The Independent Market Observer

12/11/13 – The Federal Budget Deal and 2014

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 11, 2013 10:06:30 AM

and tagged Commentary, Politics and the Economy

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I want to be excited about the new federal budget deal, I really do. I get it: it’s big news that we actually have an agreement—for two years even! We can look forward to an absence of catfights, reduced uncertainty, and less of all the good things that go with minimally responsible government.

And yet, I can’t help but feel depressed that such a minimal agreement warrants front-page news in both major national papers. What does this say about our governance? The other thing that worries me is the extensive caveats in those stories—how the deal may well not pass since the conservative Republican elements in the House are dead set against lifting the sequester spending cuts, while many of the more left-leaning Democrats are dead set against the spending limitations and letting extended unemployment benefits expire.

The fact is, even the best deal we can get is pretty modest in terms of what it actually does—and even that deal is by no means assured of passage. Nonetheless, it offers some very good takeaways that bode well for 2014. They say that when you’re in a hole, you should stop digging, and since this agreement does that, we should all cheer.

Under the existing law, discretionary federal spending would be cut by about 2 percent from 2013 to 2014; under the new agreement, spending would rise by about 2.6 percent. Although not that big of a swing, the deal would allow for more focused, less random cuts. On balance, this would probably be good for the economy—the federal government is more likely to be a net contributor to growth in 2014 than a detractor, as in 2013—and for the country, as the cuts are more thought through.

The real benefit, though, will be in the reduction of uncertainty. Presumably, since this is a two-year deal, we really will be able to set aside the Washington risk premium in the fixed income markets, at least for a while. Since this is a two-year deal, we will take fiscal policy off the table during the pending elections, and Congress will be able to thoughtfully construct the grand bargain that was unachievable this time.

All of this is quite possible. Note, though, that we still have a pending debt ceiling vote early next year. Note that Republican interest groups have declared against this deal, while the expiration of extended unemployment benefits is becoming a reason for Democrats to oppose it.

I will become (slightly) more excited about this deal if and when it actually passes Congress and is signed by the President. I think it will be, as it’s in no one’s political interest to vote it down—although I do expect a good deal of political theater before it is passed.

On a more extended timeline, this deal could start to reestablish the budget process and hopefully create some bonds of trust between the two parties, allowing them to begin dealing with the longer-term problems. It also suggests that the centers of both parties feel more confident about engaging their extremes – and that the influence of those extremes might have peaked. Other supporting evidence of this is the recent engagement of centrist, business-oriented groups in Republican primary politics; meanwhile, the Obamacare website debacle has encouraged the Democrats to take a more moderate stance as well.

On the whole, the potential moderation of politics is a very positive sign—and one that, at some point, will be worth getting even more excited about than the very modest fiscal and economic benefits of this agreement.

Just not yet.

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