Serial Brinkmanship

Seems everyone was applauding, even the American financial markets. Positive Congressional smoke signals emerged late yesterday afternoon, as Democratic Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell took to the Senate floor to announce the result of four days of talks. Equity and bond markets, anticipating an agreement to re-open the federal government and once again raise the debt limit - for the 46th time just since the Carter presidency in the 1970's, from $0.7 trillion then to the current ceiling of $16.7 trillion - had been rallying for days. They jumped again yesterday on the news of an agreement.

But yesterday's euphoria seems to have evaporated this morning, as it has become clear that the bi-partisan resolution, signed into law by the President, is no solution. It merely re-sets the ticking clock, and not for very long, pushing forward budget decisions and borrowing limits to, respectively, January and early February next year.

Long-term reforms to tax policy and entitlement spending (Medicare, Medicaid and Social Security) are what America needs, implemented within a multi-year framework in which annual federal budgets move from deficit to surplus, and the stock of outstanding public debt declines, at least as a proportion of GDP. Through its impact on confidence, such a fiscal "Grand Bargain" at this point would revitalize growth and spur employment to an extent no amount of further monetary easing could possibly replicate. The Federal Reserve's incoming chairman, Janet Yellen, knows this, as do political leaders on both sides of the spectrum. But the antipathy between Republicans and Democrats, and within the Republican party itself, makes such a fundamental deal difficult to fathom. Instead, judging especially by the experience of the past two years, we are likely to get more blunt, inappropriate fiscal measures (think "sequester")  that damage growth in the short-term while ignoring structural change.

As part of yesterday's agreement, politicians have also agreed to come together and write a budget plan for the next ten years by December 13th. (Here's a suggestion: dust off the latest Simpson-Bowles plan, and implement it.) The effort began in earnest this morning, with House Budget Committee Chairman Paul Ryan meeting over breakfast with his Senate counterparts, in a process, known as a budget conference, that aims to reconcile separate budget documents passed earlier this year by the House and Senate. These documents are hugely different from one another.

We're all holding our breath.