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In the Nation's Interest

The End of the Beginning

Sadly, we have seen the end of the Supercommittee. It failed to meet its deadline to report a deficit-reduction bill to the Congress.

But equally sadly, we have not seen the end of the issue. The exploding cigar of debt is still lit and burning. And we do not know precisely where in the cigar the charge is located. We are living on borrowed time – as well as borrowed money.

In the near term, the national sport – at least in Washington – will be the blame game. (In St. Louis, it's still baseball.) It will be an exciting game, because there is so much blame to go around.

The members of the Supercommittee are pointing fingers at the other party – but not necessarily the other party in the Supercommittee. My sense from conversations with both members and staff from both sides was that they appreciated the gravity of our budget situation, and dearly wanted an agreement. When I accompanied former Senator Pete Domenici and Alice Rivlin as they testified before the Supercommittee, I heard the usual word games and questions-without-question-marks so that the witnesses had no chance to answer, but there were also sincere efforts to elicit agreement and find common ground.

The Supercommittee Republicans say that they were willing to raise taxes, but that the Democrats were not willing to address entitlements. The Democrats say that they were willing to cut entitlements, but that the Republicans were not willing to raise taxes on the well-to-do. Each side put forward a proposal that it claimed addressed the other side's concerns. Those proposals were not dreadfully specific, and clearly bore the distinguishing marks of first offers. But neither side took the step of trying to tighten the circle around the two respective positions. Why?

The reason (in my opinion) is that the two parties in the Congress as a whole (and in the nation broadly) have too many extreme members who are not willing to compromise at all. We heard numerous times, from members of both parties, the cliché that "no deal is better than a bad deal." What these people do not understand is that there must be a deal, and before very long; and the longer that deal is postponed, the worse the terms will get – for both sides.

The political counterargument from the wings of each party is that they will roll sevens continuously between now and 2013. The debt problem will never reach the critical stage, they will run the table and win complete control of the government in the 2012 elections, and then they can solve the problem their way.

Thus, the supply-side tax-cutters will reduce tax rates and watch the revenues roll in to balance the budget (just as they did after 1981 and 2001 – not). Meanwhile, they will cut spending by eliminating the Departments of Commerce (hurricanes will forecast themselves), Education (truly motivated undergraduates don't need student loans), and Energy (our stockpiles of nuclear weapons and fissile materials will decay naturally over the next few centuries even without guards).

Or, alternatively, the supply-side spenders will accelerate economic growth through investments in infrastructure (cargo-carrying 18-wheelers will drive much faster – speed limits notwithstanding), education (with better elementary schools, our students all will enter the labor force at age 13), and the Internet (pop-up ads will appear much more quickly on all of those social-networking websites). Plus, we will tax the rich (but no one else, once we decide what "rich" means) and end the war (sorry – we counted that money already).

The bottom line for the budget is neither side can solve the problem with only steps that it considers fun. But the bottom line for the Supercommittee members – in both parties – was that even their tentative steps toward compromise already had put them in hot water with a significant number of members of their own caucuses. Suppose that the Supercommittee members had read Profiles In Courage again, taken a collective deep breath, and passed an agreement that split the difference on tax increases and Medicare reform. Not only would they have risked whatever leadership positions they held in the House and Senate; not only would they have run a serious risk of encouraging ideologically extreme primary opponents in their next elections; but for that matter their "grand compromise" might well have failed enactment anyway, with their own ideologically extreme party members voting "no." It is one thing to sacrifice yourself; it is quite another to sacrifice yourself in vain.

Should the Supercommittee members have taken the leap anyway? Sure. They should have led, cajoled, and beaten about the head and shoulders the members of their caucuses to do the right thing. But even the designees to such an august and powerful body are not the best choice to lead the Congress. There is a good reason why symphony orchestras tend to have only one conductor at a time. The Supercommittee collectively was not the vehicle of choice to achieve such leadership. That role should have fallen to the House and Senate leaders – and to the President.

There is no sign that any of the four House and Senate leaders took any prominent leadership position to advance a deal. That might have been because of political calculation; the rank and file in both parties likely believe that the budget will be a strong issue for them in the next election (and given gerrymandered House districts and numerous bright red and bright blue states, both parties may be right). Alternatively, it may have been because, even on substantive grounds, the leaders themselves honestly believe that "no deal is better than a bad deal." In any event, there is no news account of a leader of a congressional caucus begging his troops to sacrifice for the well being of future generations (at least during this most recent stage of the process).

Just as the members of the Supercommittee likely felt at risk from the extremes of their caucuses and their party members at large, so surely did the four congressional leaders. Every one of them likely contemplated a nightmare scenario: Imagine Speaker Boehner (choosing one leader only for example) taking a Supercommittee bill to the floor, and having it pass with the votes of 65 percent of Democrats, but only 40 percent of Republicans. Many would consider the Speaker a hero for solving the budget problem. But he likely would not be Speaker in January of 2013, if not sooner. Senate Majority Leader Reid, Senate Minority Leader McConnell, and House Minority Leader Pelosi all surely shared that nightmare. That is no excuse, but it may well be part of the reason, for the Supercommittee's failure to act – or at least the leaders' failure to push harder for them to act.

