Vice President Biden and congressional negotiators met again
Wednesday to try to reach a deal on the budget deficit and US debt.
As the economic recovery falters, how not to imperil it is a top
Americans be warned: The debate in Washington over the federal
budget and the US debt ceiling has major implications that go beyond
just the scale and shape of government. It could also affect the
prosperity of the wider economy, especially in terms of jobs and
income growth, for years to come.
A budget deal that works well could help put a fragile economic
recovery back on track, while also starting to steer the nation onto
firmer footing for long-term growth. Failure to make fiscal
progress, by contrast, could prolong current weakness and increase
the risk of a debt crisis.
Those are the stakes as talks led by Vice President Joe Biden
continue Wednesday. Republicans and Democrats have agreed to meet
more frequently amid signs that US job growth has slowed.
WATCH: CBO DIRECTOR: US BUDGET PROBLEM FUNDAMENTALLY DIFFERENT
THAN IN PAST
The two sides are also aware that stock and bond markets could
falter if no deal is on the horizon soon. The Treasury Department
has said that without an agreement to allow new borrowing, it will
run into trouble paying government bills starting around Aug. 2.
The difficulties in budget talks are partly about each side
maneuvering for political high ground.
Republicans say it's irresponsible to allow more Treasury
borrowing without enacting a deficit-reduction plan that includes
sharp cuts in federal spending. Democrats say path to long-term
fiscal health should include a mix of spending cuts and tax revenue,
including higher taxes paid by the rich.
But beyond those positions, the debate is also about thorny
Most prominent is this question: Will the private-sector engines
of job creation be helped or hurt if the federal government starts
reducing its role as a big spender? Economists have lined up on both
sides of this debate.
Critics of Republican spending-cut proposals say the move could
be damaging and is unnecessary, while supporters say it will succeed
at reviving investor and consumer confidence where wrongly named
"stimulus" programs have been failing.
Some economists warn against going to either extreme. "It's
definitely a delicate balancing act," says John Silvia, chief
economist at the banking firm Wells Fargo in Charlotte, N.C. "You
want to show [that] we really are going to get our fiscal house in
order," he says, while also being careful not to pull too much
activity out of the economy too quickly.
In his view, there's room for a middle-ground fix that will meet
both objectives: Some substantial spending cuts could begin in the
next budget year without damaging economic growth.
But the economic outlook has darkened in recent weeks, raising
the stakes in this debate. Among the sobering signs:
- The pace of US growth has been slower than expected during the
year's first half - near a 2 percent annual pace, adjusted for
inflation. That's not fast enough to bring down unemployment. In
May, the official unemployment rate ticked up to 9.1 percent.
- The global economy has also lost momentum, with emerging
nations like China and India struggling to tamp down inflation
pressures. In addition, Japan has slowed since the March earthquake
and tsunami, and Europe is struggling to contain concerns about
whether nations like Greece will be able to finance their public-
- The credit rating firm Moody's joined Standard & Poor's in
issuing a warning that the United States needs to get its fiscal act
together, or risk a downgrade of its public debt rating. A
downgrade, while not considered imminent, would push up the cost of
borrowing throughout the US economy.
An underlying problem is that economic recoveries following a
financial crisis tend to be slower than typical rebounds from