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The Details of the "Debt Deal"




  • It guarantees that the debt limit will be hiked by $2.4 trillion.
  • Immediately upon enactment of the plan, the Treasury will be granted $400 billion of new borrowing authority.
  • After that President Obama will be allowed to extend the debt limit by $500 billion, subject to a vote of disapproval by Congress (would need 2/3 of both houses to block).
  • That initial $900 billion of increase in the debt ceiling will be paired with $900 billion of discretionary spending cuts, first identified by the bipartisan working group that had met under Vice President Biden, which will be spread out over 10 years.
  • Obama will later be able to raise the debt limit by $1.5 trillion, again subject to a vote of disapproval by Congress.
  • That increase will be paired with the formation of a Congressional committee (being called the Super Congress) of 12 members of Congress (6 from each party) that will be tasked with reducing deficits by a minimum of $1.2 trillion. That reduction can be composed of spending cuts, tax increases or a mixture of both.
  • If the Committee fails to reach $1.2 trillion in deficit reduction, it will trigger an automatic across the board spending cut, half from domestic spending, half from defense spending, of $1.5 trillion.
  • The domestic cuts would come from Medicare providers, but Medicaid and Social Security would be exempted. The enforcement mechanism carves out programs that help the poor and veterans.
  • If the Committee finds $1.5 trillion or more in savings, the enforcement mechanisms would not be triggered as $1.5 trillion plus the original $900 billion would equal $2.4 trillion, the amount the debt ceiling would be raised under this two-stage plan.
  • If the Committee finds between $1.2 trillion and $1.5 trillion, then the balance will be made up by the corresponding percentage of the enforcement mechanism’s cuts, still in a one-to-one ration.
  • There will be a vote on a balanced budget amendment, though it would require a 2/3 majority in both homes, its not likely to pass.
  • The deal does not include tax revenue, though that may be part of the recommendations of the Super Congress. However its not clear that any kind of revenue increase would pass the even split of the Committee. The Committee’s will have until the end of the year to come to do their work, and its list of cuts is guaranteed to come to the floor of the House and Senate without amendment for an up-or-down vote. Interestingly enough the figures for how much will be cut from the 2012 and 2013 budgets are quite small. A cut of about $7 billion in discretionary funding is seen for 2012 compared to 2011, and 2013 discretionary spending would be $3 billion below current levels. The deal also avoids a showdown over the 2012 budget because the deal deems and passes the 2012 budget. What’s deem and pass? That is a legislative move that essentially means that Congress will consider the budget passed without ever actually having to vote on it. What does each part get out of this deal: “Politically, each side gets something in the bill. Democrats get to finish the debt-ceiling work in 2011, and ensure the debate won’t come up in the 2012 election cycle. They also get to protect entitlement and welfare programs from cuts, except for those that may be proposed by the bipartisan committee, to which Democrats would have to agree. For Republicans, there are the resolutions of disapproval, which allow them to vote against the debt ceiling increase and place blame for it on Obama. Also, there are significant cuts to the deficit, $2.7 trillion over 10 years. And while the balanced budget amendment vote might be symbolic, it will also be useful as a political wedge in the 2012 cycle.” Super Congress Needs to Succeed or the ‘Neutron Bomb’ Drops: The White House believes that Republicans won’t walk away from the table when Democrats propose new tax revenues (via reforms on the rich, we’ll presume) because the alternative would be the “trigger,” in which we ostensibly automatically cut $500 billion from future defense budgets (and an equal amount from domestic programs) if the committee cannot reach an agreement that the House and Senate can agree too. If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education (dropping the Neutron Bomb). That outcome would be unacceptable to many Republicans and Democrats alike – creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for the US economy. Impact on Economy Clearly the fact that the country will not default, if this deal is passed by both houses will be a great relief for the financial markets. The promised amount of cuts is also big enough that it may keep the credit rating agencies at bay in regards to downgrading the US’ AAA credit rating. The impact on the economy are going to be contractionary as that much aggregate demand will be taken out of the economy by fiscal consolidation aka austerity. The economics team from JPMorgan says that federal fiscal policy will subtract around 1.5% points from GDP growth in 2012. Also this bill seems to avoid the real underlying causes of the US fiscal situation and that is the growth in entitlements and the lack of revenue being raised by the US. Both of these important factors to the US deteriorating fiscal position are not addressed here. It also does nothing to help lift the economy in the short term. It does not extend federal emergency unemployment benefits, which expire at the end of the year, and it does not extend the reduction in payroll taxes that ends in December.]]]]> ]]>

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