While the legislation that President Obama signed into law on Tuesday night averts the worst effects of the fiscal cliff and is a step toward raising revenue needed to cut the deficit, most economists would say it is an incomplete solution at best. Here are three ways – and six charts – showing what the fiscal cliff deal does and doesn’t accomplish.
It doesn’t defuse the threat of a debt default. The government has already reached its $16.4 trillion borrowing limit and is now undertaking “extraordinary measures” to pay its bills and continue borrowing. But those measures will be exhausted in about two months, and Republicans pledge to use that moment to force additional spending cuts. Obama has vowed not to negotiate over the debt limit.
The coming debate could easily trigger economic effects similar to what occurred in the summer of 2011 – the last time there was a clash over the debt limit. Here’s a look at how consumer confidence fared during those months.
And here’s a look at the performance of the Standard & Poor’s 500 and the degree of market volatility in those months.
It doesn’t do much to address the nation's stubbornly high unemployment. With 12 million Americans now out of work, the deal could aggravate the problem by allowing the payroll tax cut to expire.
On the other hand, it saves many jobs that wouldn't have been saved if we had been allowed to fall off the entire fiscal cliff. Here is a very rough illustration, based loosely on data from the Federal Reserve, the Congressional Budget Office and various economic forecasters, of what unemployment might look like under three fiscal scenarios.
It takes another step toward bringing spending and taxes into line for the next few years. The deal does that by raising a little more than $600 billion in fresh tax revenue from the wealthy, although economists say much more needs to be done over the long run.
Today, the debt stands at about 73 percent of gross domestic product and is projected to rise rapidly over coming years. This agreement should bring the debt-to-GDP ratio down close to what it is today over the next 10 years, as this chart from the Committee for a Responsible Federal Budget shows.
The relevant lines are the “New Current Law w/ War Drawdown” and “New CRFB Realistic.” The “New Current Law w/ War Drawdown” shows the path of debt-to-GDP assuming that deep spending cuts, known as the sequester, are allowed to take place, or are replaced by other spending cuts or tax hikes of equivalent value. The “New CRFB Realistic” line shows what happens to debt-to-GDP without the sequester or an equivalent policy.
But the deal is too modest to fundamentally tame the government’s soaring debt. The nation’s long-term finances remain in peril, with federal spending projected to rise dramatically as a wave of retiring baby boomers taps the government to help pay for ever-more-costly health care.
Nobody has modeled the long-term budget path of the deal, but here, again from CRFB, is the long-term, debt-to-GDP ratio of Obama’s 2013 budget, which proposed even more deficit reduction than this deal.
Most of that increase is driven by entitlement spending – specifically health care costs. Neither side is currently advocating a plan that would significantly deal with those costs.