Despite the lack of a sizable deficit-reduction deal, and little indication Washington will agree to one this year, equities continue their climb to record highs, and government borrowing costs hover near historic lows.
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“There's a happy feeling out there, at least among investors, that housing's recovering, the economy's beginning to recover, we don't need to go down that austerity route,” said Charles Gabriel, the president of Capital Alpha Partners, LLC.
“They are just watching and assuming that ultimately Congress and the president will get their act together and will not do something that's incredibly stupid for the economy,” said Stephen D. Oliner, an economist with the American Enterprise Institute.
In the past 18 months, Republicans have agreed to revenue increases and Democrats have signed off on spending cuts. Depending on the calculation, Washington has enacted about $2.5 trillion in deficit reduction. That is still about $1 trillion short of what many analysts suggest is necessary to move federal finances to a sustainable course over the next decade.
“While the deficit reduction enacted to date represents notable progress, our debt problems remain far from solved. By our estimates, lawmakers have achieved only slightly more than half of the minimum necessary deficit reduction to achieve sustainability over the next decade,” said a statement from the Committee for a Responsible Federal Budget. “Moreover, much of the savings already enacted represents the easier ‘low-hanging fruit’ of deficit reduction.”
The federal government’s longer-term fiscal commitments are even further in imbalance, due to Medicare, Medicaid and Social Security. "Absent substantial increases in federal revenues, such growth in outlays would result in greater debt burdens than the United States has ever experienced,” according to the Congressional Budget Office.
Republicans have seized on White House Press Secretary Jay Carney’s comments that “deficit reduction is not a goal -- a worthy goal unto itself; this is all about making our economy stronger and making it more productive and allowing it to create even more jobs.” Republicans said this proves President Obama is indifferent to the growing national debt. President Obama and administration officials have discussed, almost daily, the need for Congress to act on deficit reduction. The parties remain split on how to accomplish it.
In response to Carney’s comments, a recent Fox News poll showed 77% of respondents said reducing the federal budget deficit is a worthy goal in and of itself. A Gallup poll showed respondents believe the federal budget deficit trails only the “economy in general” as America’s most important problem. The concern from voters has failed to bridge the sizable gap between Democrats and Republicans on how to reduce deficits. “Deficit reduction is always done in bits in pieces, and the issue never goes away,” said Sean West, an analyst with Eurasia Group. “I'd be surprised if the 113th Congress does much more than justify pushing off this year's sequester with a small batch of cuts that take place over many years.”
For most Democrats, responsible deficit reduction means increasing domestic spending to spur economic growth (and tax receipts) and cutting deficits through tax increases on the wealthy and corporations. They have also offered spending cuts well short of what Republicans say are needed to ensure sustainable budgeting. Democrats generally speak more about defending deep entitlement cuts to beneficiaries than ensuring they remain solvent.
Republicans want immediate spending cuts, particularly controls on entitlement spending. They continue to resist tax increases and claim the spending cuts Democrats have discussed are too modest.
While the partisan bickering continues, so does the climb in equities, prompting the question: Why cut now?
“This isn’t about the day-to-day trading of markets, this about the solvency of these programs that are our social safety net and the overall health of our economy that goes much deeper than where the Dow closes on a given day,” answered one GOP leadership aide