The President's role has been controversial. He did, early in the process, send the Congress a detailed package for $3 trillion of additional budget savings. However, that package was largely recycled proposals from past budgets, and there was little indication that they would fare any better this time. After that, the President mostly stood in the background. Some defend that decision on the grounds that the Congress designed the process to omit the President, and that many members of both parties, for their own reasons, either advised the President to stay away, or allegedly tried to pull him in so that he would be identified with failure. On the other hand, some criticized the President as being absent from a crucial process where his leadership might have made a difference.

It is impossible to say whether having the President more closely involved would have changed the outcome. But given that the Supercommittee failed abjectly, producing no plan even to save a fraction of its minimum $1.2 trillion target, 20-20 hindsight clearly shows that any change would have been worth a try. And arguably, the President's place on such a vital issue was in the room – win, lose or draw.

But where to from here? As was noted at the outset, the problem has not gone away; rather, the inevitable solution has been postponed. One obvious but perhaps forgotten change is that the special powers of the Supercommittee are now totally gone. The fast-track authority was a matter of law, and the conditions of that law have not been met. There is no possibility for a gentlemen's agreement to declare a mulligan and retry that process. Furthermore, the special powers were given to the Supercommittee under threat of breaching the debt limit and causing a government default. The likelihood that the Congress will try again, especially after this failure, is low – to be optimistic.

In this eventuality, the BCA calls for $1.2 trillion of across-the-board cuts (with exceptions, exempting or limiting the cuts on most entitlements, and thus hitting much harder at annually appropriated spending) effective on January 1, 2013. Those cuts were designed to motivate the Supercommittee to produce more carefully crafted deficit reduction of their own. At least one Supercommittee member said that the unavoidable one-year delay in the cuts (it is too late to implement cuts in fiscal 2012) made them too weak as a motivator. The Supercommittee members (and others) believe that there remains plenty of time to turn the automatic cuts off, or even to replace them with more purposeful cuts, before they take effect. Some members of Congress likely believe that after their party takes complete control of government, they can wait until the early days of 2013 and eliminate the cuts with little practical consequence.

As the Congress considers eliminating the automatic spending cuts, Washington's credibility suffers even beyond the loss from the Supercommittee's failure itself. And this particular issue may have even more-serious implications. In today's weak economy, it would make sense to enact deficit reduction now but postpone its effect date – or even to stimulate the economy first, and reduce the deficit later. But if the Congress will not keep its word on these automatic spending cuts, what credibility will the federal government have if and when it again schedules future deficit reduction? Such credibility could keep the financial markets calm in the face of necessary actions that would increase the deficit. Without it, economic stimulus may not be feasible. And looking forward, we know from the experience of the Federal Reserve and its monetary policy that credibility, once lost, can be re-earned only slowly and painfully.

That said, the automatic cuts are clearly far from ideal. Take defense as an example. Recently installed Secretary of Defense Leon E. Panetta has a richly earned reputation as a deficit hawk. He caused a stir within the Pentagon and around the country by saying that he would be willing to consider changes to the military's health-insurance and pension systems to reduce spending. However, he also has said that the automatic spending cuts would hollow out the defense establishment. Notably, the automatic cuts allow only limited discretion. They apply to annual appropriations only. They are not satisfied by any savings in pensions, military health insurance, or other entitlement programs within the Pentagon. And because roughly half of the Pentagon's appropriations go for salaries and associated costs for the military, the automatic cuts will require significant reductions of either the number of troops or their salaries, or both – whether that fits with the nation's security strategy or not. We need carefully considered savings, not blunt-edged hacking at the budget. And even after all of the hacking in these scheduled automatic cuts, the nation's debt still likely will grow faster than its economy.

So we will proceed through the end of this year and into the next with an urgent need to establish a credible glide path to reduce the deficit, and many members of Congress seeking just the opposite (by turning off the automatic cuts), while all sides seek to position themselves for the election. It will be ugly.

And all of this will happen in a world (literally) of uncertainty. Europe is shaking. China is trying to rein in potentially inflationary growth. This is the worst imaginable time for the world's economic and financial flywheel to start losing its bearings.

But even beyond that, the failure of the Supercommittee is an enormous lost opportunity. With the rest of the world in turmoil, a steady United States could truly be a "safe haven." Our producers could have had access to cheap capital to modernize and build a competitive advantage, and that same cheap capital could have helped the Federal Reserve to hold interest rates low and facilitate a continued economic recovery. Our nation could have reestablished its reputation as a global leader while others bickered. Instead, we are just one more member of the crowd of nations that cannot get their fiscal acts together.

We at CED will work with our partners to try to direct this chaotic energy into constructive channels. With the budget news perhaps fading from the front page as the election campaign climbs above the fold, we will try to keep you informed about what is happening, and what you can do to keep our economy in the lead world-wide.