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The Deal

CAP Analysis of the Debt Deal

SOURCE: AP/J. Scott Applewhite

Speaker of the House John Boehner returns to his office on Capitol Hill in Washington on July 30, 2011. Leaders in Congress struck a deal on the debt limit over the weekend.

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The debt deal struck this weekend does nothing to help with the biggest problem facing our nation: anemic job growth and a faltering economy. In fact, by putting a noose on public investments and tightening the squeeze on the middle class, the deal goes straight in the wrong direction. Unfortunately, conservatives put the country on the precipice of an economic calamity that would have ensued had Congress not raised the debt limit. Precisely because of conservative willingness to carry through on that irresponsible threat, this agreement skews toward conservative priorities.

There is the potential for one saving grace, however. The special congressional committee created by the deal, which is tasked with presenting to Congress a proposal for further deficit reduction, has the authority to recommend policies aimed at getting the economy moving again. As leadership in both houses and both parties choose their appointees, they should select those for whom job creation and economic growth are the top priorities. If the committee fails to produce a plan that furthers those goals, its proposals should be rejected.

It’s especially important for the committee to produce a plan that creates jobs and spurs growth because the committee’s proposals will come on top of a set of already-dramatic spending cuts that will have adverse economic consequences. The deal starts out with caps on discretionary spending that are much tighter for domestic, nondefense programs than they are for the Pentagon. As a category, nondefense discretionary is home to the most important public investments our federal government makes, including education, highway building and repair, scientific research and development, clean energy projects, and health care research. It also houses some areas of support for the vulnerable and those hardest hit by the economic downturn. This category also includes all of the nuts and bolts of everyday government operations such as food inspections, air traffic control, border security, and law enforcement. The caps on this category of spending would amount to cuts of more than 11 percent, compared to the current baseline.

On the defense side of the ledger, the initial round of cuts is much less severe. Defense spending, excluding ongoing war costs, would suffer a 3.5 percent cut compared to the baseline.

To the dealmakers’ credit, the initial round of cuts holds harmless the largest programs that serve low-income households because these are not in the “discretionary” part of the budget. The country’s safety net is porous as it is. Further cuts would have been a grave injustice—especially since this is legislation that asks nothing from the wealthiest or largest corporations.

Together, the initial cuts to nondefense and defense discretionary spending will cut the budget about $1 trillion over the next 10 years. That, however, is only the first stage. The second stage is where the special congressional committee becomes involved.

This committee will consist of 12 members of Congress: six from each party drawn equally from both chambers. They are assigned the task of coming up with $1.5 trillion of deficit reduction over the next 10 years. Importantly, the committee’s proposal must be put to a majority vote in both houses of Congress and therefore may better reflect the will of the American people by including revenues as part of its solution. If the committee is unable to achieve $1.5 trillion in deficit reduction, or if Congress refuses to pass the recommendation, then $1.2 trillion of spending cuts will occur automatically, split evenly between defense cuts and nondefense cuts. The deal, however, exempts from automatic cuts Social Security, Medicaid, and other low-income programs.

Exempting these essential safety net programs from sequester preserves a long and essential tradition from prior deficit reduction packages. Medicare would not be exempt from the automatic cuts but the cuts would be limited to 2 percent, all from payments to health care providers and none from payments to beneficiaries. It’s important to note, however, that none of these rules apply to the committee itself. If its proposals are adopted, they would supersede the automatic cuts.

If the committee fails and the automatic cuts go into effect, the total cuts to defense would amount to about 12.5 percent from the current nonwar baseline. This includes both the initial round of cuts plus this new, automatic round. The discretionary part of nondefense spending would be cut by nearly 17 percent compared to the current baseline.

The deal pending before Congress today just starts the process. The next steps, including who is appointed to the committee, are crucial in determining the consequences unleashed. While the committee is charged with finding a net decrease in the deficit of $1.5 trillion, there are better pathways to that result. The committee could find more revenue and spending cuts and include proposals that help foster job creation.

Indeed, job creation and boosting the economy should be an important litmus test for the work of the committee and progressives should hold the committee, its members, and the resulting product to that standard. If the committee’s proposal doesn’t accomplish this in its recommendations, then it’s hard to imagine how those recommendations will be any better than a stalemate that produces the automatic cuts to both domestic and defense spending—and potentially the expiration of all the Bush tax cuts.

As a practical matter, there’s no way for the committee to achieve these economic goals without including tax increases, getting back to the balanced approach that was initially demanded by President Obama and progressives in Congress—an approach that includes contributions from the wealthiest Americans. Since domestic investments and middle-class services will face substantial reduction in the first round of cuts, the case for such revenue is even stronger now.

As budget negotiations move to the committee, America’s priorities should be better reflected in the deliberations, including job growth and ensuring all Americans, especially those who have fared better through the economic turmoil, are contributors to the solution.

Michael Ettlinger is Vice President for Economic Policy and Michael Linden is Director of Tax and Budget Policy at American Progress.

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