Debt-Ceiling Deal is an Alarming Bipartisan Mess

http://www.bloomberg.com/news/2011-08-02/congress-s-agreement-on-debt-ceiling-is-an-alarming-bipartisan-mess-view.html

Editorial-Bloomberg, 2-Aug-11: The deal reached by the U.S. Congress to raise the $14.3 trillion debt ceiling has spared the nation an immediate catastrophe while potentially setting a path for longer-term disasters.
Financial markets’ initial euphoria over the deal faded quickly. The S&P 500 index of U.S. stocks declined for the sixth day in a row, losing 0.4 percent Monday to close at 1,286.94. The dollar gained against the euro and the yen but declined to a record low against the Swiss franc.
The markets’ response underscores an unfortunate reality: While the government may have averted a self-inflicted disaster, it hasn’t solved fundamental problems and appears to have created new ones. What the U.S. needs is a deficit-reduction plan to address its long-term fiscal gap without weighing too heavily on a weak recovery.
Instead, it’s getting the opposite: immediate spending cuts that threaten the recovery in the short term but aren’t substantial enough to fix the long-term budget problems.
Under the deal the House approved Monday, the government must find $21 billion in new spending cuts next year, and possibly much more. If legislators fail to agree by the end of this year on at least $1.2 trillion in further deficit reduction, the country will face indiscriminate cuts in domestic and defense programs.
The cuts could hamper the recovery, especially given $250 billion in expiring unemployment benefits, the end of the temporary payroll-tax cut and the winding down of the stimulus program. Growth was barely evident in the first half, and a manufacturing report Monday showed a steep deterioration in both activity and hiring plans in July.

AAA Rating

A growing economy is crucial to fixing the government’s finances. Economic output is the denominator in the U.S. government’s debt burden, which currently stands at almost 100 percent of gross domestic product, according to the International Monetary Fund -- the highest level since the aftermath of World War II.
Even if the economy doesn’t falter under the cuts, the deal provides far too little future deficit reduction to put the government’s finances on a sustainable path, and possibly too little to maintain its AAA credit rating. Economists estimate the U.S. structural budget deficit -- the gap that must be closed to achieve long-term stability -- at about 5 to 6 percent of GDP. The $2.4 trillion in deficit reduction envisioned in the compromise plan amounts to 1 percent of projected GDP over the next decade.

Political Will

Make no mistake: The U.S. is a wealthy country that can afford to solve its budget problems. Closing the fiscal gap will require political leaders to embrace more ambitious policies and to build popular support for the sacrifices they will entail. These tasks will only be more painful if markets ultimately force them on us.
Bold measures -- including overhauling entitlements, rethinking the uniquely dysfunctional U.S. tax code and considering a federal value-added tax -- must be on the table. At an estimated 30.5 percent of GDP in 2011, the total tax burden on Americans is the lowest among the Group of Seven industrialized nations.
In addition to fiscal restructuring, the U.S. needs political renewal. The debt-ceiling deal was nurtured in a hothouse of ideology and blossomed in a storm of political machinations that put the nation at risk. Having successfully held the economy hostage to achieve their aims, House Republicans established a template for the aggrieved, reckless and intractable partisans of any future Congress. The danger did not end with Monday’s vote.

Long-Term Dangers

The accord that resulted is almost wholly uninformed by the nation’s actual economy, demographic trends or social reality. In addition to stalled economic growth, we have an aging population and growing inequality, with roughly a third of the nation’s wealth controlled by 1 percent of our citizens. The deal amounts to complete denial of these by our political leaders.
That includes President Barack Obama, who has largely ignored the long-term dangers posed by deficits in his budget proposals and who failed, inexplicably, to endorse the sensible suggestions of his own deficit-reduction commission. The congressional committee charged under the new debt deal with finding additional budget savings is unlikely to produce anything comparably bold or intelligent.
This deal is an unholy and bipartisan mess. But it must be made to work. Congress should use the breathing room it provides to find creative long-term fiscal reforms that focus not just on avoiding crisis -- but on creating a government that’s smarter, fairer and more innovative. Done the right way, the boring work of crafting budgets can be an edifying national experience. We’ve seen quite clearly what happens when it’s done the wrong way.



Sha: The level and intensity of republicans' ignorance on the current state of US economy, and the sheer arrogance, is astonishing! Democrats were ready to sacrifice the huge spending cuts in order to save today's economic mess (created partly by republicans under Bush's era anyhow) but the republicans.... ?!!! what is wrong about paying extra 1 dollar on tax with every 3 dollar spending saved (cut)?

Additional tax increase on american corporation would not cut job, if there is studies on it, i bet is republican's sponsored studies. Even if it cut 1 job, tax revenue will create more than 2 jobs if government spend the tax revenue on something more stimulating like education or skills training... rather than say burning the dollar on war (or defense).

Increase government spending on war, doesn't create actual (long term) job, does not stimulate the economy, only enriching a few that service the "defense industry". Portion of the spending on defense went to ashes, a portion goes to rebuilding nation that don't belong to the tax payers. How sad...

America need to re-industrialized its economy (and reform the tax code so that the companies actually pay taxes)... American infrastructure are among worst, ugly and outdated. Just look at the train, road, bridges... urghhh...  America need to produce some thing, sell some thing, not just buy buy buy all things... Get more tourist come in and shop on American products, bring in more foreign money to invest...  impose import tax if necessary, reform health-care and pension systems, those who work and pay get retirement benefits, those who did not work and contribute less get less (minimum) benefits... Subsidized health care only for poor and low-income people only.... Why prolonged ageing/death when it is costly ....  Don't get republicans brain wash on fear. Fear that foreigners/tourist are bad people to destroy the country.. Fear that paying extra taxes will be bad for economy ( it is not if the goal is to reduce deficit and to balance budget)... Fear to step out to other "less developed" countries and see and learn what they have done to stimulate their economy....