0
Vote Up Vote Down

Ask The Experts: Examining the Murray-Ryan Budget Deal

by John S Kiernan on January 24, 2014

Ryan - MurrayWhen President Obama this month signed a $1 trillion spending bill, funding the U.S. government through September, it completed a drama that, as recently as a few weeks ago, few in Washington believed likely to end anytime soon. Republicans and Democrats were able to find enough common ground to pass a budget that enough lawmakers in both parties found palatable.

After all, a deadlock last October among Republicans and Democrats over spending led to a 16-day government shutdown, causing nervousness in the financial markets. But in December one-on-one negotiations by Rep. Paul Ryan (D-WI), chairman of the House Budget Committee, and Sen. Patty Murray (D-WA), chairman of the Senate Budget Committee, produced a blueprint both sides could live with. Right away it provided hope that Washington would be able grapple with what were once routine economic matters without becoming embroiled in partisan warfare.

John Ballantine Jr., senior lecturer at Brandeis University, believes the budget agreement could mean less volatility and some market improvement going forward, but sees a pretty big “if.”

Aberration or Sign of What’s to Come?

“If this signals a change in budget management and tax/spending issues,” Ballantine says, then we can expect consistent market improvement.  However, Ballantine is “less confident in this scenario at the moment,” saying that, “We could do better, but the differences in DC are large and brinkmanship will not bridge the underlying differences.”

As a result, Ballantine foresees a “volatile, muddling along period” where the U.S. economy does not get stronger and does not weaken either, but provides tough sledding for many consumers.

H. Whitt Kilburn, associate professor of political science at Grand Valley State University, thinks the politics of the budget deal is potentially significant but the budget itself is not.

“The budget plan, after all, is a two year plan,” he notes. “Over the short term, the plan basically restores the budget cuts from sequestration.”

Kilburn hopes the agreement will give the parties room to negotiate over the long-term future of the three big-ticket items in the federal budget: Medicare, Social Security, and defense spending. That, he says, could matter for the long term economy.

Alan Ciglar, Chancellor's Club Teaching Professor of Political Science at the University of Kansas, says the deal’s impact is hard to gauge without further evidence, but he suspects there will be little change.

The Next Test:  A Vote on the Debt Ceiling Debt

Ciglar may not have to wait long for further evidence. Coming up next is a vote on whether or not to raise the debt ceiling, something conservatives are loath to do. Failing to do so, however, raises the threat of a U.S. default on its debt. Such a move, says Chris Annala, economics professor at State University of New York (SUNY) Geneseo, would have a dramatic impact on the global economy.

“As a ‘safe’ asset; firms, pension plans, insurance companies, and foreign governments are holding U.S. Treasury bills,” Annala said. “Uncertainty regarding the payment of bills already has some institutions selling and/or unwilling to hold those t-bills. If short-term t-bills cannot be used as collateral for loans, the credit markets may seize up.”

The impact on consumers would be swift and brutal. Interest rates would skyrocket while business investment – which normally leads to job creation – would slow. As a result, Annala says, we could quickly fall back into recession just as we are starting to see a mild recovery.

While most of our experts expect lawmakers to avoid a catastrophic default, most are not expecting a new Congressional attitude of accommodation to yield dramatic economic results. Nor do they expect new Federal Reserve Chairman Janet Yellen to produce results beyond what her predecessor, Ben Bernanke, was able to produce.

John Seater, Thurman/Raytheon Professor of Economics at North Carolina State University, thinks the economy could even be worse three to five years from now.

“Social spending must be cut or taxes must be raised substantially to restore fiscal order to the federal budget,” he said. “This budget does neither.”

Meet Our Experts

John Ballantine Jr. - Brandeis University

Just how catastrophic would the federal government defaulting on its loans be for the economy - both in the United States and worldwide? In other words, what are politicians risking here?

More volatility and uncertainty IF market feels that this is how the U.S. government will be managed over the next couple of years -- through the 2014 elections. Stalemate and crisis management...and speaking as a more activist economist, not tackling the underlying challenges in U.S. economy.

Does a short-term debt ceiling increase simply mean that we will encounter the same market volatility and concern witnessed over the past few of days a month from now?

Less volatility and market improvement, IF this signals a change in budget management and Tax/spending issues and that the House finds a way to reach compromises that will be supported by the Senate. I am less confident in this scenario at the moment.

How do you see economic policy taking shape under Janet Yellen? What is the outlook for the economy in the next 3-5 years?

Continue to muddle through, managing to reach some small accommodations and letting the economy grow at its current tepid pace. We could do better, but the differences in WDC are large and brinkmanship will not bridge the underlying differences. Europe and the rest of the world (China and other large investors) will try to diversify and find other investment options. This is not easy, but the money flows will slow towards the U.S.


Chris Annala - State University of New York at Geneseo

Just how catastrophic would the federal government defaulting on its loans be for the economy - both in the United States and worldwide? In other words, what are politicians risking here?

A default on U.S. sovereign debt would have dramatic impacts on the global economy. As a "safe" asset; firms, pension plans, insurance companies, and foreign governments are holding U.S. Treasury bills. Uncertainty regarding the payment of bills maturing in October and November already has some institutions selling and/or unwilling to hold those T-bills. If short-term T-bills can not be used a collateral for loans, the credit markets may seize up. The rising interest rate on T-bills will impact interest rates throughout the U.S. and global economies and may slow investment and consumption at a time when we are experiencing a mild recovery, this could push the global economy back into recession.

Does a short-term debt ceiling increase simply mean that we will encounter the same market volatility and concern witnessed over the past few of days a month from now?

