathing space for markets. And it was done ahead of the absolute deadline, a rarity in DC. Something to build on.
This piece is cross-posted from Macro and Markets with permission.