When 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.”
Ask The Experts
- 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?
- 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?
- How do you see economic policy taking shape under Janet Yellen? What is the outlook for the economy in the next 3-5 years?
- 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?
- What are the political ramifications? Does it suggest a move away from fiscal brinksmanship or is this an isolated instance where compromise was possible?
- 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?