Optimism returns to fiscal talks

July 19, 2011

When it comes to the fiscal debate in Congress, the worst-case scenario is clear: no agreement at all, and a default. The best-case scenario is also clear: a bipartisan agreement on a credible long-term fiscal plan which allows a large measure of certainty and predictability going forwards. Something along those lines looks more likely today, and markets are rising as a result.

In the middle is the McConnell muddle-through approach — something which avoids immediate disaster but doesn’t address any long-term issues at all. That’s fine — Congress has never been particularly good at addressing long-term issues. But the world is changing, and both Moody’s and S&P have said that the US could lose its triple-A credit rating if it doesn’t make a credible attempt to get a grip on the national debt.

Will Congress make a serious effort at achieving the best-case outcome? I think it will. But there’s risk associated with doing so: the more time and effort you put into a substantive deal, the more difficult it becomes to cobble together a McConnell-style Plan B in the event that it falls apart at the last minute. Congress showed, during the first TARP vote in 2008, that measures which need to get passed can still fail.

My fear here is that if the ambitious plan becomes the main focus of attention, no one will really have a clue how easy or difficult it might be to pivot to Plan B should it fail. The House Republicans, in particular, can be highly unpredictable. So while today’s optimism is warranted, it’s also tinged with danger. This kind of brinkmanship is emphatically not the way that long-term fiscal policy is best hammered out.


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