Debt-Ceiling Deal Comes With High Costs: The Ticker

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(Corrects the Republicans' stance on taxes in eighth paragraph.)

By Mark Whitehouse and Paula Dwyer

The world can feel some relief as U.S. lawmakers close in on a deal to prevent the government from reneging on its bills. It's too early for a hallelujah chorus, but as Monday morning dawned in Asia, optimism lifted the dollar against the yen and Swiss franc, and stock-index futures pointed up.

The dysfunction may be about to end, but the deal to lift the $14.3 trillion debt ceiling flirts with danger. It could create an unwelcome drag at a difficult time for the U.S. economy. While the spending details, and their timing, are not yet known, the up-front cuts, combined with about $250 billion in expiring unemployment benefits, the end of the temporary payroll-tax cut, and the winding down of the stimulus program will present major obstacles to the recovery.

Here's what is known so far about the emerging compromise: It would cut spending by about $1 trillion over 10 years. Then it calls on Congress to shave another $1.5 trillion from long-term debt by 2021. If that package of cuts doesn't pass Congress by year's end, punishing reductions kick in government-wide, including in Medicare and defense.

A bipartisan congressional super-committee would have to come up with the second round of savings by late November. Negotiators were still working Sunday evening on the so-called trigger mechanism meant to ensure the deficit-reduction package materializes.

Both sides appear to have made concessions in the final hours, with Republicans dropping their insistence on a balanced budget amendment to the Constitution passing both houses of Congress. (They may get a balanced-budget vote, but raising the debt cap won't depend on its passage.)

And it looks like the White House agreed to forgo an automatic tax increase as one of the consequences of not enacting the debt-reduction law by Christmas.

The economy, however, can ill afford sharp spending cuts this year and next. The latest data from the U.S. Commerce Department show that the recovery effectively stalled in the first quarter of this year, and has gained only meager momentum since.

The deal represents a leap of faith that the confidence boost provided by a degree of fiscal rectitude will somehow outweigh the effect of the government cutbacks. It's a bet that hasn't yet worked for Britain, which embarked on its own austerity program more than a year ago and has seen little growth since. It's also unclear how much confidence this deal will inspire, given how far it remains from closing the government's structural budget deficit, which currently amounts to about $800 billion a year.

Republicans like to say that President Barack Obama owns the U.S. economy -- meaning that no matter how hard he tries to shift the blame to his predecessor, the economy's performance is the result of his decisions and policies. But if this compromise package passes, it will be far more a reflection of Republican ideals -- a firm stand against raising taxes even for the wealthiest Americans; an insistence on spending cuts even in the face of a slowdown; and a refusal to accept a larger package even if it means foregoing much-needed tax and entitlement reforms.

The result is that this accord makes the economy as much the Republicans' as Obama's. If unemployment worsens, or a double-dip recession occurs, that could cost Republicans dearly in November 2012.

There are other costs, including to the U.S.'s standing in the world. As Washington turned itself into a theatre of the absurd, the rest of the world looked on in dismay at the lone superpower's lack of maturity. China began to look like an island of stability.

Still, it appears that calamity has for now been averted, and for that Congress deserves some credit. It's a low bar for success.

(Read more from The Ticker.)

-0- Aug/01/2011 14:37 GMT