What A Dream Deal In Washington Would Actually Look Like

This is what I'd like to see (and many other analysts and economists would too):

• Eliminate the "debt ceiling". It is superfluous. As former Fed Chairman Alan Greenspan and others have said, the "debt ceiling" is just arithmetic. We have approved expenditures. We have revenue. The shortfall is borrowed. If we don't get rid of the debt ceiling, increase the level through 2014.

• Pass a Continuing Resolution (CR) for fiscal 2014 that reduces the impact of the sequester. As Republican advisor Mark Zandi said last week:

As part of any budget deal, lawmakers should reverse the sequester. The second year of budget sequestration will likely have greater consequences than the first, affecting many government programs in ways that nearly all agree are not desirable. A sizable share of the sequestration cuts to date has involved one-off adjustments, but future cuts will have to come from lasting reductions in operational budgets.

• In the long run (not this decade), the US will be challenged by health care costs. This requires some adjustments to both spending and revenue. As Mark Zandi said last week:

It would of course also be desirable for lawmakers to address the nation's long-term fiscal challenges. ... Both cuts in government spending and increases in tax revenues will be necessary to reasonably solve these long-term fiscal problems.

As I noted last week, perhaps another super-committee with long term consequences if the committee fails (not more short term cuts like the sequester). The consequences should be distasteful to both parties - and both cut spending and raise revenue in the long term so there is some motivation for the committee to reach agreement.

• It is important to note that the deficit is declining, and declining rapidly. Over the next few years (the short run), the deficit will not be a problem (great news!), as long as the economy continues to grow (government shutdowns and threats to not "pay the bills" hurt the short run).

Final comment: It is sad, but predictable, that this shutdown and threat to not "pay-the-bills" is happening now. As Goldman Sachs chief economist Jan Hatzius wrote in April:

The federal budget deficit is shrinking rapidly. ... [T]here is still a great deal of room for the economic recovery to reduce the deficit for cyclical reasons. ... In our view, the most important implication from the reduction in the budget deficit for the near-term economic outlook is reduced pressure for further fiscal retrenchment.

In another year, the House will have lost the short term deficit as an argument (actually for those paying attention, the short term deficit is no longer a serious concern). However this doesn't mean we shouldn't pay attention to the long term issues, and maybe we could find some common ground on moving forward on those issues - without hurting the short term.