In my opinion, a short-term fix is unlikely to significantly reduce the uncertainty around the debt ceiling debate. If there is a short-term deal with some indication that a long-term plan is also being formulated, that would help to reduce the uncertainty and alleviate some concerns going forward.

How do you see economic policy taking shape under Janet Yellen? What is the outlook for the economy in the next 3-5 years?

I would expect Ms. Yellen to continue the policies of Mr. Bernanke with little change, so as to avoid introducing any more uncertainty into an already uncertain situation.


Jason Lin - Truman State University

Just how catastrophic would the federal government defaulting on its loans be for the economy - both in the United States and worldwide? In other words, what are politicians risking here?

A real U.S. default will result in absolutely total calamity worse than the subprime mortgage crisis we experienced in 2008. If China, Japan, Germany and Taiwan decided to cash in their holdings of U.S. Treasury bonds, the default will spread out quickly and more severe than the Asian financial crisis in 1997 and the most recent Euro crisis. The pain and risk will be felt more on the ordinary people than politicians.

Does a short-term debt ceiling increase simply mean that we will encounter the same market volatility and concern witnessed over the past few of days a month from now?

A temporary debt ceiling increase will not solve the problem. We need both debt ceiling increase and a cut in budget deficit to make it work and sustainable. The government has to reduce spending if they are expecting higher revenues from taxation. If budget deficit grows faster than debt ceiling increase, the same old story will repeat itself over and over again.

How do you see economic policy taking shape under Janet Yellen? What is the outlook for the economy in the next 3-5 years?

Janet Yellen will basically follow the same path Ben Bernanke has been doing over the past eight years. Don't expect any surprise from policy change under Yellen. The outlook for the economy in the next 3-5 years is positive in my mind. Unless other political shocks or incredible natural disaster occur, we are expecting stronger economy in the near future. I didn't see immediate systemic risk existing as of now.


John J. Seater - North Carolina State University

Just how catastrophic would the federal government defaulting on its loans be for the economy - both in the United States and worldwide? In other words, what are politicians risking here?

It's hard to say what the long-run implications of any budget deal are because the government can change its mind any time it wants to, and it often does. This particular deal seems especially unimportant for the long-run because it pretty clearly is a stop-gap compromise to pass a budget, any budget. Having said that, however, if we take the budget at face value, it is yet another failure by Congress to face up to the need to cut spending or raise taxes drastically. The current fiscal path is unsustainable. Both Social Security and Medicare are in serious financial trouble. The government has been cutting Medicare surreptitiously by reducing what it will pay for health care services to the point that doctors won't participate. That kind of thing will eliminate the fiscal problem with Medicare because in effect it is eliminating Medicare itself. Social Security is another matter. No one is willing to touch that, so it continues to down the path toward insolvency.

How do you see economic policy taking shape under Janet Yellen? What is the outlook for the economy in the next 3-5 years?

Worse, of course. Social spending must be cut or taxes must be raised substantially to restore fiscal order to the federal budget. This budget does neither.


H. Whitt Kilburn - Grand Valley State University

What do you think the budget compromise reached by Rep. Paul Ryan and Sen. Patty Murray means for the long-term future of the economy? Significant or not?

The politics of the budget deal are potentially significant. The budget itself is not. The budget plan, after all, is a two-year plan. Over the short term, the plan basically restores the budget cuts from sequestration. The end of long term unemployment insurance is potentially a drag on the economy, but hopefully over the long term, no longer a necessary stimulus. What really matters is the political process of compromised negotiation in Congress, which has seemed all but absent in Washington over the past decade. Hopefully it will give the parties room to negotiate over the long term growth of the three big-ticket items in the federal budget, Medicare, Social Security, and defense spending. And that could matter for the long term economy.

What are the political ramifications? Does it suggest a move away from fiscal brinksmanship or is this an isolated instance where compromise was possible?

Perhaps the fallout over the government shutdown taught Congressional leaders a valuable lesson about the future --- that they have more to gain by cooperating to accomplish the most basic governing responsibilities, than they do from stirring up anger and support from their respective donor-activist bases. Of course, the budget is just one deal. But the record low approval by most Americans, not just the activists, for incumbent members of Congress has scared enough of them into working together.

Will a budget deal that restores discretionary and military spending cut by the sequester benefit consumers in any way or will it simply make the deficit worse?

It won't mean the economy rebounds tomorrow, but indirectly it will be a modest, positive stimulus. Of course, some of the stimulus is washed out with the end the end of unemployment insurance payments, which for those who received the checks would have meant dollars going directly into local economies. At least where I live, Michigan, unemployment remains stubbornly high. The end of these payments will hurt over the short term. More broadly, over the long term, forecasts from the Congressional Budget Office among others show the deficit stabilizing, so among all this there's some great news for the budget hawks.


Allan Cigler - The University of Kansas  

What do you think the budget compromise reached by Rep. Paul Ryan and Sen. Patty Murray means for the long-term future of the economy? Significant or not?

Mainly significant as a potential indicator of a willingness to engage in bi-partisan compromise. It will have minor economic impact economically - backloaded and avoided dealing with entitlements.

What are the political ramifications? Does it suggest a move away from fiscal brinksmanship or is this an isolated instance where compromise was possible?

Hard to say without further evidence(I suspect little change), Major impact deals with Republican factionalism.

Will a budget deal that restores discretionary and military spending cut by the sequester benefit consumers in any way or will it simply make the deficit worse?

In the short run adds to deficit and makes anything like a sequester unlikely But the Congress has learned its lesson about across-the-board cuts.

 

Author
User
John Kiernan is Senior Writer & Editor at Evolution Finance. He graduated from the University of Maryland with a BA in Journalism, a minor in Sport Commerce & Culture,…
659 Wallet Points