We shouldn't be surprised. The economy continues to face severe dual challenges: (1) a very slow recovery from an unusually bad recession, and (2) an unsustainable longer-term government budget outlook. If our policymakers had their act together and were making successful efforts to combat either one of these, progress with the other would follow. As it is, the lack of substantial policy progress that came out of the debt-limit talks means months – perhaps even years – of the threat of a continued downward spiral.
To be fair, it's not clear that policymakers could have done much better before the August debt ceiling deadline. It seems to take real crises to bring Americans together on difficult choices. The subsequent turmoil in the stock market may be just what we need to get us to focus on real compromise in time for Round 2 of the debt-limit deal.
By Thanksgiving, the bipartisan "super committee" of sitting politicians appointed by congressional leaders will have the opportunity to become "superheroes" for America. All they have to do is come up with a package of fiscal policies that will pass Congress and reduce the deficit by another $1.5 trillion over 10 years.
Democrats are still reeling from Round 1 of the deal, which included no increase in tax revenues and relied instead on almost $1 trillion in cuts over 10 years from annually appropriated "discretionary" spending. To their chagrin, it also imposes more spending cuts and no revenue increases if a majority of the super committee fails to come up with a passable plan. But the committee has no such constraints as it takes up Round 2.
Meanwhile, back in the real world of the US economy, job growth is still too weak. The consensus view of economists is that, while government efforts to stimulate demand kept things from getting worse, they still haven't been effective enough in making things better. But more fiscal stimulus would mean more deficits, and now more than ever there's no political appetite for that.
So are we stuck between a fiscal policy rock and an economic hard place? Not necessarily. It's possible to stimulate the economy further, now, without increasing the 10-year deficit. It would mean steering funds away from spending and tax cuts that offer low "bang for the buck" economic stimulus and toward higher "bang" policies.
Then the deficit would be no higher but the economy would improve. That growth, in turn, would help brighten our debt outlook, as our economy would be better able to keep pace with our still-growing debt.
What shifts would be needed? The nonpartisan Congressional Budget Office lists payroll tax cuts and aid to state and local governments high on its list of fiscal policies designed to stimulate demand. Care to guess what falls dead last on that list? Extended income tax cuts.
So why not let the Bush tax cuts (at a cost of $2.5 trillion over 10 years) expire, as scheduled, at the end of 2012? At the very least, we should insist that any portion of those tax cuts we wish to extend should be paid for.
Healing both of our economy's ailments isn't hard as long as we open our eyes to all options. Round 2 of the debt-limit deal gives us another chance to get it right.