— After weeks of political brinkmanship in Washington, President Obama Tuesday signed into law the debt ceiling and deficit reduction deal he brokered with Congressional leaders.
Now, the questions shift from the fate of the deal to what might happen next as it moves toward becoming a reality.
The final deal raises the nation's ability to borrow by about $2.1 trillion and reduces cumulative deficits by about the same amount according to the non-partisan Congressional Budget Office. But the deal, made Sunday night and quickly acted upon in Congress, contains mechanisms and mysteries that will play out over time.
Here are some questions whose answers will become clear only over next several weeks, months, or even years:
Who will serve on the 12-member special joint congressional committee to recommend an additional $1.2 trillion in deficit reductions?
The bill calls for the creation of a 12-member committee of current House and Senate members, chosen by congressional leaders, which will be charged with finding more savings than the immediate cuts made. If no agreement is reached, automatic cuts would occur in areas each party cares about. So who serves?
“It’s extremely important that I pick people who are willing to make hard choices, but aren’t locked in,” Senate Majority Leader Harry Reid said Monday.
Assuming the bill passes, he has two weeks to make his three picks. The other nine members will be selected by Senate GOP Leader Mitch McConnell, House Speaker John Boehner and House Minority Leader Nancy Pelosi.
Since much of the committee’s work will have to focus on ways to redesign entitlement programs, such as Medicare, to find deficit reductions, it would make sense for the chairmen of the Senate Finance and House Ways & Means Committees, which have jurisdiction over those programs, to be on the new special committee, but there’s no guarantee of that.
How likely is it that future Congresses would adhere to the planned deficit reductions?
If a Democratic House majority is elected next year, if Obama wins re-election, and if Democrats retain control of the Senate (all big unknowns, of course), does the deal remain intact? Or would Democrats seek to lessen future cuts that might be made to the programs such as Medicare which their party created and which they have championed for 40 years?
And conversely, would a Republican president and a Republican-controlled Congress stick to the decisions that will be made this year, or prefer to enact policies more to their liking in 2013 or 2014?
There's precedent for Congress undoing reforms made by prior Congresses: the tax reform bill of 1986, which reduced tax breaks and lowered tax rates lasted only four years before Congress began to dismantle it. A key element of the 1997 budget agreement was undone in 2003.
But what makes the current case different from earlier budget and tax bills is that persistent deficits are now driven by structural factors — the cost of entitlements and the retirement of the huge Baby Boom age cohorts — not merely by an upswing or downturn in the economic cycle that lasts for a year or two.
David Kendall, a senior fellow for health and fiscal policy at Third Way, a centrist Democratic-leaning advocacy group which supports the budget bill, said, “These deals are not permanent; they will change as political power shifts, but this has the best chance of sticking. This is the beginning of a multiyear effort to deal with our deficit and as long as the deficit remains the dominant issue, this deal will stick.”
How effective will the mandatory spending cuts, or sequesters, that are built into the bill, turn out to be?
If Congress does not adopt the deficit cutting recommendations of the new 12-member “super committee,” then automatic spending reductions would take effect – but high-cost programs such as Social Security, Medicaid and unemployment insurance would be exempt from those reductions.
Bill Hoagland, former Senate Budget Committee staff director, said, “The fact that so many programs are exempt from the sequester means that its effectiveness as a threat to force action is somewhat muted. The real impact of the (sequestration) process is the re-establishing of the discretionary caps downward primarily on defense spending.”
He said, “This is similar to what Ronald Reagan faced in the fall of 1986 when he had to renegotiate a fix to the Gramm-Rudman-Hollings law and Democrats were threatening big cuts in defense if he did not agree to tax increases. I assume the Democrats appointed to the joint committee will hold out taxes as the way to avoid defense cuts that Republicans will not want.”
Ken Kies, a veteran tax lawyer and lobbyist who served as chief of staff for the Joint Committee on Taxation, said the sequester that would occur if the new “super committee” couldn’t agree on deficit cutting steps, or if Congress didn’t enact the committee’s recommendations, would be “draconian. The defense cuts are so large it’s inconceivable they could actually take effect.”
He predicted Congress would vote to delay them.
So to reach its goal of $1.2 trillion in deficit cuts, would the new “super committee” recommend tax increases for some people?
If Congress simply allowed the current tax rates and credits to continue beyond the end of 2012, when they are currently scheduled to expire, “that would completely wipe out all the savings we would have gained from the budget deal. This creates a new political reality that Congress is going to have to face,” Kendall said.
Obama’s preferred course of action would be to allow today’s tax rates and tax preferences to continue for people with incomes under $250,000, but to raise taxes on people with incomes above $250,000. But doing that would reduce future revenues by $1.8 trillion and thus increase future budget deficits.
Kies predicted the new committee won’t recommend tax increases.
“It’s not hard to predict how the discussions inside this committee are going to go,” he said. “The six Democrats are going to insist until they’re blue in the face that the Republicans agree to do revenues and the Republicans will basically say, ‘it’s more likely Elvis will reappear than that we’re going to do revenues.’”
Instead Kies sees the struggle over continued the current tax rates probably delayed until the weeks after the 2012 election and perhaps, if a Republican wins the presidency, until the early months of 2013.
If the problem to be solved is the growing burden of debt, would the deal change the trend of of debt growing relative to gross domestic product?
Former CBO director Rudy Penner said, “Given current deficit projections, the agreement is not sufficiently austere to stabilize the debt-GDP ratio.”
And he added a note of caution about the future: “The debate has proceeded as though we know future deficits with certainty — when projections are often very, very wrong.”
The CBO has two quite different estimates of what total deficits between 2012 and 2021 will be.
Under the CBO baseline — which assumes tax rates revert to their 2000 levels at the start of 2013 — total cumulative deficits would be $6.7 trillion over the next ten years.
But measured by the CBO’s alternative fiscal scenario, in which tax rates stay as they now are, cumulative deficits would be $12.8 trillion.
The CBO said last month that in order to keep the ratio of debt to GDP in 2021 from rising above its current level, about 69 percent of GDP, cumulative deficits over the next decade would need to be roughly $1.6 trillion less than they're forecast to be under the CBO’s baseline projections, and $7.6 trillion less than would be the case under the alternative fiscal scenario. By the latter measure, the bill offered by Obama and congressional leaders falls quite short.