Ezra Klein: The ‘supercommittee’ misses its big chance
By Ezra Klein,
The “supercommittee,” it turned out, wasn’t so super.
By the end, it hardly mattered whether the Joint Select Committee on Deficit Reduction came to a deal. The 12 members had long since decided against “going big.” They were just trying to eke out $1.2 trillion in savings so they could avoid the $1.2 trillion in deep, automatic cuts to defense and domestic spending that would come if they failed.
In terms of deficit reduction, it was really six of one, a half-dozen of the other. There’s little reason ordinary people should have vastly preferred the deals the supercommittee was considering to the spending cuts that will come if the panel fails. A bad deal, after all, isn’t much better than no deal at all. It might even be worse.
That’s certainly how the rating agencies feel. As a recent Goldman Sachs analysis concluded, Moody’s and Standard & Poor’s “have indicated that while a stalemate in the super committee would be negative, they expect $1.2 trillion in planned deficit reduction to materialize through automatic cuts if not through the super committee, so their fiscal outlook should remain unchanged.”
Nor is there reason to think the markets will be particularly rattled. The dysfunction of American government has been priced in at least since the summer’s debt-ceiling debacle. The point of the supercommittee, in a sense, wasn’t so much to reduce the deficit as to get the debt ceiling raised. In that, at least, it succeeded.
But what the markets, the rating agencies and ordinary Americans should care about is Congress’s inability to make deals in general. Because over the next few months and years, there are deals that absolutely must be made.
Right now, every economic forecaster will tell you the same thing: These are dangerous times for the American economy. If Europe doesn’t get its act together — and right now it looks as if it probably won’t — it’s going to be difficult for us to avoid another recession.
The supercommittee was expected to help with that. The expectation was that whatever deal it produced would extend the payroll tax cut and unemployment benefits that were agreed upon in the 2010 tax agreement. Perhaps, if members reached a bigger deal, they would agree to infrastructure investment and further tax cuts. All of that would help the U.S. economy recover, or at least help us absorb any possible shocks from Europe.
And, according to some economists, so, too, would the simple sight of Congress coming to an agreement. It would show the markets that even if the European Union’s political system is completely broken, ours isn’t. It would also show when action is needed, U.S. policymakers can be counted on.
The supercommittee’s failure throws all of that into doubt. Whatever confidence boost might have come from an agreement is clearly dead. New stimulus is very unlikely. And perhaps most worrisome, the extension of the payroll tax cut and the unemployment benefits may well not happen. That could deal a big hit to growth next year and, alongside further trouble in Europe, toss us back into recession.
Similarly, most economists think we need somewhere in the neighborhood of $4 trillion in deficit reduction over the next decade or so. We don’t necessarily need it right this second; interest rates on Treasury debt are still at near-record lows, indicating that the market considers us a safe bet and isn’t overly concerned by our debt load.
Part of what’s keeping the markets off our back, however, is a series of down payments we have made in recent months: the automatic spending cuts that kick in if the supercommittee fails, for instance. But some Republicans, including Sen. John McCain (R-Ariz.), have indicated that they consider the automatic defense cuts too deep and intend to defuse the trigger.
If that happens, the ratings agencies could decide that, far from simply failing to make any deals, we’re backsliding. And that could lead to another round of downgrades and, eventually, a loss of market confidence in our ability to pay our debts more broadly.
And as hard as it has been to recover from the financial crisis, it would be much harder if interest rates on Treasury debt begin to soar.