Reports from the Economic Front

by Martin Hart-Landsberg

The Super-Committee: Root For Failure

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The Congressional deficit commission (also known as the super-committee), which is charged which recommending ways to reduce the national deficit by some $1.2 trillion over the next ten years, appears headed for failure.  And that is a good thing.  

The commission has until Monday, November 21, to submit a plan to the Congressional Budget Office for evaluation.  The plan must then go to the full Congress for an up-or-down vote no later than Wednesday November 23.  Anything can happen but the reports suggest that the six Republicans and six Democrats remain deeply divided, with the Republicans demanding that deficit reduction be achieved only through spending cuts and the Democrats demanding that tax increases be a part of the plan.

The History of the Deficit Commission

The deficit commission was established in August as part of the deal that secured an increase in the national debt ceiling, giving the Treasury authority to borrow enough money to cover approved expenditures through fiscal 2012.  Republicans and Democrats both agreed that projected future deficits had to be reduced but then, as now, the Republicans wanted to achieve that goal only through spending cuts while the Democrats wanted some tax increases in addition to the spending cuts.  

In order to win Republican support for an increase in the debt ceiling and avert a federal default a compromise was struck.  The two parties agreed to reduce spending by some $1 trillion, with 35% of the spending reduction coming from security related budgets (military and homeland security) and the rest coming from non-security discretionary budgets (infrastructure, clean energy, research, education, as well as programs that help low income people with child care, housing, community service, etc.).  The compromise also included the creation of the deficit commission, which was given the charge of recommending ways to reduce future deficits by an additional $1.2-1.5 trillion.  

What made the commission especially dangerous is that both Republicans and Democrats agreed that the committee would be free to consider a full range of options, including permanent changes to Social Security, Medicare and Medicaid programs.  In fact, Democrats made clear that they would support cuts in those programs if Republicans would only accept some tax increases on the wealthy and corporations. 

If the commission failed to agree on a plan, which required only majority support, Congress would have until January 15 to approve its own plan.  And if they failed, automatic spending cuts would be triggered, with approximately half of the reduction coming from security budgets and the other half from non-security discretionary budgets.  Significantly, the automatic budget cuts would not take effect until fiscal 2013, meaning not until after the next presidential election.

A False Crisis

The premise underlying the creation of the super-committee is that federal spending is out of control, especially on social programs, and that if real deficit reduction is not achieved we face economic chaos.  More recently some supporters of deficit reduction point to European government debt problems as an omen of what awaits us if we don’t act quickly and decisively. 

The fact of the matter is that social spending is not driving our deficit and debt problems.  The primary drivers are our military spending, including our wars in Iraq and Afghanistan; the Bush-era tax cuts; and our economic crisis.  If we truly want to stabilize our national finances we need to halt our wars, raise taxes on the wealthy and corporations, and engage in serious public spending to generate equitable and sustainable economic growth.

 Moreover, there is no reason to believe that we are facing a debt crisis.  The ratio of public debt to GDP is predicted to remain comfortably below the 100% level for at least a decade, the level that some experts claim marks the danger zone.  The U.S. government has no trouble borrowing money to fund its operations.  Actually, investors throughout the world want U.S. Treasures because of their safety.  Moreover, as Paul Krugman points out, even high debt ratios are not automatically dangerous if countries are able to borrow in their own currency, which is the situation for the U.S. government:  

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

Why “Failure” Is A Good Thing

Our biggest danger is not runaway debt but austerity.  And that brings us back to the deficit commission.   

Nothing good can possibly come out of the work of the deficit commission.  If an agreement is reached it will include proposals to reduce the deficit through significant spending cuts and as a consequence we can expect two bad outcomes.  First, the cuts will weaken our economic recovery, and a weaker economic recovery will worsen the budget deficit, triggering demands for further spending reductions.  Second, the cuts will include damaging changes to our social programs, including Social Security and Medicare, which will be hard to undue.  And there is no need to weaken either program.  In fact, there are many reasons for increasing Social Security payments and expanding Medicare.

If the deficit commission fails to agree on a plan, we can be reasonably sure that Congress will do no better, and the automatic cuts will be triggered.  But, these automatic cuts will have only limited effect on our social programs.  For example, Social Security cannot be touched.  Most importantly they will not take place for over a year, giving us time to demand new policies. 

In short, we must resist the media’s attempt to panic us into rooting for a bad deal.  We don’t face any budgetary crisis.  The collapse of the deficit commission is our best possible outcome given the current political environment.  The occupy movement is beginning to influence our national dialogue and that means growing power to change our choices. 

Our demands must remain focused on economic transformation.  We need more and better directed government spending, spending that doesn’t just support our existing economic structure but is designed to reshape existing patterns of employment, production, and investment.  And that spending needs to be financed by slashing our military budget, changing our foreign policy, and boosting taxes on the wealthy and corporations.  Someday maybe we can have a super-committee that will be charged with recommending the best way to accomplish those goals. 

Written by marty

November 19th, 2011 at 5:19 pm

One Response to 'The Super-Committee: Root For Failure'

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  1. Marty, can you explain a bit about debt to GDP ratios in more detail? Specifically, can you discuss the role of private debt as it relates to the financial crisis? When you say “there is no reason to believe we are facing a debt crisis”, are you referring only to public debt?

    Dylan

    22 Nov 11 at 6:24 pm

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