CQ WEEKLY – IN FOCUS
Nov. 19, 2011 – 1:50 p.m.
Unintended Consequences From the Deficit Committee
By David Harrison, CQ Staff
Since the anti-deficit “supercommittee” was formed in August, leaders of both parties have been predicting dire consequences should it falter in its task. The worst possible outcome, they said, would be if it did not come up with at least $1.2 trillion in deficit cuts by Nov. 23 that could pass muster in the full Congress. That would trigger automatic cuts of $1.2 trillion targeting both military and domestic spending.
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So horrible was the prospect of this so-called sequestration that it would scare everybody into submission.
But there was bluff in the warnings, layers of it. Despite the significance attached to Nov. 23, a deal by then wouldn’t resolve anything until Congress votes to approve it by Dec. 23. Failure to meet either deadline wouldn’t matter in any legal sense until January 2013, when the dreaded sequestrations are supposed to take effect.
So the tension is a little contrived. But while some in Congress might not take it that seriously, others do, underscoring the potential for a manufactured crisis to produce a real one, or what Virginia Democratic Sen.
Indeed, some market analysts and investment companies have been fretting in public for weeks about a possible sell-off of defense stocks, which could be hit hard by automatic budget cuts, and of another blow to confidence in Washington’s capacity to govern.
“We believe a failure to reach an agreement will be interpreted as yet another sign of governmental gridlock that will strike a blow to market confidence and lead to a decline in stock prices,” a Charles Schwab & Co. publication warned clients on Nov. 16.
“A deal is likely to be interpreted as evidence that Washington can function,” it added. “And that’s a positive. However, the details of the deal matter to a degree. A deal that is not credible in terms of producing real deficit reduction is not likely to be viewed positively.”
A few members, such as Georgia Republican Sen.
“Every economist in the country that we have talked to — and in our ‘Gang of Six’ we talked to dozens of them — every expert from the community bank world to the Wall Street world, and everybody in between, has said that if you don’t get to $4 trillion, that you’re not sending the right message to the marketplace,” Chambliss said Nov. 15 in a CNN interview. “And if you don’t send the right message, then the markets are simply going to react in a negative way.”
“The world is watching,” Democratic Rep.
In fact, polls show that the public is paying little attention. And other analysts say the market, expecting little from Washington anyway, has already priced in more budget gridlock.
No Problem
Unintended Consequences From the Deficit Committee
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Perhaps Nov. 23 seemed a lifetime away back in August, when all of this was set in motion. After a fight over raising the debt ceiling pushed the government to the brink of crisis and ultimately a credit-rating downgrade, lawmakers hatched a last-minute plan to cut slightly more than $900 billion and immediately raise the debt limit by that amount.
The agreement under the Budget Control Act of 2011 created a new special committee, officially the Joint Select Committee on Deficit Reduction, with extraordinary powers and tasked it with cutting an additional $1.2 trillion from the debt over 10 years, something lawmakers couldn’t bring themselves to do in any normal process. The debt ceiling could then be raised by that amount. The agreement called for $1.2 trillion in automatic cuts starting in 2013, should the committee not deliver. Senate Republican Leader
“The joint committee is not going to gridlock, in my opinion,” he declared on Aug. 2. “This is clearly not kicking the can down the road. They’re going to report by Nov. 23. It’ll be voted on before the end of the year. And I wouldn’t focus a whole lot on what would happen if they didn’t function, because I think they are.”
The numbers themselves reflected political calculations more than anything else. The target amount allowed the government to borrow enough money to get past the 2012 election, and the Thanksgiving deadline was chosen to hold members’ feet to the fire.
Still, after weeks of partisan battles, exhausted lawmakers were only too happy to punt the difficult decisions to a dozen of their colleagues and head home for the summer, despite objections that the plan circumvented Congress’ regular order.
“It’s sort of like emergency first aid has turned into long-term care,” says Ross Baker, a political scientist at Rutgers University. “It was an act of desperation. Rather than default, they had to come up with something, and it bought a little bit of time.”
Then, once the committee started meeting, talk turned to the task ahead as both parties vowed to set partisanship aside and work for the good of the country.
One of the committee’s two leaders, Democratic Sen.
Inevitably, of course, partisanship crept back into the debate, and as word leaked out that the committee was deadlocked, a few notes of doubt found their way into public comments.
House Democratic Whip
More recently, lawmakers such as Republican Rep.
Still, the mood, while glum, has been distinctly different from the frenzy surrounding earlier rounds of brinkmanship.
Unintended Consequences From the Deficit Committee
Unlike the debt ceiling battles of last summer and various government “shutdown” showdowns of years past, no matter what the committee does, the government will continue to function: Social Security checks will still go out; debt obligations will still be fulfilled; and lenders will continue to mop up Treasury bonds by the bucketful.
Indeed, there’s always a chance that many Americans won’t notice if, on Nov. 23, nothing happens or if the committee throws in the towel.
