The Super Committee’s failure— does it matter?

H/T: Off the Charts

The super committee has failed to reach a debt-reduction deal, pretty much as expected. Given the proven inability of Republicans and Democrats to agree on tax hikes or entitlement cuts, a super committee success would have been remarkable.

So, where do we go from here? 

Part of the deal to resolve the debt-ceiling crisis last summer was the creation of a “super committee” charged with identifying ways to reduce the deficit by $1.2 trillion over ten years. In the previous year, at least three bipartisan efforts to reduce the debt (by Simpson-Bowles, Obama and Boehner, and the “gang of six”) were unable to sell their proposals to both sides.

Anticipating, then, the likelihood of another unsuccessful attempt, Congress stipulated that if the super committee didn’t forge a deal, the $1.2 trillion savings would be achieved in spite of its failure. Cuts in discretionary spending would kick in automatically.

Discretionary spending—defense and social programs—is roughly 35 percent of the entire budget. (The non-discretionary portion consists of Medicare, Medicaid and Social Security.) Half the cuts would come from defense and the other $600 billion from non-defense spending. That’s where we are now.

Although the mandatory cutbacks won’t take effect until 2013, Republicans are already discussing how to restore some of the funds cut from the Pentagon. President Obama, however, warned that he will veto any attempt to undo the mandated reductions.

“The only way these spending cuts will not take place is if Congress gets back to work to reduce the deficit by at least $1.2 trillion,” he said. “They’ve still got a year to figure it out.”

The more immediate concern is the matter of the on-going small stimulus in the form of temporary payroll tax reduction and the extension of unemployment benefits. If these are allowed to expire as scheduled on December 31, the effect will be devastating on the long-term unemployed. Moreover, economists predict that the money taken out of circulation will slow the growth of an already sluggish economy by an estimated 1 to 2 percent.

Another looming problem is Medicare payments to doctors, which are scheduled to be cut by 27 percent beginning in January. Congress has postponed these cuts in the past, but now that the deficit is an overriding concern, it’s unlikely these cuts in Medicare spending will be waived. The cuts are already in the budget, so reinstating the payments will mean a $300 billion increase over projected spending.

The Bush tax cuts are also set to expire on December 31 unless Congress intervenes. A return to a more progressive tax code that includes higher rates for the wealthiest Americans was the main sticking point in the super committee’s deliberations. Democrats would go along with Republicans in extending the Bush tax cuts, but only for incomes under $250,000 (i.e., the middle class). They would let the cuts for incomes over $250,000 expire, which would put $800 billion into IRS coffers annually. According to the Congressional Budget Office, permanently extending the tax cuts for 98 percent of Americans would count as a $3 trillion tax cut over 10 years. Republicans maintain that the expiration of tax cuts for the wealthiest 2 percent would be an $800 billion tax hike, “the largest in history,” according to spokesman for House Speaker Michael Steel.

Republicans oppose any deal that doesn’t include making all the tax cuts permanent. But holding tax cuts for the middle class hostage to tax cuts for the wealthy may be a difficult position for the Republicans to explain to voters, especially in an election year.

At one point in the committee’s negotiations, Sen. Pat Toomey (R-VA) proposed closing tax loopholes to gain $300 billion in revenue. This was the first time a Republican offer included increased revenue from taxes.

Spirits rose.

And quickly fell. The Democrats rejected the proposal because it would have made all the Bush tax cuts permanent, adding $3.8 trillion to the deficit.

As things stand now, the Democrats appear to have gained the advantage. Under the trigger agreement, taxes will rise for the super-rich, but Medicare, Medicaid and Social Security are exempt from any cuts.

As for the long term, it’s impossible to predict what a future Congress will do. Given the polarization of the two parties and the intransigence of Congress, it’s a pretty safe bet that no deal will be struck this year. The Republican primaries will drive the party further to the right, making it even more difficult for the two sides to agree. The legislators have all of 2012 to hammer out an agreement, but in an election year with the presidency, a third of the Senate and all of the House in play, the focus on the election will leave little energy for budget negotiations.

An interesting outcome of the super committee’s inability to reach a deal is that if Congress does nothing, the reductions in spending that are now on the books—the expiration of the Bush tax cuts and other temporary tax reductions ($4.8 trillion), the decreased Medicare payments to doctors ($300 billion), the automatic cuts that follow the super committee’s debacle ($1.2 trillion), together with the resulting savings on servicing the national debt ($900 billion)—will shrink the deficit by $7.1 trillion, far more than would have been achieved with a compromise.

On the other hand, raising taxes across the board and cutting spending indiscriminately will slow growth and further depress the economy.

The assumption that Congress will do nothing about any of this is, of course, chimerical.

A positive result of the super committee’s deliberations is that Democrats and Republicans were forced to work together, giving them an opportunity to become individually acquainted as real people, not faceless opponents. “Of those that I worked with, I have greater respect for them than before this process started,” the Republican co-chair said. Mr. Hensarling continued, “Although we butted heads and we are all bitterly disappointed, these were good folks who were working hard. Prior to this thing I could not pick [Democratic co-chair] Patty Murray in a lineup, but she was very professional and acted with honor and integrity.”

It is admittedly exceedingly difficult, if not impossible, to make painless cuts anywhere in the budget. Secretary of Defense Leon Panetta lobbied the super committee daily not to allow the $600 billion cuts to the defense budget. Democrats tried to protect the programs that support the weakest and neediest Americans. Non-defense discretionary spending includes spending on infrastructure such as roads and bridges, veterans’ benefits, medical research, food safety, clean air and water, air traffic control, to name just a few. “Discretionary spending let the Defense Department build the Internet. It let the National Institutes of Health finance life-saving research. It has helped make possible the semiconductor, the broadband network, the highway system and airports,” observed David Leonhardt in The New York Times.

If the cuts are applied across the board, all Americans would suffer the adverse effects. The Third Way has calculated  the probable results of staff cutbacks in government agencies: there would be, for example, an increase in food-borne illnesses, more flight delays and cancellations, fewer arrests and convictions. The nation’s future competitiveness would be negatively impacted by severe reductions in scientific and medical research and cutbacks in education. Many of the cuts would be counterproductive: it’s much cheaper to repair an aging bridge, for example, than to replace it later.

Leonhardt distinguishes between the real and the imagined deficit:

The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70 — and to pay for it all, the lowest tax rates in decades.

As Americans we have a Herculean task before us in deciding where and on whom to inflict the pain of harsh budgetary cutbacks. But the immediate goal must be to reverse the tide of joblessness. Until the unemployed go back to work, the economy cannot recover. People need to earn money to pump back into the economy through their purchases. The money saved by a diminished need for government assistance and the income tax paid by productive workers will go a long way towards bringing down the deficit.

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