Morgan Stanley-US Economics: Debt Deal Leaves Much to Be Desired

The debt ceiling deal is advertised as containing $2.4 trillion of deficit reduction over the nextdecade. This occurs in two phases: $900 billion in the first phase (about one-half from defense)and another $1.5 trillion beginning in 2013. The second phase of $1.5 trillion involves actionsrecommended by a new bipartisan committee that will be formed and a complicated triggermechanism if Congress doesn’t enact the committee’s recommendation. From a big picturestandpoint, the events of the past few months show how difficult it is to achieve meaningful deficitreduction if both taxes and entitlements are off the table. At certain points in time, it appearedthere was a decent chance of a grand compromise that would help remedy the unsustainablecourse of fiscal policy. But political considerations won out in the end and we are left with apackage that resolves the near-term uncertainty on default but does little to address the nation’slong-run fiscal imbalances.