A Fateful Weekend for U.S. Fiscal Stability
The fate of the fiscal stability of the United States was sealed on the weekend of December 4-5, 2010. The previous Thursday President Obama received the long-awaited report of his National Commission on Fiscal Responsibility and Reform, co-chaired by Democrat Erskine Bowles and Republican Alan Simpson. The report of the commission received a favorable vote with an 11-7 majority, but fell short of the 14 votes required for a mandatory “up-or-down” vote by Congress.
The commissioners delivered a balanced report that reduced U.S. deficits by $4 trillion over ten years – $3 trillion from spending cuts and $1 trillion from revenue increases. It received favorable consideration from both Republicans and Democrats on the commission. President Obama had the perfect opportunity to restore stability to U.S. finances by endorsing the plan and sending it to Congress.
For the President it was the perfect political setup, complete with “air cover.” He appointed a bipartisan commission. It had delivered a bipartisan proposal. Surely, he could rally the country behind it by going directly to the American people. While the deficit reduction plan would have faced opposition from the extreme right and extreme left, President Obama had the opportunity to demonstrate his leadership and garner the support of fiscal conservatives, moderates and independents around the country.
What did the President do? Nothing.
The silence from the White House was deafening. The President ignored the commission’s report entirely. He chose the politically expedient route and, in so doing, failed to lead the country by improving its long-run fiscal health.
Actually, what he did was worse than nothing. Over that weekend, the President negotiated with Republican congressional leaders a $4 trillion increase in the nation’s deficits over ten years ($858 billion for the first two years, with the remaining $3.2 trillion projected over the next eight years). The added deficits came from a combination of tax cuts and spending increases – just the opposite of what the Bowles-Simpson commission recommended.
This new deal was passed by Congress over the objections of Democratic congressional leaders, who felt left out in the cold. On December 18, 2010 the President signed the deal into law, thereby killing any hope of deficit reductions coming from the Bowles-Simpson recommendations.
In one weekend our nation’s leaders swung from a plan to reduce the deficit $4 trillion to actions that increased it $4 trillion – an $8 trillion unfavorable swing. This proves the old political adage that it is easier to cut taxes and raise spending that it is to demonstrate fiscal responsibility, as long as you’ve got a plan to get out of town before the sheriff comes.
The sheriff didn’t take long to arrive. Realizing this President wasn’t prepared to take tough fiscal actions, Republican leaders next played brinksmanship with appropriations. That brought the federal government to the verge of shutting down at midnight on April 8, 2011. A last minute deal to cut the budget by $38 billion averted the shutdown. President Obama hailed the agreement as “the biggest annual spending cut in history.” Hmmm. Seems pretty paltry compared to $4 trillion over ten years.
Republican leaders, seeing blood in the water, attacked again like sharks on a rampage in August, 2011. Demanding more spending cuts with no revenue increases, Republicans held the line against raising the debt ceiling until the August 1st deadline. A last-minute compromise reflected the agreement to disagree. At the 11th hour, the President and congressional leaders passed the Budget Control Act, appointing a Congressional “super committee” with the requirement to reduce the deficit by $1.2 trillion by November 23, 2011.
Concerned by feckless political behavior, Standard & Poor’s took the historic step of reducing the U.S. sovereign debt rating from AAA to AA+. “The political brinksmanship of recent months,” the company said, “highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
This paved the way for the super-committee’s failure on Monday. If committee members were ever serious about compromise, it wasn’t evident. Republicans refused to agree to any revenue increases, causing Democrats to back away from spending and entitlement cuts they had offered. Now $1.2 trillion in automatic cuts go into effect next September. Speaking on CNN, political commentator David Gergen called the move “an irresponsible, reckless gamble.”
The consequence of this gridlock? The financial troubles of the U.S. get worse, the country’s competitiveness continues to slip, and the prospect of a future deal is even further away.
And it all started with an $8 trillion reversal one weekend last December.