How Long Till The Roof Comes Off The Debt Ceiling?

The twenty-fourth hour approaches and a deal is finally made. Despite the deal being done, it was hardly finished, more like a temporary piece of tape for a blown out tire. Except the tire is the U.S. public debt and the piece of tape is an acceptable Presidential proposal in order to help the U.S. government vehicle keep moving down the highway. Republicans and Democrats finally came to an agreement Monday night, allowing the U.S. government to avoid a potential default on its $14.2 trillion deficit. The agreement calls for a reduction in $2.4 trillion. So what highway are we exactly heading down and when will we actually make it to our destination? In an interview with Benzinga Radio, James Kwak, co-author of the book "Thirteen Bankers" and a fellow of the Harvard Law School program on corporate governance, shared his take on the debt ceiling fiasco. "They just compromised on discussionary spending caps, which were the easiest thing to agree," said Kwak, a co-writer of the blog the Baseline Scenario. "Then they agreed on a process by which some other group of people will have to figure out another set of spending cuts or potentially tax increases. They kicked the ball down the road and the hope is that this joint committee of Congress is going to be able to come up $1.5 trillion in deficit reduction." Kwak describes discussionary spending as spending that Congress must authorize each year such as the budget for the Securities and Exchange Commission. While a compromise was agreed upon, the only cuts that were made are based upon projected values of future spending. "According to news reports, tax increases from anywhere between $800 billion to $1.2 trillion over ten years," Kwak adds. "But those are increases from a baseline that assumes that all of the Bush tax cuts would be extended and made permanent. The Bush tax cuts are scheduled to expire at the end of 2012. If those tax cuts are allowed to expire, they will bring in about $3.5 trillion in revenue over the next 10 years." "I think that on the one hand, the Republicans have been driven with this notice of keeping down the total size of government. Then on the other hand, the reason they were so successful is that in negotiations, it is actually good to limit your options going in," said Kwak. "So, if you can credibly say I cannot compromise, you're more likely to win because the other side will have to compromise. The Republicans were able to do this in part because the vast majority of the them find their pledge not to raise taxes in any way." In addition to favoring a smaller government and tax cuts, some Republicans believe "defaulting is one way to balance the deficit and that is better than increasing the debt ceiling," said Kwak. One reason the proposals were not passed sooner is because "there is certainly a small group of Republicans who were not going to vote for any debt ceiling increase under any circumstances." Kwak insists that while deficit reduction is not new to Congress, there has always been a bipartisanship between Democrats and Republicans surrounding this crucial issue. "The first time we had a real budget standoff that was completely on partisan lines was in 1993 when President Clinton's tax increase for the 1993-1994 budget was passed with zero Republican votes so it was a complete party line vote." The difficulty during this experience and the reason why Kwak explains that there is more than one side of the story when it comes to the debt ceiling is the current state of the U.S. economy. "The economy is very weak…and second quarter growth was about one percent in real terms and unemployment is over nine percent. By that argument, we should be doing more to stimulate the economy. On the other hand, the issue that has been dominating Washington for the past few months is the deficit and the long-term deficits and the need to reduce those deficits. What is interesting is you can pick one or the other to justify any argument you want to make and that cuts both ways." At the end of the day, Kwak, a Democrat at heart sympathizes with Republicans saying that you can't put too much blame on them and then adds that "the most important thing we have after this weekend is the government is not going to default, at least until sometime late next year."