Debt ceiling: losers | FT Alphaville

Debt ceiling: losers

The winners have been profiled. Now for the ugly part.


1. The budgetary process. The debt ceiling is an anachronism that should be abolished but it has now supplanted the traditional process of budgets and continuing resolutions. We’ve discussed our opposition to the debt ceiling and our nascent love of Chilean fiscal rules in this inherently thrilling post. In short: policy decisions shouldn’t be divorced from the decision to pay for them. Debt ceiling rows have flared up before, but 2011 seems to set a dangerous precedent. Roll on 2013!

2. The unemployed. The White House tried to include the extension of “emergency” federal unemployment insurance in a grand bargain with House speaker John Boehner. It didn’t form part of the final deal, and now looks likely to expire at the end of 2011. With the US still very much facing an “emergency” employment  situation, this will make life harder for job seekers and reduce private consumption.

3. Graduate students. Title V of the Budget Control Act details reductions to federal student loan grants, subsidised loans for graduate students, and financial incentives to pay loans early.

4. Stimulus supporters. No real surprise here, but it’s all eyes back on Ben Bernanke, should the US economy slip further in the second half of 2011. The New York Times’s Nate Silver is right that there is some good news for stimulus advocates: all but $20bn of spending cuts are backdated beyond fiscal year 2012. Using conventional macroeconomic models that’ll mean small fiscal drag (Citi estimates 0.1 – 0.2 per cent). But with no payroll tax cut extension included in the deal, that will be scant comfort. Indeed, Paul Krugman is angry.

5. The Bowles-Simpson plan. The National Commission on Fiscal Responsibility and Reform was ostensibly established to provide a bipartisan way to return to the US to sound fiscal footing. It had its faults but it’s still probably the best moderate plan out there. Now, there’s a new Joint Committee in town. But it’s a much smaller entity, both in size (it will identify $1,200bn of savings compared to Bowles-Simpson’s $4,000bn) and in scope (revenue increases are half off the table).

6. A stable debt:GDP ratio. After all the fuss, little has been done to reduce the US’s structural deficit, at a time when GDP estimates receiving widespread downward revisions. BarCap estimate that the deal is only about half the size required to stabilise the debt:GDP ratio at 75-80 per cent within 10 years. And that’s with current, rosy growth assumptions. Willem Buiter is even more pessimistic.

7. Standard & Poor’s. This might be a little harsh. According to Vincent and Carmen Reinhart, the credit rating agency would be justified in downgrading the US to AA. But it has put itself in a bit of a bind. In addition to placing the US on CreditWatch negative (i.e. there’s a greater than one in two chance of a downgrade within 90 days) it strongly hinted that $4,000bn of savings over 10 years was the magic number. The deal offers no more than $2,400bn. Follow through, and S&P risks a political backlash. Back down, and it risks looking weak.

8. Presidents Kennedy through George W. Bush. All their hard work increasing non-discretionary spending has been rolled back. According to the White House statement on the debt debt, “discretionary caps will put us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President.”

9. Winning the future. The cousin of loser number 8. The cuts to discretionary spending required of the Joint Committee are to parts of the US budget that the President hoped would fund his 2011 State of the Union vision. A lot of education and infrastructure funding is local. As ever, though, the Onion made the point better (and more controversially) than anyone else: “Al-Qaeda Claims U.S. Mass Transportation Infrastructure Must Drastically Improve Before Any Terrorist Attacks.”

10. Platinum coin makers. FT Alphaville was looking forward to having our picture taken next to Tim Geithner’s newly minted $1,000bn coin at the US Mint. Alas, we’ll have to wait until at least 2013.

Related links:
What the debt ceiling deal means for the unemployed – Washington Post
The Fine Print on the Debt Deal – New York Times