Super Committee To The Rescue

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Faster than a speeding tortoise, more powerful than suntan lotion, unable to leap small objects in a single bound – the Joint Select Committee on Deficit Reduction (aka “the super committee”) is stumbling toward its November 23 deadline.

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Super Committee To The Rescue

  1. 1. 6363 Woodway Dr Suite 870 Houston, TX 77057 Phone: 713-244-3030 Fax: 713-513-5669 Securities are offered through RAYMOND JAMES FINANCIAL SERVICES, INC. Member FINRA / SIPC Green Financial Group An Independent FirmWeekly Commentary by Dr. Scott BrownSuper Committee To The Rescue?November 14 – November 18, 2011Faster than a speeding tortoise, more powerful than suntan lotion, unable to leap small objects in a singlebound – the Joint Select Committee on Deficit Reduction (aka “the super committee”) is stumbling towardits November 23 deadline.The super committee, composed of six Democrats and six Republicans is charged with coming up with apackage of recommendations by November 23 to achieve $1.5 trillion in deficit reduction over ten years.Congress will then have a simple up or down vote on that package (no amendments, no House blocks, and noSenate filibusters) by December 23. If the committee fails to agree on a package or if Congress does notapprove it, $1.2 trillion in spending cuts over ten years will be triggered. These cuts would start in 2013, afternext year’s election, and would include reductions in defense and other discretionary spending (Social
  2. 2. Security and Medicare would be untouched, for the most part). The Budget Control Act of 2011 also includesanother $500 billion increase in the debt ceiling whether or not the super committee’s recommendations arepassed (subject to a congressional resolution of disapproval if that fails). The increase in the debt ceilingwould then allow the government to borrow until (you guessed it) after the election.How’s it going? Not good. The nonpartisan Congressional Budget Office has to score the super committee’srecommendations and return its analysis to the committee by November 21, which would allow thecommittee two days to make changes before its final recommendations. The CBO was supposed to receive thebulk of the recommendations by late October or early November. Things are a little behind schedule.The committee seemed doomed to fail from its inception. Members of one party have signed pledges to neverraise taxes and most believe that includes any reduction in tax loopholes. The other party is set on keepingentitlement programs intact. That leaves discretionary spending, including defense, as the only feasible areasto cut. As a general rule, Republicans like defense spending, and some have signaled a willingness toeliminate about $300 billion in tax breaks (over 10 years) to reduce cuts in defense spending. However,without an increase in tax revenues, tax reform, and some entitlement reforms, serious deficit reduction isjust not going to happen. The two sides remain far apart. Moreover, there’s not much incentive tocompromise. By doing nothing, each party can achieve its primary objective (for the Republicans, there’s notax hikes, and for the Democrats, there’s no major cuts in entitlements.)As it stands now, the Bush tax cuts are set to expire at the end of 2012. The CBO has estimated that extendingthose tax cuts will add about $3.6 trillion to the 10-year budget deficit. That’s a lot. An expiration of the Bushtax cuts would slow the economy, but could be phased in over some period of time to limit the damage.However, there’s a good chance that they will be extended again as some Democrats are seen as willing to goalong. Tax reform is certainly needed, and if you started from scratch, you could design a much moreefficient system. However, getting there from here is extremely difficult, as there will be winners and losersunder a new system and current recipients of tax breaks aren’t going to want to give them up.The troubles in Europe have added to confusion about the long-term deficit outlook here. Large budgetdeficits and generous social programs were not the catalyst for Europe’s troubles. For example, Spain andIreland had budget surpluses heading into the current crisis. Germany and Sweden have generous socialsystems and their economies have done well. Granted, large deficits, as in the U.S., become ever larger ineconomic downturns – but that doesn’t mean that deficits are the root cause of the trouble. The problem inEurope has been capital flows, or rather, the sudden stop and reversal of those flows. On entry into the eurosystem, these countries enjoyed the benefits of lower interest rates. However, as with the Asian financialcrisis of 1997, troubles are set up when a country borrows too much in another currency. Italy and Greeceborrowed in euros, a currency under which they have no control. If Ireland, Greece, Spain, Portugal, andItaly had their own currencies, they could simply devalue, reducing real wages and generating a way out oftheir troubles. Wedded to the euro, these countries must undertake contractionary fiscal policies (austeritymeasures) which further weaken their economies, adding to financial strains in a self-reinforcing spiral.
  3. 3. Moreover, there’s no mechanism to defend against a run on any particular country. The European CentralBank, in contrast to the U.S. Federal Reserve is not the lender of last resort. Due to its larger size, Italy is amuch more serious concern for the eurozone and for the global financial system. The ECB needs to provide amore significant backstop for Italy – absent such support, the country’s outlook is worrisome.This doesn’t mean that the U.S. doesn’t have a problem with its long-term budget outlook. It does. We areclearly on an unsustainable trajectory. However, it’s only a “crisis” because our politicians have made it so.The early August showdown over the debt ceiling was unnecessary. There’s plenty of time to reduce thedeficit and that will happen over time.Some may be concerned about a possible further downgrade of U.S. government debt. It’s important to notethe Standard & Poor’s reduction in the debt rating on August 5 was largely a comment on the politicalenvironment, and was not based on concerns that the U.S. would be unable to repay its debt.

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