Debt deal didn't solve fiscal woes

After months of wrangling and weeks of brinksmanship, the U.S. Congress passed a bill raising the debt ceiling and President Barak Obama signed it into law.

The compromise calls for an immediate increase in the legal limit on federal borrowing by $2.4 trillion and imposes reductions in federal spending by the same amount over the next 10 years.

It will be interesting to see how Congress interprets the word "reduction." For most of us, a reduction is an absolute drop. Congress, however, reduces spending by comparing the new forecast level of spending with the amount that was forecast before the agreement was reached, the so-called "baseline."

There is no legal reason for using this baseline as opposed to some other measure. Some proponents of spending reform prefer a "zero baseline," where any change in policy is compared to a case where all future spending is assumed to remain at this year's levels.

This latter baseline is a more accurate measure of how spending will actually change over time, but the former is a better reflection of the impact of a piece of legislation.

If this was the only difference, baselines would not matter all that much. But when Congress actually begins to implement the mandated spending cuts, the definition used will become very important.

For example, if spending were forecast to rise by 10 percent per year over the next 10 years, and we slowed that growth to 5 percent, then (ignoring inflation) by the first definition we would have achieved a savings of just more than 21 percent, but we would still have increased spending almost 26 percent from a zero baseline.

Credit agencies and financial markets are unimpressed by the debt-limit agreement. It is a good start; probably preferable to having the U.S. Treasury default on its debt payments. It may even be the best possible agreement one could hope for with a divided government. But it is only a start.

One of the more pithy, but accurate, descriptions of the deal came from Sen. Rand Paul (R-Ky.), who said, "The current deal to raise the debt ceiling doesn't stop us from going over the fiscal cliff. At best, it slows us from going over it at 80 miles per hour to going over it at 60 miles per hour."