Layman’s Terms: What does The Debt Supercommittee Failure Mean?

What is the Supercommittee?
The Supercommittee was created by Congress to try to find a way to cut $1.2 trillion from the federal budget over the next 10 years. Congress could not agree on a way to do this, so they appointed 12 of their members – 6 Democrat and 6 Republican – to try to come up with such a way, and if seven of them agreed on a plan, that plan would go straight to the House and the Senate to be voted on. However, these 12 members could not agree on a plan any more than the rest of Congress could earlier.

What was the Supercommittee’s deadline?
The official deadline for coming up with a plan was Wednesday, November 23, but the Congressional Budget Office needed 48 hours to analyze the plan and verify that it would produce $1.2 trillion in savings, so the failure of the committee to come up with a plan by Monday night means that they have failed completely.

Was it the Republican’s fault or the Democrat’s fault?
Take your pick. The Democrat narrative is that they were trying to be reasonable and make concessions but the Republicans were being completely unreasonable about tax cuts. The Republican narrative is that they were trying to be reasonable and make concessions but the Democrats were being completely unreasonable about tax hikes.

What happens since the Supercommittee failed to produce a plan?
Congress agreed to “automatic cuts” of $1.2 trillion if the Supercommittee failed, and they spread out these cuts among programs that Republicans and Democrats both like. Now when Congress cuts spending, that also cuts the future interest that they will have to spend, so they only have to cut $984 billion to achieve $1.2 trillion in deficit cuts: “They are supposed to start in 2013 and be spread evenly over the next nine years, divided equally between defense and domestic programs. That works out to around $55 billion annually each from defense and domestic programs.”

How do these automatic cuts affect the defense/military/Pentagon budget?
If the government doesn’t come up with a way around these cuts, the Department of Defense budget¬†(sometimes referred to as the military budget or the Pentagon budget) will be cut by 10% in 2013. However, the budget is already projected to increase every single year, and cutting $55 billion from each year does nothing to stop the overall increase. Senator Rand Paul notes that “if we do nothing, military spending goes up 23 percent over 10 years. If we sequester the money, it will still go up 16 percent.” Either way the United States will continue to have military expenditures that are almost as large as the rest of the world combined.

How do these automatic cuts affect domestic programs?
That remains to be seen. “The law exempts Social Security, Medicaid and many veterans’ benefits and low-income programs…¬†Still, that leaves education, agriculture and the environment programs exposed to cuts of around 8 percent in 2013.” (source) Just as with the defense “cuts,” however, these are not true cuts but merely plans to make spending go up slower. If government spending is like driving a car, and we are speeding down the highway at 80mph with our foot on the gas, and it’s projected that we will be going 90mph pretty soon, these “cuts” are like saying that we will only go up to 88mph. But we will still be speeding and we will still be speeding more than we were before. Senator Jim DeMint notes that for all the talk of austerity and trimming the federal budget this year, “federal spending has gone up 5 percent in the first nine months of this year alone.”

Will these cuts (a.k.a. “reductions in the rate of growth”) actually happen?
It’s hard to say. These reductions do not even begin until the year 2013, and Republicans are already looking for ways around the defense cuts, although for now Obama says he will veto any attempt. Even if the existing government doesn’t agree to change the rules by 2013, the new government might, depending on who is President and what kinds of people are in the new Congress (The election is November 2012, and the winners get to work in early 2013.)

Bonus: Why do we need to worry about the deficit when interest rates are so low?
This is a common argument by proponents of Keynesian economics who believe that the government needs to spend more money right now to get the economy going. It is true that interest rates are very low right now, which means that investors all over the world want to loan money to the United States government without getting very much interest on it because right now they trust the United States government better than other places they could be loaning their money (like some European countries). Columnists like Ezra Klein are saying, “We can borrow at a bargain, buy at a bargain and ease the unemployment crisis in the hardest-hit sector of our economy, all while making desperately needed investments in our future competitiveness and quality of life..”

This seems like a reasonable view, but I agree with columnists like Megan McCardle, who says that “by the time your interest rates rise, it is already too late to do anything easy.” James Hamilton notes (hat tip MR) that “A year ago, the Italian government was able to issue 10-year bonds with an interest cost below 3.8%… ‘Yes, yields are low– until they’re not.’ Historically, the changes can come pretty quickly, as the Italians discovered last week.” Recently investors have decided that they think Italy is in bad enough shape that there’s a bigger chance it won’t be able to pay them back, so they don’t want to loan money to its government unless it offers much higher interest rates, and the country is now in a crisis. Keynesians like Paul Krugman used to argue that Italy was proof that countries could handle high debts without going under. That proof now seems very much in doubt. Investors are confident right now that the United States will pay back what they loan us, but that doesn’t mean we should just borrow lots of more money because we have no idea when they will lose that confidence, and interest rates can go up very fast. I believe that the sooner we start slowing this car down, the safer we are as the future unfolds.

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