I was on Mark Thompson’s show on Sirius XM radio on Friday, and I said at that time that there’s a better chance of Herman Cain knowing what he’s talking about on Libya than the Super Committee coming to a deal. And indeed, I will not be proven wrong. It’s clear that the Super Committee will go down to defeat as early as tomorrow, with an announcement that they could not reach agreement on a deficit reduction deal. In the end, there was no reason to reach a deal. There’s an election next year, and both sides want to use key elements to any deal in their pitch to voters; broadly speaking, Republicans want to be the party to protect your tax rates, and Democrats want to be the party to protect Medicare. Both those items were imperiled by a deal, so there could be no deal. The gentle sobbing of Erskine Bowles and Alice Rivlin and Alan Simpson and Pete Domenici will be heard across the land.
But the playing field now shifts to a host of issues. Notice how this traditional media article focuses on the consequences of Super Committee failure, as if we should all feel sorry for its demise.
The congressional committee tasked with reducing the federal deficit is poised to admit defeat as soon as Monday, and its unfinished business will set up a year-end battle over emergency jobless benefits and an expiring payroll tax holiday.
Those provisions are among a host of measures set to lapse at the end of December. During nearly three months of negotiations, the “supercommittee” had been weighing whether to extend at least some of them as part of a broader plan to shave a minimum of $1.2 trillion over the next decade.
Democrats and many economists consider particularly urgent the need to extend jobless benefits and the one-year payroll tax cut. With national unemployment stuck at 9 percent, and the ranks of the long-term unemployed at record levels, the government is providing up to 99 weeks of support to about 3.5 million people.
Meanwhile, the payroll tax cut, enacted last December, allows most American workers to keep an additional 2 percent of their earnings, a boon to tight household budgets as well as the economic recovery. Economists at J.P. Morgan Chase recently estimated that if Congress does not extend the two measures, economic growth next year could take a hit of as much as two percentage points — enough to revive fears of a recession.
There was never a guarantee that these measures would be extended in the Super Committee. All Lori Montgomery and Rosalind S. Helderman could muster is that the committee was “weighing” an extension. They were “weighing” the cut of Social Security benefits, the privatization of Medicare and an increase in taxes of up to $1 trillion, as long as you’re using that standard. None of that happened, however. [cont’d.]
This does raise a set of key issues going forward as we reach the end of the year, however. The Super Committee is a dead letter. They are exceedingly likely not to recommend anything at all. Jon Kyl talked about the committee in the past tense on the morning shows today. It’s all over except for the finger-pointing, which will be as meaningless as it is intense.
But there are all these loose ends out there, and all of them would actually increase the deficit, just to show you what a joke fiscal responsibility has always been. First, there are the aforementioned payroll tax cut and unemployment benefits extension. Those expire at the end of the year. So do two other notable measures: the patch that avoids a cut to Medicare reimbursement for providers by over 20%, colloquially known as the “doc fix,” and the adjustment to the alternative minimum tax that helps the upper middle class avoid the additional levy. Then there are a host of other expiring tax breaks, many for businesses, that usually get lumped in and called “tax extenders.” The thumbnail cost for extending every single one of the above-mentioned items is $300 billion. By the same token, that’s the amount you would take out of the economy if you failed to extend any of these measures. And that would, as noted above, be a significant fiscal drag on the economy.
There’s one way to get around this, and it concerns the war savings from drawing down troops in Iraq and Afghanistan. Democrats want to use that budget item to extend the payroll tax cut and unemployment benefits, Republicans want to use it for a dic fix and an AMT patch. There’s enough money saved from the drawdown, at least on paper, to use it to do both. I could see a scenario where that gets done, despite criticism that the whole thing is largely an accounting gimmick.
But that’s not all. The longer-term fight will be over the automatic sequestration cuts, which will be triggered now that the Super Committee has failed. Half of those fall on the discretionary side of the ledger and half of them fall on defense. Super Committee members are already talking about setting aside the defense cuts, most vociferously Jon Kyl:
Senator Jon Kyl (R-Ariz.) a member of the congressional super committee charged with devising a plan to shrink the national debt, pledged on Sunday to find a way to limit the defense budget cuts that would be triggered by that committee’s likely failure.
“I can’t imagine that knowing of the importance of national defense that both Republicans and Democrats wouldn’t find a way to work through that process so that we still get the $1.2 trillion in cuts but it doesn’t all fall on defense as [Defense] Secretary [Leon] Panetta pointed out,” Kyl said on “Meet the Press.” “I think there is a way to avoid that if there is good will on both sides. And again I think when the reality sets in even those Democrat friends who would like to see more defense cuts … will find ways to work around that.”
Rather than just nullifying the cuts, the conversation has shifted to altering them, putting the cuts somewhere else. But then you get into the same problems that characterized the failure of the Super Committee. And unlike that process, any changes to the trigger will have to go through regular order, with the prospect of filibusters and amendments. So while it does appear that there’s a broad consensus over avoiding the defense cuts, with no consensus over what takes its place, and an election year coming up, I wouldn’t say there’s a guarantee that the cuts are avoided. Indeed, Democrats believe they have the upper hand in these negotiations, because they aren’t as concerned about the defense cuts being triggered.
That issue will play out over the course of a year. The $300 billion in extenders will play out in a tight time frame of less than a month and a half (though some of the tax changes could be patched retroactively). And Congress hasn’t displayed much of an appetite for agreement this year.