Washington political leaders have averted an economic meltdown during the baseball playoffs — only to delay it until the upcoming football playoffs.
- European Pressphoto Agency
Congress and the White House came to an agreement Wednesday night to avoid the U.S. defaulting on its sovereign debt and to reopen the government. Those are welcome developments.
The problem, however, is that a replay of the budget standoff is now scheduled for January. A bipartisan committee will meet to reconcile two budget agreements, one passed by the Senate and one passed in the House. The committee may also take up the nation’s longer-run budget challenges: growing entitlement spending and an overly confusing tax code.
But the U.S. has played this game before, the best known being the Simpson-Bowles commission. It advocated for many long-term changes to both taxes and entitlements, but those recommendations went nowhere.
The risk to kicking the can down the road is that business uncertainty and voter disgust could once again skew private spending and hiring decisions in the first quarter of 2014. Surveys done by the New York and Philadelphia Federal Reserve banks show area manufacturers are very upbeat about the future. But another fiscal standoff could crush that optimism fairly quickly.
Fiscal uncertainty could also sway decisions at the Federal Reserve. It looks very unlikely that the Fed will start tapering at its October policy meeting and worries about another budget debacle in early 2014 could keep tapering off the table at the December meeting.
As noted by economists at TD Securities, one important development in the agreement is the McConnell rule, which changes the game on the debt ceiling. The president now has the ability to suspend the limit in order for the government to pay its debt obligations. Congress can vote against raising the limit, but will need a two-thirds majority vote. The rule suggests, but doesn’t guarantee, that the debt ceiling and thus the full faith and credit of Treasury debt will be removed from politics.
How will the rule function? The answer should be known in February 2014, when the debt limit comes into play again. That new deadline adds another layer of policy uncertainty to the early 2014 outlook.
