New Hope That ‘Grand Bargain’ on Taxes, Spending, Entitlements Can Be Reached Before Obama Leaves Office?

Finally, in late December 2014, as one of its last acts, the 113th Congress passed a $1.1 trillion budget that keeps the government running through September 2015 — at least for a while, no more month-to-month lurching from threat of government shutdown to government shutdown. An opening may even appear for some long-term thinking by America’s political leaders — a “Grand Bargain” between Congress and President Obama on long-term budget and tax decisions and entitlement reform of Social Security, Medicare, and Medicaid.

Obama and Republicans in Congress were not totally irresponsible in their disagreements on fiscal matters. They avoided the “fiscal cliff” of draconian budget cuts and tax increases at the beginning of 2013 that would have led to recession and higher unemployment. Instead, at the final moment, before serious economic damage set in, on January 1, 2013, they passed the American Taxpayer Relief Act of 2012. They wrangled through the debt-ceiling crisis of 2013, shut down the government briefly, and then Congress in October, 2013 passed the Continuing Appropriations Act, 2014, and continued to raise the debt ceiling through 2014. Jared Bernstein, a former chief economist for Vice President Biden, wrote:

“In 2013, fiscal policy — taxing and spending decisions — subtracted around 1.5 percentage points off of the growth in gross domestic product. That’s equivalent to over a million jobs.”

But in 2014, fiscal policy was relatively neutral in terms of its impact on economic growth, Bernstein wrote.

“That’s both a marked improvement — a clear move towards “do-no-harm” — and a reason why employment growth has accelerated this year compared to last: in the first seven months of this year, we’ve added an average of 230,000 jobs per month compared to 196,000 over the comparable period last year, a cumulative difference of 240,000 jobs. That’s not a huge difference, but I’ll take it.”

The defeat of House Majority Leader Eric Cantor in a Virginia Republican Primary in spring 2014, Republicans increasing their numbers in the House and take-over of the Senate suggests they now have an incentive to show they can govern responsibly.  There was a great sense in numerous journalistic accounts that Cantor undermined Boehner’s attempts to strike a deal with Obama, and that the Tea Party wing preferred fiscal crisis to an actual budget agreement with Obama.

By the end of 2014, the deficit has declined to 2.8% of GDP, meaning that robust economic growth combined with fiscal restraint on the part of Congress and the President have weathered the crisis. The American economy is growing far faster than the economies of Europe, Russia or China….Truth is that for all the blather from Washington, the government stalemates of 2011-14 seems to have had little long-term effect on the American economy.

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