Congress Brings Latest Drama to an End with THE DEAL on the Debt Crisis.

The stalemate over a compromise between Democrats and Republicans was embarrassing on all sides, with everyone pointing blame and walking out of the room when conversations led to a standoff.

The media play over the deadlock was imploding, with talk show hosts loving the grandstanding and playing it up as if nothing else was going on in the world. They wanted to scare you, some bought it, but most knew it was politics, just a little uglier than the every day shenanigans.

You may have believed that the wayward Congress would eventually come to a compromise just in the nick of time and just rolled your eyes knowing they’d do something. Regardless of the outcome, the process took its toll on our world market reputation as well as the stock market which shook with volatility. Investors don’t like uncertainties and the U.S. environment is clearly unsteady. However, one investor reminded us of 1976 when investors obsessed over runaway inflation and a dysfunctional economy. Today, despite all the financial shocks in the intervening 35 years, the Dow stands north of 12,000.

While Congress initiated this long, painful process and used the issue for political grandstanding (hoping that they would make the other party look worse than they did), the good news is that they have been forced to tackle the exploding government debt.

The deal reduced the deficit from both domestic and Pentagon spending by at least $1 trillion and establishes a bipartisan process to seek a balanced approach to large deficit reduction through entitlement and tax reform (good luck with that one).

According to the Congressional Budget Office report released on Monday, August 1, 2011, the deal on the table cuts $917 billion while raising the debt ceiling by $900 billion, but the special committee tasked with finding another $1.5 trillion in savings by Thanksgiving (or the automatic cuts that result if they fail) will raise that number substantially.

The implications of not raising the debt ceiling or an outright default created unacceptable economic uncertainty by risking default and increasing the chance of a downgrade. This bill, however, may not have gone far enough to satisfy major ratings agencies, which have threatened to downgrade the United States’ AAA credit rating. Ratings agency Standard and Poor’s said in mid-July there was a 50-50 chance it would cut U.S. ratings if congress failed to create a meaningful deficit-cutting plan. With this measure the S&P may still downgrade U.S. ratings.

The Congressional Budget Office (CBO) has estimated the impact on the deficit of the Budget Control Act of 2011, as posted on the website of the House Committee on Rules on August 1, 2011. The legislation would:

• Establish caps on discretionary spending through 2011;
• Allow for certain amounts of additional spending for “program integrity” initiatives aimed at reducing the amount of improper benefit payments;
• Make changes to the Pell Grant and student loan programs;
• Require that the House of Representatives and the Senate vote on a joint resolution proposing a balanced budget amendment to the Constitution;
• Establish a procedure to increase the debt limit by $400 billion initially and procedures that would allow the limit to be raised further in two additional steps, for a cumulative increase of between $2.1 trillion and $2.4 trillion;
• Reinstate and modify certain budget process rules;
• Create a Congressional Joint Select Committee on Deficit Reduction to propose further deficit reduction, with a stated goal of achieving at least $1.5 trillion in budgetary savings over 10 years; and
• Establish automatic procedures for reducing spending by as much as $1.2 trillion if legislation originating with the new joint select committee does not achieve such savings.

Here is a symnopsis of the Bipartisan Debt Deal as gathered from various sources:

• Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.

• President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.
• The measure would cut federal spending by at least $2.1 trillion over a decade — and possibly considerably more — and would not require tax increases. The U.S. debt limit would rise by at least $2.1 trillion, tiding the Treasury over through the 2012 elections.
• Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.

• Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.

1. 1. REMOVING UNCERTAINTY TO SUPPORT THE AMERICAN ECONOMY

• Deal Removes Cloud of Uncertainty Until 2013, Eliminating Key Headwind on the Economy: Independent analysts, economists, and ratings agencies have all made clear that a short-term debt limit increase would create unacceptable economic uncertainty by risking default again within only a matter of months and as S&P stated, increase the chance of a downgrade. By ensuring a debt limit increase of at least $2.1 trillion, this deal removes the specter of default, providing important certainty to our economy at a fragile moment.

• Mechanism to Ensure Further Deficit Reduction is Designed to Phase-In Beginning in 2013 to Avoid Harming the Recovery: The deal includes a mechanism to ensure additional deficit reduction, consistent with the economic recovery. The enforcement mechanism would not be made effective until 2013, avoiding any immediate contraction that could harm the recovery. And savings from the down payment will be enacted over 10 years, consistent with supporting the economic recovery.

1. 2. A DOWNPAYMENT ON DEFICIT REDUCTION BY LOCKING IN HISTORIC SPENDING DISCIPLINE – BALANCED BETWEEN DOMESTIC AND PENTAGON SPENDING

• More than $900 Billion in Savings over 10 Years By Capping Discretionary Spending: The deal includes caps on discretionary spending that will produce more than $900 billion in savings over the next 10 years compared to the CBO March baseline, even as it protects core investments from deep and economically damaging cuts.

