You can read about it here, if you’re so inclined. It’s a big messy compromise with massive cuts and a two-stage debt ceiling hike and a cost-cutting super panel and triggers for huge spending cuts and a balanced budget amendment to the US Constitution. (I’m actually not sure that a deal that is to the right of the Republicans’ initial bargaining position can be considered a compromise but apparently this is the only thing that both party leaderships could agree on.)
As far as I can tell, there are some really serious problems with this deal from a policy perspective:
- The budget cut triggers. If the super panel’s recommendations weren’t adopted in the spring, then this compromise would trigger massive spending cuts to defense, Medicare, and other big-ticket nondiscretionary areas. This is intended to guarantee Congress would consider the panel’s recommendations seriously. Unfortunately, this basically never works; historically Congress passes new laws to get around politically unpopular cuts. So this attempt to foist the deficit issue off on a distant and separate panel would almost certainly be just as unsuccessful as every other deficit-fighting panel that the US Congress has created in the last few decades.
- The balanced budget amendment. If Congress didn’t adopt all the super panel recommendations, they’d have to send a balanced budget amendment to the states for ratification. You’d probably think this has no chance of passing, as it would absolutely devastate the American federal government’s ability to fight wars or recessions or natural disasters, but 74% of American adults polled last week supported such an amendment. That’s a higher proportion than basically any other policy proposal - so this is actually something that states would likely consider and debate, and some would ratify, and it’s something that would be a big part of political discourse in 2012 campaigning. This would be massively suboptimal.
- The US Treasury credit rating. This new deal might not be sufficient to prevent a downgrade of US credit by the big credit rating agencies. Specifically, since the deal (not including the panel recommendations) doesn’t raise revenue and doesn’t cut entitlement spending, and the process for raising the debt ceiling hasn’t changed, it’s relatively likely that at least S&P will downgrade the reliability of US government debt - because bondholders won’t be guaranteed that this exact same thing won’t happen again in the future. This would raise government borrowing costs by around $100 billion a year.
Despite all these problems, I’m going to say the odds that this passes are about 80%, because the alternative is seriously suboptimal. The most likely failure point would be in the House, where the Tea Party types are going to vote against anything and leftist Democrats probably won’t want to be on record supporting this proposal. A filibuster in the Senate is possible, I guess, although that would be really effing malicious. (Or a personal hold, although I’m not sure if that would even be respected in this situation.)
If this passes, I’m guessing markets will gain a couple hundred points right away, and then (as real economists have noted) the US will see a sharp slowdown in growth and rise in unemployment as the cuts are implemented. Most likely the panel’s recommendations will be somehow circumvented in the spring, and then things will go back to the status quo until the next debt ceiling fight.
If this doesn’t pass then the debt ceiling doesn’t get raised in time and the US Treasury runs out of cash. From there, things would go really poorly. I’m not sure if it would be like TARP, where Congress votes for something really unpopular in the face of market panic - there might need to be more negotiations, and I’m really not sure what that would look like in the context of government shutdown.