The Debt Deal: Winners and Losers

Last Updated Aug 1, 2011 11:40 AM EDT

Washington finally came to its senses Sunday night and delivered the "framework" for a compromise debt ceiling deal.Assuming both chambers of Congress fall in line on Monday -- and after the circus-like escapades of the past week, that's not actually a given -- it looks like the debt ceiling will be raised in time for the U.S. Treasury to keep paying the bills on time.

The Deal

It's tough to see any outright winners in this process. Even though we seem to have averted defaulting on debt payments, the bald display of political dysfunction has led to a growing sense that even without a formal credit downgrade -- Moody's backed off its threat on Friday -- the U.S.'s global financial reputation has been bloodied. And the plan that finally managed to get enough bipartisan support still leaves plenty up in the air.

Here are the main components of the deal and who stands to gain and lose:

The debt ceiling is raised by as much as $2.4 trillion through 2012. There will be an immediate $400 billion increase ASAP so Treasury can start cutting checks, soon followed by another $500 billion. That $900 billion hike will be offset by an agreed $900 billion in spending cuts over the next 10 years. There are no increased revenues in this first phase of deficit reduction, which means it's all spending cuts, and not a penny of increased tax revenue. A clear win for the Republicans.

Then we get to the really interesting part three: another $1.2 trillion to $1.5 trillion increase in the debt ceiling to get us through the 2012 election is tied to a new Congressional super committee finding another $1.5 trillion in deficit reductions to take effect over a 10-year period. That committee has a Thanksgiving 2011 deadline to report back on a plan, and assuming it produces anything that can be voted on, Congress will tackle it before the Christmas recess. That means we're going to have a second straight year of Washington mucking up the holiday season. (If you've already blocked it out, last December it was the tax deal that also held the fate of extended unemployment benefits hostage until Christmas.)

The way the plan is constructed, we will not have another debt ceiling debate even if the super committee can't come to any super compromise. There can be votes of disapproval over raising the debt ceiling, but it will still be raised, thereby sparing us all from this abominable process through the 2012 election cycle. That said, if the super committee doesn't generate a proposal that passes Congress, there is going to be a horse trade to get the additional $1.5 trillion increase in the debt ceiling. Either Congress agrees to automatic spending cuts (details below) that will be triggered by the failure of the committee to come up with a deal, or Congress has to pass a balanced budget amendment. But either way, the debt ceiling rises.

If the super committee fails, automatic spending cuts will kick in. To deal with the potential for more Capitol Hill gridlock, this new deal comes ready-made with imposing threats that will be hanging over the heads of the super committee: If the 12-member bipartisan committee can't come up with a plan for up to $1.5 trillion in deficit reductions that Congress can act on, then $1.2 trillion in automatic spending cuts will be triggered. Well, sort of automatic. The cuts wouldn't actually happen until the end of 2012, which would be post-election.

As it stands now about half of the trigger cuts would come from defense spending, with the other half coming from discretionary spending, including Medicare. The idea is to put sacred cows in for both parties to increase the odds that the committee will be able to compromise; otherwise, Republicans will have to stomach deep defense cuts and Democrats will see Medicare get cut.

Medicare is in the trigger, but Social Security COLA is spared. There's nothing the super committee can't -- and likely won't -- throw into the debate on how to come up with the second round of spending cuts. But if that debate does end in gridlock, Medicare (though not Medicaid) will be part of "trigger" cuts. Only Medicare providers, not recipients, would see cuts, and total Medicare cuts will be held to 3 percent or less of all discretionary cuts. The proposal to change the formula for computing Social Security's cost of living adjustment (COLA), which would lead to smaller inflation increases, is specifically omitted as a trigger. (Though there's nothing that would keep it from being part of the super committee debate.)

One Manufactured Crisis Averted, One Real Crisis That Looms Larger Than Ever
Debt ceilings have been raised dozens of times over the years, with every imaginable permutation of parties in power. That's to say, there was no need for this to be a crisis. Congress chose to make this a crisis. And in the process of tending to its own manufactured mess, it continued to ignore the real crisis that needs attention: the economy.

In case you were lucky enough to take a summer Friday last week, and smart enough to swear off the news over the weekend, you may have missed the horrid economic report we got. Not only was second quarter gross domestic product (GDP) growth even lower than already-lowered expectations, first quarter GDP growth was revised lower, too. And to be clear, the slowdown is a shift from way-too-slow, to yikes-we're barely growing at-all. Moreover, the Bureau of Economic Analysis also revised its GDP data runs from during the Great Recession, delivering the news that it was even greater than we'd thought. That led one market watcher to suggest that this isn't a job-less recovery, it's a recovery-less recovery.

Yet there was no stimulus in the debt-ceiling/deficit plan. Nada. No extension of unemployment benefits through 2012. No payroll tax holiday extension through 2012. Nor a move to extend the program to include employers in the tax holiday. We may get them later, but given the horrid economic data and the fact that unemployment is at 9.2 percent two years after the official end to the recession (brace yourself for a new unemployment report this Friday), you'd think something would be on Washington's radar. Just think if Congress put the same effort it exerted on this debt-ceiling exercise into thoughtful consideration on how to address the fact that we have 24 million Americans unemployed or underemployed, and little indication that things will be getting better soon for any of them.


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  • Carla Fried

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