• Includes Savings of $350 Billion from the Base Defense Budget – the First Defense Cut Since the 1990s: The deal puts us on track to cut $350 billion from the defense budget over 10 years. These reductions will be implemented based on the outcome of a review of our missions, roles, and capabilities that will reflect the President’s commitment to protecting our national security.

• Reduces Domestic Discretionary Spending to the Lowest Level Since Eisenhower: These discretionary caps will put us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President.

• Includes Funding to Protect the President’s Historic Investment in Pell Grants: Since taking office, the President has increased the maximum Pell award by $819 to a maximum award $5,550, helping over 9 million students pay for college tuition bills. The deal provides specific protection in the discretionary budget to ensure that the there will be sufficient funding for the President’s historic investment in Pell Grants without undermining other critical investments.

1. 3. ESTABLISHING A BIPARTISAN PROCESS TO ACHIEVE $1.5 TRILLION IN ADDITIONAL BALANCED DEFICIT REDUCTION BY THE END OF 2011

• The Deal Locks in a Process to Enact $1.5 Trillion in Additional Deficit Reduction Through a Bipartisan, Bicameral Congressional Committee: The deal creates a bipartisan, bicameral Congressional Committee that is charged with enacting $1.5 trillion in additional deficit reduction by the end of the year. This Committee will work without the looming specter of default, ensuring time to carefully consider essential reforms without the disruption and brinksmanship of the past few months.

• This Committee is Empowered Beyond Previous Bipartisan Attempts at Deficit Reduction: Any recommendation of the Committee would be given fast-track privilege in the House and Senate, assuring it of an up or down vote and preventing some from using procedural gimmicks to block action.

• To Meet This Target, the Committee Will Consider Responsible Entitlement and Tax Reform. This means putting all the priorities of both parties on the table – including both entitlement reform and revenue-raising tax reform.

1. 4. A STRONG ENFORCEMENT MECHANISM TO MAKE ALL SIDES COME TOGETHER

• The Deal Includes An Automatic Sequester to Ensure That At Least $1.2 Trillion in Deficit Reduction Is Achieved By 2013 Beyond the Discretionary Caps: The deal includes an automatic sequester on certain spending programs to ensure that—between the Committee and the trigger—we at least put in place an additional $1.2 trillion in deficit reduction by 2013.

• Consistent With Past Practice, Sequester Would Be Divided Equally Between Defense and Non-Defense Programs and Exempt Social Security, Medicaid, and Low-Income Programs: Consistent with the bipartisan precedents established in the 1980s and 1990s, the sequester would be divided equally between defense and non-defense program, and it would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side.

• Sequester Would Provide a Strong Incentive for Both Sides to Come to the Table: If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education.  That outcome would be unacceptable to many Republicans and Democrats alike – creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for our economy.

1. 5. A BALANCED DEAL CONSISTENT WITH THE PRESIDENT’S COMMITMENT TO SHARED SACRIFICE

• The Deal Sets the Stage for Balanced Deficit Reduction, Consistent with the President’s Values: The deal is designed to achieve balanced deficit reduction, consistent with the values the President articulated in his April Fiscal Framework. The discretionary savings are spread between both domestic and defense spending. And the President will demand that the Committee pursue a balanced deficit reduction package, where any entitlement reforms are coupled with revenue-raising tax reform that asks for the most fortunate Americans to sacrifice.

• The Enforcement Mechanism Complements the Forcing Event Already In Law – the Expiration of the Bush Tax Cuts – To Create Pressure for a Balanced Deal: The Bush tax cuts expire as of 1/1/2013, the same date that the spending sequester would go into effect. These two events together will force balanced deficit reduction. Absent a balanced deal, it would enable the President to use his veto pen to ensure nearly $1 trillion in additional deficit reduction by not extending the high-income tax cuts.

• In Securing this Bipartisan Deal, the President Rejected Proposals that Would Have Placed the Sole Burden of Deficit Reduction on Low-Income or Middle-Class Families: The President stood firmly against proposals that would have placed the sole burden of deficit reduction on lower-income and middle-class families. This includes not only proposals in the House Republican Budget that would have undermined the core commitments of Medicare to our seniors and forced tens of millions of low-income Americans to go without health insurance, but also enforcement mechanisms that would have forced automatic cuts to low-income programs. The enforcement mechanism in the deal exempts Social Security, Medicaid, Medicare benefits, unemployment insurance, programs for low-income families, and civilian and military retirement.