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Super Committee Failure Won’t Hurt the Economy for Another Year Super Committee Failure Won’t Hurt the Economy for Another Year Super Committee Failure Won’t Hurt the Economy for Another Year Super Committee Failure W...

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Super Committee: The Deficit Dozen / analysis

Super Committee Failure Won’t Hurt the Economy for Another Year

Though dark clouds might be looming over the super committee, cuts that will now be triggered by the Budget Control Act aren't scheduled to take effect until 2013.(AP Photo/J. Scott Applewhite)

photo of Jim Tankersley
November 21, 2011

A compromise in the super committee was never going to boost the economy right away. Failure will not hurt it, for at least another year.

The across-the-board budget cuts that will now be triggered by the Budget Control Act are scheduled to take effect in 2013, when the Federal Reserve projects the U.S. economy will be growing at a 3.0-to-3.5-percent clip, or about double the growth rate today. The Bush tax cuts—which the super committee failed to find agreement on, as well—are set to expire in 2013, too. 

(FULL COVERAGE: Super Committee News and Analysis)

 

The timing gives the still-sluggish recovery another year to gain steam before major spending cuts and tax hikes begin to drag it backward. And drag they will. Analysts at Nomura estimated on Monday that if Congress allows the spending cuts to go forward and the tax cuts to expire, U.S. gross domestic product will dip by 3 percentage points. Do the math: That’s a prescription for little or no growth overall.

Still, that pain is at least a year away. So why are markets so glum today? Quite possibly, it’s because investors see this failure as even more reason to doubt that Democrats and Republicans will come together in the coming months or year to stoke the recovery back to a healthy growth rate.

If a small committee can’t agree on how to avert $1.2 trillion in cuts neither party particularly likes, what are the odds that all of Congress can agree on extending jobless benefits for the long-term unemployed or the payroll tax cut, which expires at year’s end; or reforming the corporate tax code to reduce inefficiencies and increase growth; or compromise on making some or all of the Bush tax cuts permanent?

Analysts worry about all of those. Economists at Barclays Capital warned last week that committee failure would lead to “an increase in the risk the payroll tax cut and extended unemployment benefits will expire.”

Those questions, and not the scale of the federal budget deficit, are what really matters to the economy in the short term, while federal borrowing costs remain at historic lows. Weak recoveries bog down when businesses and consumers start spending less money because their taxes are higher, or the government pumps less into the economy because it borrows less. European governments are discovering that now, as they raise taxes and cut spending and find themselves in a spiral of austerity and slowing growth that is leading into recession.

Launching an immediate round of American austerity is the worst thing the super committee could have done. The best thing the committee could have done was never really on the table: a mix of short-term tax cuts and spending increases, to stimulate the recovery, coupled with fundamental changes to entitlement programs and tax policy, in order to reduce federal debt and unleash growth over the medium and long term.

The committee produced neither of those. The economy is no worse for it—for now. But it’s no better, either, and that’s the real failure lawmakers should be answering for today.

 

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