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U.S. debt deal sets up new risks to growth

Economy may falter if drama saps confidence

by Zachary A. Goldfarb

The Washington Post

The deal reached by Congress on Wednesday to end the government shutdown and raise the debt ceiling would avert a financial catastrophe but leave the weakened U.S. economy facing new threats.

But while the bipartisan deal would end a period of disruption that has slowed the economy — the shutdown removed more than $20 billion in direct government spending and related economic activity — it would create new perils, setting up other economy-shaking deadlines in just a few months.

It also would do almost nothing for existing economic challenges, including automatic spending cuts that are worsening the problem of high unemployment and a long-term debt challenge posed by mounting costs in health care and retirement programs.

Under the terms of the bipartisan agreement, lawmakers in both parties would spend the next two months trying to hash out a deal that could alleviate some of these risks. But there is little optimism that effort would succeed, given that several similar bipartisan initiatives in recent years have failed over disagreements about taxes and spending.

“The U.S. economy dodged a bullet today. But the reprieve will be short,” Paul Edelstein, director of financial economics at IHS Global Insight, said Wednesday in an analysis. “Democrats and Republicans remain far apart on fiscal policy, and the stage is set for another showdown in January.”

For now, the biggest failure of the agreement, analysts say, is that it would keep the government operating for only a few months, with a new need to fund agencies and raise the debt ceiling coming in the first five weeks of 2014.

As a result, economists say, consumers and businesses are likely to hold back on spending and investment during the important holiday season, knowing that a similarly economy-shaking political showdown might be right around the corner.

The two-week showdown has already harmed the economy — partly as a result of shuttered national parks, museums and federal agencies, slowed mortgage lending and small-business loans, and fewer dollars in the hands of federal workers.

But the indirect impact has been just as large, economists say. The Federal Reserve, for instance, said Wednesday that a growing number of companies in the past month have reported “an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate.”

Consumer confidence collapsed in recent weeks, and companies have for the first time in a year reduced their hiring expectations, according to a widely followed survey.

For all the drama, the bipartisan agreement would do little for the country’s most pressing problems, economists say. With 11.3 million people unemployed, the deal does not contain any measures to address joblessness.

To the contrary, it would leave in place deep domestic and defense cuts, known as sequestration, that took effect this year and that numerous members of both parties oppose. The Congressional Budget Office estimates sequestration will cost the economy 800,000 jobs next year.

“The ill-timed sequestration cuts are slowing economic growth, worsening unemployment and harming broadly supported public services,” said Bob Greenstein, head of the Center on Budget and Policy Priorities.

At the same time, the agreement offers no new measures to address the nation’s long-term budget deficit.

The CBO also warned last month that “the budget is on an unsustainable path,” in particular because health care programs will continue to gobble up a growing share of the nation’s financial resources as waves of Americans retire and medical costs climb.

Despite the most recent fiscal battle — the fourth in three years — lawmakers still have not addressed the financial challenge of offering health care to the elderly. That is expected to drive the debt higher for decades.

But there is some hope that these concerns could be addressed in coming months. As a condition of the agreement, Republicans and Democrats from the House and the Senate will try to work out a budget agreement by mid-December.

It would be just the latest of several efforts to find bipartisan agreement on big budget issues — either on a modest goal like reducing the impact of sequestration or a more ambitious initiative like forging a long-term budget agreement.

Democrats dislike the sequester because it undercuts the vision of domestic investment they have long touted in campaigns. Republicans are more ambivalent, but there are many in the GOP who don’t like how deeply it cuts Pentagon spending.

The most likely path to replacing part of the sequester is to make cuts to mandatory spending — such as health care programs. On a practical level, Republicans and Democrats agree that mandatory spending is better to cut because it is the long-term driver of U.S. debt.

But any discussion of significant changes to mandatory spending usually leads Democrats to insist on new taxes, which has been a deal breaker for the GOP.