Huzzah! Supercommittee's failure is good news
COMMENTARY Pop open the champagne -- the "supercommittee" blew it.
What's to celebrate? First, the congressional panel charged with reducing the federal deficit by $1.2 trillion over 10 years was likely to do more harm to the U.S. economy than good. That's because lawmakers were poised to chop spending on everything from education and environmental protection to law enforcement, child care and science research.
Trouble is, experts across the political spectrum have warned that large, near-term federal spending cuts would hurt the nation's already tepid growth. That would actually worsen the deficit by reducing federal tax revenue. As economist Paul Krugman recently wrote:
[A]ny deal reached now would almost surely end up worsening the economic slump. Slashing spending while the economy is depressed destroys jobs, and it's probably even counterproductive in terms of deficit reduction, since it leads to lower revenue both now and in the future. And current projections, like those of the Federal Reserve, suggest that the economy will remain depressed at least through 2014. Better to have no deal than a deal that imposes spending cuts in the next few years.
Second, the so-called Joint Select Committee on Deficit Reduction was always an unnecessary sideshow that distracted attention from this country's main economic challenge -- creating jobs. The deficit isn't what is weighing down lending, holding back hiring and otherwise sucking demand out of the economy. It's that people are poorer than they used to be and are understandably worried about the future.
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Nor, despite Monday's stock-market wobble, are financial markets particularly anxious about America's debt. If they were, global investors wouldn't be seeking refuge in the relative safety of U.S. Treasuries and in the greenback.
Also recall that the 12-member supercommittee was a bogus political fix to a fake problem. Congressional Democrats and Republicans only formed the panel because GOP lawmakers took the U.S. to the edge of default by blocking a routine effort to raise the government's borrowing limit. It was chiefly that political dysfunction -- not concerns about the country's fiscal health -- that led Standard & Poor's in August to downgrade U.S. debt.
No harm, no foul
Third, the potential fallout from the supercommittee's collapse is less severe than it may appear. Yes, stock markets tumbled Monday. But Jill Schlesinger argues that traders were focused on Europe, not the supercommittee. The impasse didn't take investors by surprise, so the damage should be limited. The partisan discord undermining the panel was visible from a mile off, and economic and financial pundits have been predicting gridlock for weeks.
Could the committee's failure spook some investors and further erode public confidence that the feds will do what is necessary to revive the economy? Sure. But confidence is already low. The latest Capitol Hill theatrics reveal nothing new, confirming only that Republicans are determined to oppose tax hikes no matter what the larger impact on the economy.
Fourth, political gridlock is better than smoothly executed -- but destructive -- public policy. A proposalby committee member Sen. Pat Toomey, R-Pa., was little more than a brazen attempt to cut taxes for the wealthiest Americans and for corporations under the guise of deficit-reduction. The plan would reduce tax rates well below Bush-era levels, funding that decrease largely with new revenue generated by closing tax loopholes. Here's what that would do, says economist Robert Greenstein of the Center on Budget and Policy Priorities, a Washington think-tank:
The result would have been that both the large potential savings from tax reform and the potential savings from allowing some or all of the Bush tax cuts to expire would have been taken off the table for the future rounds of deficit reduction the nation will need.
Think different
Fifth, the automatic defense and discretionary spending cuts that are supposed to take effect if the supercommittee fails in its mission don't kick in until 2013. That gives Congress plenty of time to ditch them. In fact, Republicans are already moving to block the Pentagon cuts. More liberal Democrats in Congress will also close ranks to protect Social Security, Medicaid and other social services (as they should).
As a result, concludes one prominent economic advisory firm, the supercommittee's failure could return lawmakers' attention where it belongs -- on devising ways to stimulate growth in the short-term while curbing the deficit once the economy is healthier.
On that front, fortunately, there are no shortage of worthy ideas, from imposing a tax on securities trading, to taxing pollution, to, yes, letting tax cuts lapse for the richest Americans. As Barry Ritholtz notes, allowing temporary income and estate tax cuts passed between 2001 and 2010 expire as scheduled next year would save more than $3 trillion over a decade.
That's a final reason to raise our glasses to the supercommittee for a job badly done. It's a chance for the public, and our political parties, to revisit a dubious and dangerous idea -- that the U.S. can cut its way back to growth. If that's what is learned from the panel's failure, super.