Why a Budget Deal Might Be Good News for the Economy
The light at the end of the tunnel for debt ceiling negotiations is finally visible. The Biden administration and House Republicans have come to an agreement in principle on how to address the looming budget ceiling crisis. This consensus did not come easy. Both sides, under the pressure and watchful gaze of their respective political parties, were engaged in weeks of tense negotiations.
For those that point to the disappointing aftermath of the 2011 debt deal and worry about the negative impacts of this debt deal, there are two important things to keep in mind. First, the 2011 debt deal is very different from the present debt deal. Second, the state of the economy in 2011 is very different from that of our present economy. It is unlikely that history will repeating itself for these two differences.
Compared to the 2011 budget deal struck by the Obama administration, the Biden’s debt deal is much more lenient. In Biden’s debt deal, cuts and caps in spending are in place for two years: this is way shorter than the ten-year period stated in the 2011 deal. The spending caps in 2011 were also implemented for defense and non-defense discretionary spending. In the current debt deal, cuts will be limited to non-defense discretionary defense (this was considered a large win for House Republicans who wanted to preserve defense and veterans’ care spending).
Our economy also looks very different from what it was in 2011. In 2011, the economy was recovering from the 2008 financial crisis and was in need of stimulus. The unemployment rate was at nine percent and the Fed Reserve had pared down interest rates close to zero. The Fed was doing all it could to stimulate growth, but many called for the Treasury to do its part by increasing spending. This was impossible amidst an impending debt crisis and the 2011 debt deal reduced federal discretionary spending by 4% and then 5.5% in the following year.
In contrast to 2011, the economy today is need of a cooldown (not stimulus). The unemployment rate today is 3.4% percent and prices are rising at a rate of 4%—way higher than the Fed’s target rate of 2%. In order to address this problem of persistent inflation, the Fed raised interest rates just this March (by 25 points on March 22). Such interest rate hikes are not all good, however, as they are linked to recent midsize bank failures. Given the needs of our current economy, many economists and House Republicans believe that the budget deal might in fact be helpful in getting the country’s economy back on track after the pandemic.