Only one in five people are paying attention to the committee, according to the latest Pew Research Center survey.
Rebuilding Confidence
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Oddly, Congress has gotten itself into this potential mess over an issue — deficits — that remains quite low on the public’s list of major concerns.
What the public does want, polls show, is bipartisan cooperation in Washington. Thus, setting and then hyping another deadline for an agreement that fails to materialize can only call further attention to Washington’s partisanship and further erode the public’s trust in Congress.
“America is expecting all of us to work together,” said Republican Rep.
“There’s a vicious cycle here,” says Brian Gaines, a political scientist at the University of Illinois. On the one hand, the fear of primary challengers makes lawmakers hesitant to cross party lines to make a deal. On the other, holding firm against compromise could so irritate voters who just want the standoff to end that they turn against incumbents, regardless of party.
“There’s a risk for everyone, from the leadership all the way down to the back bench, on both sides of the aisle here,” says Michael Dimock, associate director of the Pew Research Center for the People and the Press. “The public tends to personalize their frustration with the political situation. The public blames the people in office for the problems, and that means they’re liable to hold those people accountable.”
With the holiday shopping season under way, analysts are worried that the morass in Congress could depress retail sales.
The latest consumer confidence survey by Reuters and the University of Michigan found that only 7 percent of respondents had confidence in the government’s economic policies, a record low.
The Federal Reserve in its Nov. 2 statement did not rule out another round of asset purchases to stimulate the economy. Despite a 2.5 percent growth rate in the third quarter of this year, “consumer confidence is about where it was in the depths of the recession,” said Federal Reserve Chairman
Unintended Consequences From the Deficit Committee
Bernanke also suggested that people ignore Congress altogether.
“My best advice to Americans is to continue to live your lives,” he said. “Continue to think about your personal situation and try to make smart decisions based on your own financial position.”
Ignoring Congress might become difficult. Payroll tax extensions and unemployment benefits run out at the end of the year, so the economy could be in for a shock unless lawmakers act on those issues.
Two weeks ago, Standard & Poor’s warned that U.S. fiscal gridlock could bring down earnings next year, despite a strong 2011. And a recent study by the Federal Reserve Bank of San Francisco pegged the risks of recession in early 2012 at “greater than 50 percent.”
“If we don’t get [a payroll tax cut extension], I think it raises the risk of another recession next year,” says William Delwiche, an investment strategist at Baird Research. “Given the risks in Europe and around the globe, it wouldn’t take much of a shock to go from growth to recession. That is really the problem right now: You’re relying on Congress to do something to avoid a shock.”
That could lead trigger-happy traders — already rattled by Europe’s fiscal problems — to drive down the U.S. stock market if they lose confidence in Congress. It will take more than a joint committee agreement to restore their faith, however. A recent Goldman Sachs study noted that the market is likely to be unstable regardless of the committee’s outcome.
Ratings agencies have also taken note of the government sclerosis. In August, Standard & Poor’s cited Congress’ dysfunction as the main reason behind its downgrade of American debt. Other rating agencies could follow. In September, Moody’s downgraded the country’s largest banks, on the assumption that the government would not intervene should they start to wobble. To be sure, the country’s sovereign debt ratings are not an immediate concern, because investors are not likely to abandon Treasuries, but they don’t help the economy regain confidence.
No Backtracking
Among the outcomes that most worry analysts is that Congress could try to wriggle out of the automatic cuts, which would reinforce the image of the institution as incapable of any kind of discipline.
“If they circumvent the sequestration process with the supercommittee not really coming up with much, that’s really where you’re going to have some issues with the ratings agencies and perhaps a really strong threat of a U.S. downgrade,” says Andrew Busch, public policy strategist for BMO Capital Markets.
Investors and businesses are tired of being jolted by Capitol Hill crises and are looking for lawmakers to agree on a plan for growth, he adds.
“Uncertainty generally shows up in the worst possible way when corporations are sitting on lots of cash and don’t feel like doing anything with it. They’re not sure where Congress is going to go,” he says. “The best thing that’s happening right now is that there is growth returning to the United States. One would just wonder, if Congress could get its act together, what would that growth look like?”
Apart from the potential impact on voters or the economy, the elaborate machinery created in August to deal with the situation altered the ordinary process by which Congress does business in ways that could have lasting effects.
Unintended Consequences From the Deficit Committee
One consequence of punting the difficult job of deficit cutting to a special committee is to dilute the authority of regular committees, says Baker, the Rutgers professor. What party leaders described back in August as a one-time extraordinary measure could easily become a new standard, cutting committee chairs and their experienced staffs out of the legislative process.
“Certainly Congress has had the experience of task forces before and will again, but this sort of strengthens the argument that standing committees can’t do the job,” Baker says. “It sort of turns Congress into an oligarchy: There are a few participants, and there are a lot of bystanders.”
FOR FURTHER READING: Deficit panel, p. 2442; confidence polling, CQ Weekly, p. 1964; debt limit law (PL 112-25), p. 1761.