Failure seems to be an option for the debt committee
As we draw nearer to November 23, the deadline for agreement by the congressional “debt supercommittee”, financial markets are bracing for another government-inspired crisis.
After the last budget fight between President Obama and the Congressional Republicans, the supercommittee was created to produce an agreement on budget cuts and taxes demanded by both parties.
The Joint Select Committee on Deficit Reduction, as it is more formally known, was created via the Budget Control Act of 2011 on August 2, 2011. The aim was to avoid sovereign default from hitting the debt ceiling and controlling the country’s runaway deficits.
The committee is charged with issuing a recommendation by November 23, 2011 for at least $1.5 trillion in additional deficit reduction steps to be undertaken over a ten?year period. As of today, agreement is still elusive.
Republicans, who until recently refused to consider tax increases on the wealthiest Americans – as demanded by Democrats – have finally, grudgingly agreed to some limited tax increases, mainly by closing loopholes.
In return, they are reportedly asking for the top tax rate to be brought down from 35% to 28% (so $300 billion in new taxes plus $3.7 trillion in tax cuts), a proposal quite understandably, laughed off by Democrats as benefiting the super-rich.
Democrats have also stood fast on limiting increases in entitlements, such as Social Security and Medicare. Increasingly however, it now seems that the perennially undisciplined Democrats will likely break into factionswhile the Republicans vote as a block. That may be the most likely option, with more cuts and fewer new taxes.
The only other option would be failure and that may be slightly more likely. But what does failure mean, really? The agreement says failure triggers $1 trillion in automatic cuts over the next 10 years.
Half of these cuts would be defense-related and the other discretionary, minus social security and Medicare.
However, the same folks who set the trigger would likely undo it, the smart money seems to be on that outcome.
If we fail to rein in deficits though, the markets will ultimately impose discipline on us and punish the U.S. with new credit downgrades, a hit to the stock market, and other economic consequences e.g., more costly borrowing.
We shall wait and see what happens over the next few days. I am less than optimistic.
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