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Worries Over U.S. Fiscal Process

Author: Jonathan Masters, Deputy Editor
November 23, 2011


A string of highly partisan budget battles over the past two years has called into question Washington's ability to seriously address the nation's long-term fiscal challenges. U.S. lawmakers have been unable to strike a compromise over the core issues of taxes and entitlement reform, unsettling financial markets and disillusioning the U.S. public. The fruitless deliberations of the bipartisan supercommittee mark the latest episode of legislative gridlock, coming as Congress' job approval (Gallup) dipped to just 13 percent for November, tying a record low. "Such battles are now so much part of the Washington furniture," writes Richard McGregor of the Financial Times, "that the players seem unaware how damaging they are."

What's at Stake

Congressional dysfunction has not only thwarted a solution to the nation's long-term solvency problem, but has also jeopardized economic growth in the short term. The Economist's Greg Ip says the current U.S. fiscal approach is backwards as result of congressional inaction. Most economists, he says, recommend the same thing: more stimulus in the near term and a fiscal consolidation in the long term. However, "what we now have is the opposite," he adds, looming fiscal-tightening early next year, and no plan to address the large deficits in the longer term.

Ratings agencies and international creditors have routinely admonished Washington for failing to put its fiscal house in order, but to little avail. Standard & Poor's stripped the United States of its AAA credit-rating in early August despite a last-minute deal to avoid a default. In September, top U.S. creditor China urged Washington to "carry out appropriate economic policies and maintain fiscal and financial stability (Xinhua)." In a November interview with 60 Minutes, IMF Managing Director Christine Lagarde described "political bickering" as her biggest worry with the United States.

The Debate

Observers question whether a blowback from financial markets is the only threat that would compel Congress to collaborate on fiscal policy. Congress has proved unresponsive to statutory budget sequesters, often overturning them with subsequent legislation. Washington only enacted the October 2008 TARP bailout after a failed first vote plunged the Dow Jones Industrial Average (CNN) 778 points.

Other critics question whether the protracted impasse over U.S. fiscal policy demonstrates how democracies are ill-equipped to manage the whims of the global economy. Moises Naim of Carnegie Endowment writes in the Financial Times that "the globalization of finance coupled with the speed at which money now crosses borders makes it even harder for politicians to respond to the demands of financial markets without infuriating voters."

Policy Options

CFR's Peter R. Orszag says "one of the ironies" of the eurozone debt crisis is that it has given the United States "breathing room" to implement the right fiscal policies because the dollar remains the safe-haven asset. In the short term, he advocates extending the payroll tax holiday so that it winds down with higher employment rates, and allowing all of the Bush-era tax cuts to expire.

To bridge the divide over taxes, Congress should repeal or curb subsidy programs run through the tax code, write experts Leonard Burman and Marvin Phaup. Most economists, they say, recognize that tax expenditures and traditional spending programs, "have nearly identical effects on the budget, resource allocation, relative prices, and the distribution of income." Another way to overcome the legislative deadlock would be to subject entitlement programs such as Medicare and Social Security to the annual appropriations process, says expert Charles Wyplosz.

Background Materials

This report from the Congressional Research Service discusses the economic implications of a long term U.S. budget outlook.

This report from the Congressional Research Service discusses patterns of federal spending and taxes and compares different approaches to debt reduction.

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