It was a terrible process, but a good result.
Now that Congress has reached a compromise to move toward restoring fiscal responsibility, what have we achieved and what challenges remain?
The agreement creates room for the private sector to continue to grow, without the threat of default and the burden of higher interest rates.
It locks in at least $2 trillion in long-term savings from cuts in government spending, but those savings are phased in gradually to avoid hurting the economy in the near term.
The initial savings, which total roughly $1 trillion over 10 years, require cuts in security programs and savings across the rest of annual discretionary spending. Changes must be made in how government works, and some programs will be scaled back to make room for those that are essential for the future, such as education and innovation.
The agreement sets up a powerful mechanism for agreement on tax reforms to strengthen growth, and entitlement reforms to strengthen programs such as Medicare. A congressional committee with fast-track authority will have a Nov. 23 deadline to recommend a balanced package of long-term reforms to produce $1.5 trillion in additional deficit reduction.
The agreement creates a strong incentive to compromise: If the committee fails to reach agreement or Congress fails to act on the recommendations, government spending will automatically be cut by $1.2 trillion. These across-the-board cuts, evenly weighted between the defense budget and domestic programs, would take effect in 2013.
These broad, automatic cuts, timed to coincide with the end of the Bush tax cuts, will make it harder for Congress to choose inaction over compromise.
The agreement removes the threat of default and lowers the prospect of using the debt limit as an instrument of coercion. It should not be possible for a small minority to threaten catastrophe if the rest of the government decides not to embrace an extreme agenda of austerity and the dismantling of programs for the elderly and the less fortunate.
Beneath all the bluster, the prospects for compromise on broader and deeper reforms are better than they have been in years. Leading Republicans have begun talking about tax reforms that will raise revenue and help reduce the deficit. Democrats recognize that we have to find savings to preserve programs for the elderly, the middle class and the poor, and to create room to help rebuild the economy.
Governing requires the recognition that we do not have unlimited resources. We cannot ask the American people to pay more in taxes without being able to demonstrate that we have found ways to use their taxes more wisely. Nor can we ask Americans to accept changes in Medicare and Medicaid if those savings will be used to pay for tax preferences for the most fortunate few.
Already, some are asking if we cut too much. Others want to know if we did enough about the long-term problem of a rising debt burden.
This agreement is the beginning of restoring fiscal sustainability. It is a substantial down payment, but not the end of the debate. The government’s ability to make smart, long-term budget choices has long been broken. This gives us a chance to fix it.
The near-term cuts in spending will not materially add to the pressures on the economy. The direct effects of the cuts — using estimates by Macroeconomic Advisors — are about one-tenth of one percentage point of annual GDP growth, far less than the damage that would have been caused by a prolonged impasse, by adopting the budget proposed by Republicans or, certainly, by default.
And by locking in long-term savings, Congress will have more room in the fall to pass additional short-term measures to strengthen the economy — such as extending the payroll tax cut, which provides an average of a thousand dollars to the after-tax incomes of working Americans; extending unemployment benefits; and financing infrastructure investments. After all, strengthening growth and putting more Americans back to work are among the most important things we can do to improve our fiscal situation today and over the long term.
This week, I spoke to business leaders across the country. Not surprisingly, their relief that Congress has finally acted was tempered by concern about the damage caused to confidence by the months-long spectacle of threats of default. These business leaders, like many Americans, want to see Congress build on this moment of compromise.
It is not enough for Congress to have prevented a disaster it brought on itself. Lawmakers should return in September prepared to act to strengthen the economy and get more Americans back to work. Doing so will help repair the damage this fractious debate inflicted on an economy that was already slowing, not just here but around the world.
The writer is secretary of the Treasury.