For Deficit Panel, Failure Cuts Two Ways
Published: November 21, 2011 - New York Times
WASHINGTON — The latest Congressional failure to agree on a plan for
balancing the government’s books could yield a surprising result: a sharp
reduction in annual federal deficits, larger than anything contemplated by the
special panel that reached its fruitless finale on Monday.
But the absence of an agreement also threatens to significantly slow growth
in an already ailing economy by raising taxes on almost everyone while reducing
government spending on almost everything.
Tax cuts passed in the Bush administration will expire at the end of 2012. By
law, the panel’s failure triggers new caps on spending, cutting $1.2 trillion
from the military, education, health care and other priorities over 10 years
beginning next fall. The combined impact of higher tax rates and less spending
would reverse the growth of annual deficits beginning in 2013, reducing by more
than half the current $1.3 trillion gap between annual revenue and spending.
That has inverted the normal reality, in which spending rises inexorably
unless Congress musters the political will to impose cuts. Now, although both
parties say they are committed to more gradual approaches, an agreement is
required to avoid the fiscal equivalent of shock therapy.
“There could be a bit of a silver lining,” said Rosanne Altshuler, an
economist at Rutgers University who served on President George W. Bush’s 2005
tax reform panel. “It forces us to come to terms with cuts in areas that have
been difficult to touch — the military and Medicare.
We may not like how the cuts are going to be done, but we better start dealing
with the fact that cuts are going to have to be made.”
The latest committee, created in August as part of a deal to let the federal
government borrow more money, was charged with identifying at least $1.2
trillion in spending cuts over the next decade. Its failure forces the same
amount of spending cuts, with half the money coming from the military budget.
The immediate economic impact depends first on investors, who must decide
whether they are now any more concerned about the nation’s financial condition.
Any increase in the interest rates that the government must pay would widen the
deficit, as would any decrease in economic growth. But while stock market
indexes fell sharply Monday, with the Dow Jones industrial average down 248.85
points, investors continue to pay for the opportunity to lend money to the
United States. Two credit
rating agencies, Standard & Poor’s and Moody’s, affirmed their ratings
of United States debt securities on Monday and said the failure did not change
their assessment of the government’s ability to pay its debts. Fitch, a third
agency, said it was reviewing its ratings and hoped to make a conclusion by the
end of the month. It said in August that a failure by the special committee
would probably result in a negative rating.
A second, looming question is whether Congress will extend a payroll tax
break for workers and continue supplemental benefits for the long-term
unemployed, both scheduled to expire at the end of the year. The tax break
reduces the amount that workers must pay for Social
Security; the extended benefits provide support for 3.5 million Americans
who have been out of a job for longer than 26 weeks. The government will spend
about $168 billion on the two programs this year. Economic forecasters estimate
that a decision to end the benefits would reduce the country’s economic growth
next year by more than one percentage point.
The Obama administration had hoped to wrap extensions of both benefits into a
broader agreement. It now faces the challenge of rescuing a smaller compromise
from the ruins of the negotiations, with some Republicans in outright opposition
and others demanding offsetting cuts in other federal spending.
President Obama plans to call for the extension of both programs in New
Hampshire on Tuesday.
Representative Jeb Hensarling, a Republican from Texas on the special
negotiating committee, said on “Fox News Sunday” that its members had been
“laser-focused on trying to get success” on the payroll tax measure. But, he
added, “the bigger tragedy is we have unsustainable debt that is threatening our
national security, is threatening our jobs, frankly, and is threatening our
children’s future.”
The decisions that must be made by the end of next year over the future of
the Bush
tax cuts and the reductions in spending are far larger, as are the economic
consequences.
The Obama administration wants to extend most Bush-era tax cuts while
restoring higher rates for higher incomes. Democrats say they will not strike
any agreement on spending cuts without an agreement to raise new revenue. Mr.
Obama repeated on Monday that he would veto any legislation extending all of the
cuts. Republicans say they will accept nothing less.
A Moody’s Analytics report warns that failing a deal, the combined impact
will amount to a “historically extreme” reduction in the deficit that could push
the economy into recession.
It notes that under current law, federal revenue would increase as a share of
economic activity by 3.7 percentage points over 2012 and 2013 — the sharpest
rise since 1969, when, Moody’s says, sudden tax increases “helped set off a mild
recession.” Combined with the required budget cuts, the deficit would shrink to
$510 billion from $1.3 trillion by 2013.
“You’re seeing a very rapid depletion of the budget deficit,” said Ben
Garber, an economist with Moody’s Capital Markets Research Group who wrote the
report. “You’re taking a weak economy and removing a large part of potential
demand, which could be enough to tip us into recession.”
There is still plenty of time for Congress to unlock its self-imposed
handcuffs and renounce frugality. Next year’s elections also could produce a
clear mandate for one party to reduce deficits according to its priorities
without any need for compromises. Partisans at both ends of the political
spectrum said they welcomed the failure of the current talks as an opportunity
to win just such a mandate.
Over the last month, conservatives feared that the committee would settle for
cosmetic cuts. They now see an opportunity to secure larger reductions, without
tax increases, to encourage faster growth.
Liberals hope the Occupy Wall Street protests have shifted political debate
from an overriding focus on the long-term danger posed by the federal deficit
toward a focus on unemployment, income
inequality and other immediate economic problems.
“This committee was created at a very different time, when the dialogue was
that our deficits were too big and unsustainable,” said Martin
Hart-Landsberg, a professor of economics at Lewis & Clark College in
Portland, Ore. “This failure gives us time to help educate and change that
dialogue, to focus on job creation and the direction of the economy.”