The Debt Limit Dance: Delaying a Bad Budget Deal?

The debt limit talks appear to be reaching the final stretch, with the Democrats saying that government revenue increases have to be part of the mix for deficit reduction and the Republicans saying that “tax hikes” are off the table.  Perhaps, there will be an agreement for “revenue enhancements” that are arguably not “tax hikes.”  Maybe not.  If the two sides cannot reach agreement by August 2 (or any revised “drop dead” date), then the most likely outcome is a short-term debt limit increase, because neither side, despite The Wall Street Journal’s editorial page’s best efforts, really wants to risk (and be blamed for) a government default and the ensuing financial market calamity. 

A short-term debt limit increase can take one of two forms.  It can be a small increase, such that Treasury will exhaust it in short order, or it can be a temporary increase, with the debt limit dropping back to the original number on a certain date.  The political advantage of the latter option is that the drop-dead date can be identified with more precision and less questions, and there is nothing like a deadline to force a resolution of some kind.  It might, though, make some people skittish that the parties will not be able to find a solution.

Well, I hope that, if there is no longer-term resolution of the debt limit issue by the beginning of August, the parties are enjoying this dance so much that they want to keep repeating it.  And if that dance delays bad economic policy from being enacted, then maybe it is not such a bad thing.  Make no mistake: cutting current spending with unemployment over 9 percent and monetary policy no longer terribly effective at stimulating the real economy is bad policy, even if the proponents of that have done an excellent job at claiming that this is the responsible thing to do.  On the contrary, the responsible thing is for the government to use whatever tools it has to promote economic growth and reduce unemployment.  If the economy does not produce enough jobs to reduce the unemployment rate for years, the whole debate about what to do about long-term fiscal problems and entitlements will become irrelevant.  Economic despair, hardship, and pessimism have a way of changing political realities and often not in a good way.