If the debt talks produce only (i) an increase in the debt ceiling and (ii) a framework for cutting federal spending over the medium term – well, there are worse ways to resolve the crisis.
The beginning of wisdom about the debt-ceiling crisis is to recognize how artificial and unnecessary it is. The US has no special urgency to reduce the budget deficit this month as opposed to 9 months from now. It’s not the lenders who are forcing this crisis. It’s the borrowers.
From the point of view of the economic cycle (as opposed to the political cycle), today’s big budget deficit is useful rather than troublesome: the deficit stimulates the economy, not least by putting purchasing power into the hands of unemployed people who otherwise would see their incomes drop to near nothing. (The New York Times reminds us that about one-fifth of personal income in the United States now takes the form of government payments. In states hard hit by recession, the proportion is even higher.)
Any qualms financial markets may feel about today’s deficit can be adequately addressed by putting in place today the mechanism for cutting spending tomorrow. But the mechanism does not need to start chopping for a little while longer.
There’s a lot to be said too in favor of a more modest rather than a more ambitious deal.
It’s not a good idea to try to reform Medicare on a 10-day deadline. Ditto the tax code. Ditto the defense establishment.
Those reforms need to be done right, backed by a broad consensus in US society. Which takes time. Which – happily – the US federal government has. It’s the unemployed who face a ticking clock. Let’s address their troubles first.