The Economist
A downgrade for Congress
By failing to agree on measures to limit the deficit, America’s politicians have failed their country
IT WAS not a very ambitious target. All that the congressional “supercommittee” was required to do was to figure out a list of measures that would reduce America’s budget deficits by $1.2 trillion over the next ten years. That sounds a lot, until you realise it is only 0.6% of GDP, not even a quarter of the $5 trillion or so that is really needed to right the books in Washington, and less than 3% of the $44 trillion that the federal government is expected to spend over that period. To reach a goal that a business cost-cutter would regard as desultory, the bipartisan committee of 12 senators and congressmen was accorded exceptional powers. Its work was to be subject to a simple up-or-down vote, with no possibility of amendment; and the Senate would not be able to use its power to filibuster. Yet on November 21st, after three months of deliberation, the team was forced to admit that it had failed.
On paper this failure might not seem to matter very much. Supposedly, spending cuts equivalent to the same $1.2 trillion figure will now automatically be triggered, starting in 2013, with $600 billion hacked out of the defence budget (see Lexington) and the other $600 billion coming from other non-mandatory categories of spending, including education, housing and environmental protection. But in reality the failure is deeply alarming, for several reasons.
First, it shows that Republicans and Democrats, even when offered the best possible conditions for dealmaking, can’t do it. The Democrats refused to consider structural reforms to the big entitlement programmes (Medicare, Medicaid and Social Security). The Republicans refused to countenance anything that would see tax rates rise, even though no sensible analyst believes that the deficit (running at 8.5% this year) can be closed to a sustainable level by spending cuts alone, and even though ruling out any tax rises, even for people making more than $250,000 a year, is difficult to justify. Though a few interesting proposals were floated, suggesting that the Republicans were not totally immune to getting rid of loopholes (as long as any rate increases for the rich were off the table), they never came close to enjoying majority support. Until the political mood changes dramatically, it is impossible to see Congress tackling the deficit successfully—a process which will require reductions (through a combination of revenue increases and spending cuts) to the tune of four times what the supercommittee has just failed to deliver.
Second, the past few months have confirmed even more strongly the near-irrelevance of the president. A Ronald Reagan or a Bill Clinton would have been much more effectively engaged in twisting arms and, where necessary, dispensing favours. Barack Obama remained damagingly aloof throughout the supercommittee’s fruitless deliberations. This should not have been surprising, given his lamentable failure a year ago to endorse the effective and brave conclusions of the Bowles-Simpson deficit commission that he personally appointed. But it does not bode well for the future—assuming that he has one, and is not turfed out of office in a year’s time.
Third, this week’s collapse sets up a nasty fiscal shock, to be administered in just five weeks’ time. At the end of this year a temporary cut in the payroll tax is due to expire; so, too, are the extended unemployment benefits which are all that stand between millions of Americans and destitution. Folding an extension of these measures into the supercommittee negotiation was the best hope of preventing what could amount to around at least 2% of fiscal tightening next year. The chances of avoiding that tightening now look grimmer.
Finally, it is now clear that an almighty budget row will have to take place towards the end of next year, in the run-up to and immediately after the presidential election on November 6th. Congress will be trying to undo the supposedly automatic budget cuts it agreed to only in order to make it impossible for the supercommittee to fail: Mr Obama has said he will veto any such attempt. At the same time, the Bush-era tax cuts are set to expire, threatening a sharp tax rise for all income-tax payers, rich and middle-class alike, unless some sort of deal can be done. Expect more destabilising brinkmanship, just like the sort that attended the debt-ceiling crisis in the summer.
The not-so-bright side
There is, however, a last consideration. One reason why the supercommittee failed is that it felt no real sense of urgency. America is not Italy: this week, its ten-year government bonds were trading at a yield of well below 2%, the lowest levels for over half a century; as the euro moves towards disintegration, the attractions of Treasury bonds will only increase. But even that silver lining has a cloud: the corollary of this observation is that it will probably take a genuine, terrifying, American bond crisis to force the politicians to act.
http://www.economist.com/node/21540254
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