If you’re reading this, I suppose I don’t need to waste any time giving background on the so-called Supercommittee that was supposed to come up with $1.2 trillion in deficit reduction.
I’ve read lots of reactions about the failure, but my favorite so far comes from Nouriel Roubini’s blunt and entertaining Twitter feed:
“Super-Committee: Super-Failure, Super-Pathetic, Super-Gridlock, Super-GOP-Lunacy on Taxes, Super-Fiscal Drag in 2012 that ensures double dip”
There are obviously serious economic and political dimensions to today’s failure. Let me pick up on a few points:
- What happens to the deficit and debt now? Well, the failure has triggered cuts to begin in 2013 — barring some major Congressional agreements that now seem out of reach. Those include a hefty cut to the growth in defense spending and some cuts to Medicare that seem likely to be felt by someone.
- The Supercommittee’s failure puts a year-end spotlight on the 2011 payroll tax cut and on federal funding for extended unemployment benefits. It’s simply stunning to me that the Obama team hasn’t gotten more credit for that payroll tax cut, which is a key reason the nation’s economy has not slid back into recession. But Republicans don’t want to give the president any credit for anything, and Democrats don’t want to admit that tax cuts can in fact be stimulative. I find it unbelievable that Republicans will actually stand in the way of a renewal of that cut for another year, but they just might do that. If they do, it will be horrible for Republicans as we enter the election year. Extended unemployment benefits, on the other hand, are likely a political nonstarter, but reducing that support for laid-off workers will do serious damage to our already teetering demand.
- With the failure of the Supercommittee, we’re actually poised for $7 trillion in automatic deficit reduction over the next decade. The Bush tax cuts are set to expire at the end of 2012, and, unless Republicans show some willingness to compromise more substantively on raising additional tax revenue, Obama and Congressional Democrats will let ALL of those tax cuts expire. For the long-term health of the country, letting all those cuts expire might be the best thing, but a tax hike on the middle class will be devastating in early 2013, when unemployment will still be high and when growth will likely still be anemic.
- So the fiscal damage of the Supercommittee’s failure really isn’t so great. The damage to the economy, however, could turn out to be extreme. And the failure seems to confirm that the U.S. is incapable of the negotiation and compromise needed to prevent a prolonged weakening of the national economy and of our standing in the world.
That’s a pretty grim analysis, but that’s where we are. For a logical way out and more optimistic way forward, I’d suggest reading Ezra Klein’s column about going back and picking up the Bowles-Simpson plan.