Ambassador Stuart Eizenstat on the US Debt Limit Deal

Stuart E. Eizenstat (Deputy Secretary of the Treasury, 1999-2001; Under Secretary of State for Economic, Business and Agricultural Affairs, 1997-1999; Under Secretary of Commerce for International Trade, 1996-1997; Ambassador to the European Union, 1993-1996)

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While the financial markets will give a sigh of relief that the US Congress and the Administration have taken action to prevent what would have been a catastrophic, first-ever default on our nation’s debt obligations domestically and abroad, the respite will be brief.

There are several features of the debt limit agreement, which are positive. By allowing the debt ceiling to rise by up to $2.4 trillion, in return for commensurate reductions in the deficit,  it avoids another ghastly standoff over raising the debt limit until 2013, providing more assurance to the market. In addition, a down-payment has been made in dealing with our unsustainable annual budget deficits and growing overall debt, now about 70 percent of GDP. Initially, there will be over $900 billion in deficit reduction over 10 years by capping discretionary spending. These caps do not assume the artificial savings from winding down the Iraq and Afghan wars, which were in some earlier proposals.

Creatively, a unique 12 Member bipartisan, bicameral committee is charged with a goal of cutting the deficit by another $1.5 trillion over 10 years, for a cumulative total of $2.4 trillion, to match dollar-for-dollar the increase in the debt limit. Their recommendations, due by Thanksgiving,  are subject to a fast-track, up or down vote, without amendments. If they fail to agree on such cuts or Congress votes down the joint committee’s recommendation the enforcement mechanism is at least a $1.2 trillion reduction in deficit reduction, split 50/50 between domestic and defense programs. Thankfully, programs for the poor are exempted from the across-the-board cuts, like Food Stamps, Medicaid, and Social Security payments.

But there are significant negatives. First, ironically, the deficit reduction is too little in the long-term and too much in the short-term. One silver lining in the unsightly standoff over the past several months is a consensus that there needs to be $4 trillion in deficit reduction in the next ten years, far more than the $2.4 trillion in this package (even if all goes in accordance with plans, which is often not the case with budget deals). This is the amount in the House Republican-passed budget (the Ryan budget); the abortive deal recently negotiated between President Obama and Speaker of the House Boehner; the President’s deficit reduction commission (Bowles-Simpson); and in the proposals of outside experts like the Alice Rivlin-Pete Domenici budget. Therefore, financial markets and rating agencies may doubt the capacity of our political system to deliver such long-term savings, given the trauma of reaching a much smaller deal. Unless entitlement spending, particularly for health care costs, and an inadequate tax base, with revenues the lowest in 50 years as a percentage of GDP, are tackled, the US cannot deal with its long-term structural problems. We need to stabilize the debt to GDP ratio at today’s levels, and gradually bring them down, as we did in the last three years of the Clinton Administration.

At the same time, with the economy weakening, there is no short-term job stimulus in the package. The White House wisely insisted on putting off the largest amount of the $2.4 trillion in deficit reduction until the out years, when the economy will hopefully be stronger. But now, with $25 billion in cuts coming in 2012 and another $47 billion in 2013, on top of the end of the 2 percent payroll tax and extended unemployment insurance, and the end of the 2009 stimulus program, we are withdrawing federal spending at the wrong time. This will retard growth this year and next. It will especially hurt already reeling state and local governments, who are the main drags on employment, by further reducing federal transfer payments to them.

Even more broadly, we are entering a period of austerity, which will impact on America’s global footprint on an economic, political, defense and foreign policy context. From an economic standpoint, we remain the world’s largest economy; our slow growth and high unemployment (25 million Americans cannot get full time jobs) are a drag on global growth. It is more difficult for our country to take a leadership role in the G7 and G20, when other nations see our economy as weaker than theirs.

At a global political level, the Chinese have long-been touting their model of authoritarian, state-dominated capitalism as the best to meet the challenges of the 21st century. It is critically important that the US continues to be able to show the world that our democratic, free market system remains the best for other nations to emulate. To do so, we must demonstrate we have the political will to meet our fiscal challenges and develop pro-growth policies.

From a diplomatic and political standpoint, it is harder for us to provide the kind of massive assistance the Arab world needs to meet the promise of the Arab Spring, and to successfully transition from an autocratic to a democratic system. And this is only one of many foreign policy challenges that require our leadership, and our dollars.

At a time when China and other emerging giants are reducing the gap between our economy and theirs, our military strength (together with our moral positions on promoting human rights, freedom, and democracy) is our greatest value added. We remain the only nation that can project air, navy, and ground power on a global basis, with the highest technological capacities. China, notwithstanding its huge standing army and substantially increased defense spending, is a pale shadow of our military prowess; they have yet to have their first aircraft carrier.

But with the possibility of $600 billion in defense cuts, on top of the $400 billion the President has recommended over the next 10 to 12 years, triggered automatically, if the new joint committee cannot agree on providing some enhanced revenues through tax reform, the impact on our military will be huge. Troop strength will have to be cut back to pre-9/11 levels; major upgrades in weapon systems will be postponed; our ability to fight another significant counter-insurgency war in the future will be compromised; and our naval presence in East Asia, as a balance against China, will be reduced.

All of this means that we cannot get the budget reductions we need by only cutting the roughly 30 percent of the budget composed of discretionary programs, domestic and defense. It is essential to also tackle entitlement and tax reform, or we will be eating our seed corn of investments necessary to maintain our competitiveness, and we will compromise our global leadership across the board.

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