The Debt Deal: Very Good News

At least that’s what the markets are telling us.   But that’s mostly relief that there won’t be a fiscal/debt train wreck on Tuesday.  I’m more interested in the details.  This is the PR put out by the White House tonight:

  • Removes the cloud of uncertainty over our economy at this critical time, by ensuring that no one will be able to use the threat of the nation’s first default now, or in only a few months, for political gain;
  • Locks in a down payment on significant deficit reduction, with savings from both domestic and Pentagon spending, and is designed to protect crucial investments like aid for college students;
  • Establishes a bipartisan process to seek a balanced approach to larger deficit reduction through entitlement and tax reform;
  • Deploys an enforcement mechanism that gives all sides an incentive to reach bipartisan compromise on historic deficit reduction, while protecting Social Security, Medicare beneficiaries and low-income programs;
  • Stays true to the President’s commitment to shared sacrifice by preventing the middle class, seniors and those who are most vulnerable from shouldering the burden of deficit reduction. The President did not agree to any entitlement reforms outside of the context of a bipartisan committee process where tax reform will be on the table and the President will insist on shared sacrifice from the most well-off and those with the most indefensible tax breaks.

I don’t care much about the debate over “revenues” and “cuts.”  When read a document like that I see:

Blah, blah, blah, blah, entitlement and tax reform, blah, blah, blah, blah, tax reform will be on the table, blah, blah, blah, blah.

It’s all about entitlement and tax reform, the rest is just window dressing.  Of course I’m glad the defense budget will fall, but given how bloated it is and how deeply in debt we are, that was a given.  The good news is that there will be a commission that will produce some real reforms.  How do I know that?  Because economics isn’t a zero sum game.  There are $100 bills lying all over the place if the commission cares to pick them up.  The only way to get an agreement is to make it a positive sum game–otherwise the two sides are too far apart.  We’ve already seen both Simpson-Bowles and the Gang of Six promote major tax reform, so it doesn’t take a rocket scientist to predict the commission’s proposal will be bold—I’m taking 1986 bold.

The Asian markets are soaring because there is an end to the uncertainty, but I think the likely reform package will also be good in the longer term for the US equity markets.  At a minimum they have to do something about the US corporate income tax, which I believe is now the highest of any industrial country.  I’d look for a ten percentage point cut there, which would clearly boost equities.

Of course all this assumes the compromise will pass.  If not, then . . . well . . . nevermind.

About Scott Sumner 491 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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