By now, most have heard of the agreement between Congress and the White House over raising the debt ceiling. Senate Majority Leader Harry Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.) have backed the plan on the Senate floor. The US Senate is scheduled to begin debate today on the plan to start an expedited legislative process.
Sunday night, Speaker of the US House John Boehner (R.-Ohio) provided the House GOP caucus a Power Point presentation on the deal and stated that “there's nothing in this framework that violates our principles." As of this morning, I’ve not seen any comments from key House Tea Party members or the 87 freshman to support the plan. On the other side of the House aisle, Minority Leader Nancy Pelosi (D-Calif.) did not endorse the deal in a statement released after Obama's speech last night.
The details are not firmed up yet, but here is the fact sheet provided by the White House.
Mechanics of the Debt Deal
- Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.
- President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.
- Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.
- Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.
While I expect many of the Tea Party members in the US House will not support the deal, there should be enough moderate Republicans and Democrats to reach passage. This is not a done deal by any stretch and the markets will be following the vote in the House for a TARP-like event.
Put the political hyperbole and hubris aside for a moment and focus on the one market golden nugget inside the agreement: tax reform. This is the one area for optimism for changing the course of the country and for creating job growth. In tax reform, there are two issues that can drive economic and job growth.
First, a flatter, simpler code that reduces rates while giving up some exemptions (hopefully phased in over 5 years) is critical for US job creators. Firms 5 years and younger are the drivers of new job growth. These are the smaller firms that grow fast. They are also the ones paying the higher tax rates as they are normally not large enough or sophisticated enough to take advantage of all the tax breaks and exemptions that companies like GE can. This would level the playing field and reduce the cost of hiring new workers.
Second, the US needs to move from an extra-territorial tax structure to a territorial one. The US is one of the few countries in the world that attempts to tax the activity of its domestic based multi-nationals overseas. Cisco CEO John Chambers and Oracle President Safra Catz estimated that there is $1 trillion in US corporate profits sitting overseas that will never come back under current our current tax code. Worse, this money is likely to be used to build plants and develop business overseas because it’s cheaper to do so rather than bring the money back to the US.
Granted, the structure of the debt ceiling plan committee to reform the tax code may not lend itself to an agreement on these two issues. However with US unemployment likely to remain elevated (above 9.0%), the pressure to change course from Keynesian economic plans to practical tax reform plans will grow each month. Truly, any presidential candidate (including Obama) should be grabbing onto this issue and holding on for a ride to the White House in 2012.
Therefore while the main course of the debt ceiling debacle has looked, smelled and tasted bad, the dessert could be sweet.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.