Early August’s agreement resolving the debt ceiling charade—which followed historical precedent nearly exactly—gave rise to yet another government invention: A congressional deficit-reduction “super committee.”
The Joint Select Committee on Deficit Reduction, a 12-member bipartisan group tasked with reducing the budget deficit by at least $1.5 trillion over the period of fiscal years 2012 to 2021, is due to report by November 23—the day before Congress leaves for its Thanksgiving recess. If they don’t meet this deadline? Automatic triggers are to kick in, driving across-the-board cuts. In the run up, debate’s been hot and heavy: Republicans mostly arguing for big spending cuts; Democrats mostly pushing for a so-called “balanced” approach including higher taxes. Democrats reject the former, Republicans the latter—meaning, we Americans are subject to another round of big budget bickering inside the Beltway.
But is this select group of elected officials more “super” than the Simpson-Bowles Commission, tasked early this year with a similar goal? That group, also known as the Gang of Six, proposed a number of recommendations which fell nearly entirely on deaf ears. But we’re told the Gang of Twelve’s recommendations won’t. (No breath-holding going on here.) Are they also more super than Congress itself, which is tasked with passing a budget each and every year? (Never mind in recent years, they’ve often missed the target.) Are we to believe it’s more super than decisions reached under 1986’s Gramm-Rudman Act on the same subject, with a similar self-concocted deadline? After all, “super” is right there in their committee name! So they’ll surely get the job done. Or maybe they won’t, but either way, we’re told it’s super important for the economy.
And 13 days before the deadline, the media fretting has begun. Many fear the panel won’t reach an agreement and the automatic cuts will be too drastic. Or that proposed measures themselves—if an agreement is reached—will be onerous.
Super antics aside, this committee seems unlikely to present game-changing ideas for good or ill. Yes, the agreement set a deadline of November 23 or an automatic axe supposedly falls on government spending. But—and repeat this daily—all political deadlines, excluding elections, are changeable. This deadline even lacks the debt ceiling’s (false) threat of debt default. There’s no (economically insignificant) government shutdown if a deal isn’t reached. And there’s no reason they can’t just extend it, change it or (dare we say) do away with it. As Arizona Senator John McCain recently put it, “If there’s failure on the part of the super committee, we will be among the first on the floor to nullify that [the automatic cuts] provision. Congress is not bound by this.” And he isn’t the only one discussing this.
But for a moment, let’s consider what would happen if Congress decided to be bound by the automatic cuts. What happens? Automatic cuts targeting a total reduction of $1.2 trillion over 10 years. Seems drastic, huh? Well, not so much. You see, “over 10 years” is the key part of that sentence. Virtually every budget or deficit-reducing congressional measure has a long-ranging implementation, which the politicians we vote into office know is going to exceed their current term. Now recall, the (far-from-super) Congress passes a budget (in theory) every year. And if Mr. McCain and Co. are correct and the current Congress isn’t bound by something they passed just three months ago, why would a future Congress be bound by the super committee, automatic spending cuts or any other decision? (Hint: They’re not.)
Equally importantly, inherent in most Congressional budget plans are cuts typically targeting projected spending based on projected costs of projected program functioning, all hinging on economic projections. A government program receiving an actual year-over-year reduction in its budget is a rare occurrence indeed. What happens more often is projected increases in budgeting are cut, implying a slower growth rate.
And that’s what’s embedded in the automatic triggers. Consider: On-budget defense spending (Iraq and Afghanistan aren’t on-budget) is slated at $537 billion in 2011. The first year of automatic triggers (fiscal 2013) caps defense spending at $546 billion. Which is more. Non-defense spending is the same. (See Section 251A of the debt ceiling deal here for the full list of trigger guidelines.) In this way, arguments that spending shouldn’t be cut because macroeconomic stimulus is needed are, well, moot. Cuts to projected increases occurring over 10 years are very unlikely to present a material economic problem.
I guess there’s the outside chance my skepticism over these “cuts” is proven wrong, and the super committee actually does agree to a plan involving actual spending reduction. And then, both the House and Senate approve this plan. And so does the President! Fine enough. Economically, the idea of scaling back all-too-frequently misallocated government expenditures isn’t a terrible one. There is a ton of fat in the government’s budget ripe for trimming. But the argument to cut government spending shouldn’t hinge on a debt-doom view of the world (as we’ve often written, if the US were dangerously overindebted, 10-year Treasurys likely wouldn’t yield about 2% as of this writing). Rather, the benefit of cutting spending is it could foster greater private-sector growth and competition with reduced external influence.
The likelihood the super committee produces anything fundamentally meaningful to markets or the economy—positive or negative—is quite small indeed. Now, could fear or hot rhetoric stoke short-term volatility? Sure—but that’s frankly true of anything (think Y2K, 1999), isn’t a foregone conclusion, can’t be forecast and shouldn’t be responded to by investors, in my view.
I’m not at all convinced anything emanating from Congress is super, unless you’re referring to politicians’ superhuman ability to produce hot air. And so far, that’s about all the success this committee has had. In that way, the super committee seems to be just another government misnomer, akin to the Senate Intelligence Committee.