Timetable for a Slow Demise

140393552“My generation royally screwed you,” said Robert Litan, W’72, director of research at Bloomberg Government, to a roomful of Penn students.

At root is his Keynesian view that the U.S. economy needs short-term stimulus and long-term deficit reduction to bust it out of its current malaise and return it to a healthy trajectory—and his insider’s knowledge that today’s political climate in Washington, D.C., makes that prescription impossible.

“Now we’re in this era of deficit reduction,” he said, describing how the going fear in the capital is that America will become the next Greece.

Yet according to Litan’s predictions, what will happen next is a slow squeeze on the economy, with an eventual, sort-of resolution. Here is his timeline for how the continual budget crisis will play out in the coming months:

March 1: Sequestration. Litan predicts that the across-the-board 6 percent budget cuts—called “sequestration” in policymaker parlance—will happen. Republicans do not believe that President Barack Obama is serious about deficit reduction, Litan believes, and this is one of their only ways to hold him to it. Republicans are also still smarting after giving in twice to the president in the recent fiscal cliff and debt ceiling debates.

“They folded twice. They’re not going to fold again,” Litan put it.

Robert Litan, W’72

Robert Litan, W’72

March 27: Continuing Resolution. For the past few years, the federal government has been funded not by the traditional appropriations budget but by continuing resolution (CR). The latest CR is set to expire on March 27, after which all non-essential and non-entitlement spending would halt. How does Litan call it? Speaker of the House John Boehner remembers 1995, the last time the government “shut down” and the Republicans got blamed, and thus he will flinch this go-around and pass a CR.

May 19: Debt Ceiling. The new deadline for the lifting of the debt ceiling, May 19, will see a short-term deal done, envisions Litan. Perhaps the Republicans will extend the debt ceiling every few months for the rest of President Obama’s term to “torture” him. How is playing with the U.S. credit a political option? The bond markets will tolerate it for the time being, Litan said, because the rest of the developed world is in the “toilet.”

“We’re a safe haven even though we’re so screwed up,” he said.

Yet tolerate it forever they will not. And so perhaps ultimately a long-term budget deal will get done in Washington. Part of the deal will tackle the fastest growing budgetary cost: Medicare. The result could be fewer doctors accepting Medicare and, eventually, vouchers for future generations of retirees.

Litan speaks from impressive experience. Before Bloomberg, he worked as vice president for research and policy at the Kauffman Foundation in Kansas City and as a senior fellow in economic studies at the Brookings Institution. Litan also served in government: as deputy assistant attorney general at the Department of Justice and as associate director of the Office of Management and Budget between 1993 and 1996.

He spoke on Feb. 8 during a lecture sponsored by the Wharton Public Policy Initiative (PPI). Along with his gloomy forecasts for their futures, students in attendance got a free lunch.

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