international analysis and commentary

After the failure of the “Super Committee”: prospects for US finances


Members of the bipartisan Joint Committee on Deficit Reduction, or “Super Committee”, announced on November 21 that they had failed to reach an agreement on how to trim $1.2 trillion from future deficits over the next ten years. They were, therefore, throwing in the towel. Immediately, both Republicans and Democrats tried to pin the blame on each other.

Representative Jeb Hensarling, the Republican co-chair of the committee, wrote in the Wall Street Journal that the Democrats had been “unwilling to agree to anything less than $1 trillion in tax hikes—and unwilling to offer any structural reforms to put our health-care entitlements on a permanently sustainable basis.”

In a USA Today op-ed, Democratic Senate Majority Leader Harry Reid complained, instead, that, “Republicans never found the courage to ignore Tea Party extremists and millionaire lobbyists such as Grover Norquist [the author of an anti-tax pledge that most Republicans in Congress have signed].”

Some commentators on the right blamed President Barack Obama for his refusal to get involved in the committee negotiations. Writing in the Washington Post, Michael Gerson said that, “budget deals get done because presidents prod, plead, cajole, demand and threaten […] The Super Committee failed primarily because President Obama gave a shrug.”

But the President, who intentionally chose to remain on the sidelines after being deeply involved in the debt ceiling talks earlier this summer, wanted none of that. In response, he has recently begun stepping up his rhetoric against the GOP in anticipation of the upcoming election season. “There are still too many Republicans in Congress who have refused to listen to the voices of reason and compromise that are coming from outside of Washington,” he said during a press conference.  “They continue to insist on protecting $100 billion worth of tax cuts for the wealthiest 2 percent of Americans at any cost.”

Irrespective of where the responsibility for the Super Committee’s failure may lie, widespread Republican opposition to raising taxes on anybody, including the wealthiest Americans, made the panel’s effort to reduce future deficits doomed from the start. Back in September, Republican House Speaker John Boehner had already said that, “tax increases, I think, are off the table.”

Now that this bipartisan, congressional attempt to find a compromise is behind us, it begs the question of what lies ahead for the United States’ finances. Truth be told, even in the best-case scenario, whatever recommendations the Super Committee might have come up with would have had to be approved by Congress and, in any case, would not have gone into effect until 2013. 

This means that there is no immediate economic consequence to the negotiations’ collapse.

But the twelve-member panel’s inability to agree on anything raises questions over Washington’s readiness to tackle the next big challenge.

By the end of the year, both the payroll tax cut (which temporarily reduces the tax rate directly withdrawn from workers’ paychecks and is calculated to have saved the average American household about $1,000 in taxes this year) and the expansion of the unemployment insurance (which now covers the jobless for up to 99 weeks that they are out of work), are set to expire. Many economists believe that, if they were allowed to run out on schedule, this would have far greater and swifter consequences on the US economy than the failure of the Super Committee.  In August, a Goldman Sachs report ranked a non-extension of the payroll tax cut and of the benefits for the unemployed as two of their top three concerns for the economic future of the country, alongside Europe’s debt crisis (estimates on how this would actually impact GDP vary).

Speaking in New Hampshire, President Obama pledged to stop the payroll tax cut from expiring. “If we allow that to happen, if Congress refuses to act, then middle-class families are going to get hit with a tax increase at the worst possible time,” he said. “We can’t let that happen, not right now.” But he will need the votes of the GOP-controlled House to get an extension passed. Republicans appear to be, at least in theory, open to the idea, but only if related costs were offset by equivalent budget cuts elsewhere, and not by raising taxes.

The lack of an agreement by the deficit reduction committee also pushes to next year, and to what is gearing up to be a heated presidential campaign, the issues of the Bush-era tax cuts and of the so-called “sequester,” automatic spending cuts that are supposed to be triggered by the panel’s failure. These cuts amount to the equivalent of the Super Committee’s original target of $1.2 trillion, and will be split equally between defense and non-defense spending.

The GOP wants the tax cuts passed during the presidency of George W. Bush, expiring at the end of 2012, to be made permanent for everybody, at an estimated cost of $3.7 trillion over the next ten years. Democrats and President Obama want to renew only those that affect the middle class, while allowing the rest to run out (this would have a cost of around $3 trillion).

As for the “sequester,” Republicans fret over how it would harm the US armed forces, while Democrats are concerned, although less so, about the effects it would have on non-defense spending.

Some Republican members of Congress are already hard at work to undo the trigger. Senators John McCain and Lindsey Graham released a statement saying that, “as every military and civilian defense official has stated, these cuts represent a threat to the national security interests of the United States and cannot be allowed to occur.” President Obama promises to hold his ground. “I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending,” he said. “There will be no easy off ramps on this one.”

Because in the original negotiations over the Super Committee’s framework, Democrats had succeeded in taking Social Security, Medicare and Medicaid, off the table, some left-leaning commentators believe that, at the end of the day, no deal was a better outcome that some deal. “The automatic cuts will be painful, but they don’t touch entitlements,” wrote columnist Eugene Robinson in the Washington Post. “Instead, the Pentagon bears the brunt of the sword-of-Damocles cuts.” They think that the threat the “sequester” poses to defense spending could turn out to be a great bargaining chip in the Democrats’ hands, to get Republicans to finally agree to raising taxes.

At this point, given a highly divided Congress, much will be decided by the result of next year’s elections.

In any case, for those actually worried about the US deficit and debt, there could be a silver lining. James Horney of the Center on Budget and Policy Priorities did some calculations for the Washington Post and found that the so-called “do-nothing plan” – whereby Congress simply continues to fail to legislate and takes absolutely no action – would reduce future deficits by $7.1 trillion over the next decade, far more than any proposals currently debated would achieve.