Super Committee To The Rescue?
By Scott J. Brown
November 14, 2011
Faster than a speeding tortoise, more powerful than suntan lotion, unable to leap small objects in a single bound – the Joint Select Committee on Deficit Reduction (aka “the super committee”) is stumbling toward its November 23 deadline.
The super committee, composed of six Democrats and six Republicans is charged with coming up with a package of recommendations by November 23 to achieve $1.5 trillion in deficit reduction over ten years. Congress will then have a simple up or down vote on that package (no amendments, no House blocks, and no Senate filibusters) by December 23. If the committee fails to agree on a package or if Congress does not approve it, $1.2 trillion in spending cuts over ten years will be triggered. These cuts would start in 2013, after next year’s election, and would include reductions in defense and other discretionary spending (Social Security and Medicare would be untouched, for the most part). The Budget Control Act of 2011 also includes another $500 billion increase in the debt ceiling whether or not the super committee’s recommendations are passed (subject to a congressional resolution of disapproval if that fails). The increase in the debt ceiling would then allow the government to borrow until (you guessed it) after the election.
How’s it going? Not good. The nonpartisan Congressional Budget Office has to score the super committee’s recommendations and return its analysis to the committee by November 21, which would allow the committee two days to make changes before its final recommendations. The CBO was supposed to receive the bulk of the recommendations by late October or early November. Things are a little behind schedule.
The committee seemed doomed to fail from its inception. Members of one party have signed pledges to never raise taxes and most believe that includes any reduction in tax loopholes. The other party is set on keeping entitlement programs intact. That leaves discretionary spending, including defense, as the only feasible areas to cut. As a general rule, Republicans like defense spending, and some have signaled a willingness to eliminate about $300 billion in tax breaks (over 10 years) to reduce cuts in defense spending. However, without an increase in tax revenues, tax reform, and some entitlement reforms, serious deficit reduction is just not going to happen. The two sides remain far apart. Moreover, there’s not much incentive to compromise. By doing nothing, each party can achieve its primary objective (for the Republicans, there’s no tax hikes, and for the Democrats, there’s no major cuts in entitlements.)
As it stands now, the Bush tax cuts are set to expire at the end of 2012. The CBO has estimated that extending those tax cuts will add about $3.6 trillion to the 10-year budget deficit. That’s a lot. An expiration of the Bush tax cuts would slow the economy, but could be phased in over some period of time to limit the damage. However, there’s a good chance that they will be extended again as some Democrats are seen as willing to go along. Tax reform is certainly needed, and if you started from scratch, you could design a much more efficient system. However, getting there from here is extremely difficult, as there will be winners and losers under a new system and current recipients of tax breaks aren’t going to want to give them up.
The troubles in Europe have added to confusion about the long-term deficit outlook here. Large budget deficits and generous social programs were not the catalyst for Europe’s troubles. For example, Spain and Ireland had budget surpluses heading into the current crisis. Germany and Sweden have generous social systems and their economies have done well. Granted, large deficits, as in the U.S., become ever larger in economic downturns – but that doesn’t mean that deficits are the root cause of the trouble. The problem in Europe has been capital flows, or rather, the sudden stop and reversal of those flows. On entry into the euro system, these countries enjoyed the benefits of lower interest rates. However, as with the Asian financial crisis of 1997, troubles are set up when a country borrows too much in another currency. Italy and Greece borrowed in euros, a currency under which they have no control. If Ireland, Greece, Spain, Portugal, and Italy had their own currencies, they could simply devalue, reducing real wages and generating a way out of their troubles. Wedded to the euro, these countries must undertake contractionary fiscal policies (austerity measures) which further weaken their economies, adding to financial strains in a self-reinforcing spiral. Moreover, there’s no mechanism to defend against a run on any particular country. The European Central Bank, in contrast to the U.S. Federal Reserve is not the lender of last resort. Due to its larger size, Italy is a much more serious concern for the eurozone and for the global financial system. The ECB needs to provide a more significant backstop for Italy – absent such support, the country’s outlook is worrisome.
This doesn’t mean that the U.S. doesn’t have a problem with its long-term budget outlook. It does. We are clearly on an unsustainable trajectory. However, it’s only a “crisis” because our politicians have made it so. The early August showdown over the debt ceiling was unnecessary. There’s plenty of time to reduce the deficit and that will happen over time.
Some may be concerned about a possible further downgrade of U.S. government debt. It’s important to note the Standard & Poor’s reduction in the debt rating on August 5 was largely a comment on the political environment, and was not based on concerns that the U.S. would be unable to repay its debt.
(c) Raymond James