Will the Return of the Gang of Six End the Debt Ceiling Showdown?
As Congress flails around looking for a way out of the debt ceiling trap it has fallen into, interest has turned to a "Gang of Six" deficit reduction plan that emerged in the Senate on Tuesday. The plan, which is a version of the Bowles-Simpson deficit reduction plan, was received favorably in the Senate. Interest in the plan intensified when President Obama said he approved of the proposal as a basis for moving forward.
The proposal involves $500 billion in immediate deficit reduction, and it requires future cuts to Social Security, Medicare, and other programs. When these changes are coupled with changes in the tax code, the proposal is advertised as reducing the deficit by nearly $3.7 trillion over the next ten years (the CBO has not yet scored the plan). However, there are doubts about whether Republicans in the House will be willing to sign on to the required tax changes in the plan, and similar doubts exist regarding the willingness of Democrats to impose cuts in programs such as Social Security and Medicare. The 3 to 1 ratio of spending cuts to tax increases built into the proposal is also a potential stumbling block for Democrats. Furthermore, many of the details of the plan still need to be worked out, and there is doubt that the two parties can reach agreement on so many issues with only two weeks to go before the debt ceiling must be raised.
As for the economic impacts of the plan, one part of the proposal to take note of is the immediate cuts:
Enacting a $500 billion down payment that would secure immediate deficit savings, while establishing a fast track process for the committees in Congress to specify further savingsLet's put that in perspective. While "immediate" isn't actually defined, suppose it's over four years, i.e. through 2015 (which isn't all that immediate). Recall that the ARRA was $767 billion, but 37.5 percent of that was tax cuts, so the spending component was around $479 billion. Thus, the cut of $500 billion in the Gang of Six proposal is larger than the spending component of the stimulus package.
Now, the ARRA was spread over two years, and the $500 billion cut in the proposal is assumed to occur over four. But even so, a cut of that magnitude would be a huge mistake in an economy like ours, an economy trying to find traction and dig its way out of a very deep hole.
I am in favor of getting our long-run budget in order, and that will require both spending cuts and tax increases. The composition of the spending cuts and tax increases is, of course, partly what the fight over the debt ceiling is all about. I certainly have my preferences -- I fear too much of the burden will fall on important social services -- but that will have to be settled in the political arena.
But when it comes to the economics, I think the path is clear. We need a specific plan for long-run deficit reduction, one that lays all the cards on the table and deals with all the hard issues up front. We also need to delay implementation of the plan until the economy is on better footing. The plan can be linked to specific measures of performance, e.g. it could be triggered when the unemployment rate falls below a predetermined level. But it's important that we don't undermine the economy's ability to recover by making large cuts too soon.
Unfortunately, instead of a specific, detailed proposal that deals realistically with long-run issues without putting the recovery at risk, the Gang of Six plan is a relatively vague proposal for future cuts that threatens to undermine the ability of the economy to return to full employment. The vagueness is driven by the impending deadline to raise the debt ceiling. Both sides are looking for cover and vagueness avoids the need to make tough choices. But the decision to implement hundreds of billions of "immediate" cuts and put the recovery at risk is a choice that could be avoided if Republicans weren't insisting upon this as a condition for a deal to raise the debt ceiling.
The severe time constraint Congress faces makes it hard to see how a detailed version of the plan could be agreed upon before time runs out. Thus, while some parts of the plan could perhaps be incorporated into a deal to raise the debt ceiling, the plan is mostly about posturing and setting a baseline for future negotiations.
The dire consequences for the economy if the debt ceiling is not lifted make it likely an agreement of some sort will be reached. But Congress is still looking for a way to escape the trap it set for itself, and it's not at all clear that the Gang of Six plan points the way.
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