It’s telling that even though all of Washington knew the Super Committee had failed by Monday morning, the formal announcement was put on hold until after the markets closed. This might have mitigated the financial damage, but the Dow still dropped 300 points for the day.
There are good reasons for the markets to be nervous. The prospect of Super Committee success was one of the major reasons advanced by credit rating agencies to avoid following in the footsteps of Standard & Poor’s and downgrading the status of America’s sovereign debt. The Wall Street Journal remembered this and had a rather ominous conversation with Moody’s:
MarketBeat got on the phone late Friday with Steven Hess, the lead U.S. sovereign analyst at Moody’s, who told us that any attempt by Congress to put off serious deficit-cutting talks until the future would lack credibility. In other words, if Congress can’t make sticky decisions now, with markets tanking and Europe waist-deep in sovereign-debt quicksand, what’s going to make them see the light next year?
“If the committee is unable to come up with any recommendations… the probability of any new initiative coming before the next election is lower than it was,” he said. “If they don’t do it now, you would think the likelihood of them doing it later would not be too high… That would leave you with the same question of whether they can come to an agreement next year.”
(Emphasis mine.) The other big credit agency, Fitch Ratings, was even more explicitly menacing last summer, when they decided to leave U.S. debt with a AAA rating… for the time being. As the L.A. Times reported on August 16:
Fitch warned that the country “is at the limit of the level of government indebtedness that would be consistent with the U.S. retaining its ‘AAA’ status despite its underlying strengths.” And the company said a downgrade could come if the special congressional “super committee” charged with finding $1.5 trillion in budget cuts this fall isn’t able to reach an agreement.
Even though there would be $1.2 trillion in automatic spending cuts if the committee can’t agree, Fitch said that would be a bad sign for Washington’s ability to deal with the debt situation.
“If agreement is reached and passed into law, it would demonstrate that a political consensus can be forged on deficit reduction and provide a platform for additional measures required in the medium term,” Fitch said.
“In the event that the Joint Select Committee is unable to reach an agreement that can secure support from Congress and the administration, Fitch would be less confident that credible and timely deficit-reduction strategy necessary to underpin the U.S. ‘AAA’ sovereign rating and stable outlook will be forthcoming despite the ($1.2 trillion ) of automatic cuts that would follow.”
In an August 16 video interview with Reuters, Fitch analyst David Riley said his team gave “quite a lot of weight to the Budget Control Act, that basically set out a plan for $4.1 trillion of deficit reduction,” but “we will be watching pretty closely, though, what happens with the Joint Select Committee, or the so-called Super Committee.”
Riley portrayed the success of the Super Committee as a test of Fitch’s “fundamental judgment” in leaving the AAA rating of the United States in place. “If the Joint Select Committee doesn’t deliver,” he warned, “and we have concerns about the automatic spending cuts of $1.2 trillion, then that might prompt us to re-think again in terms of the rating outlook.”
There are plenty of reasons for analysts to be concerned about those “sequestration” spending cuts, since politicians from both sides of the aisle are already scrambling to roll them back. The best defense against a downgrade was the prospect of a rebounding U.S. economy. Sadly, there hasn’t been much of a rebound, and GDP growth is expected to remain at an anemic 2.5% throughout 2012.
And Fitch “has the most positive outlook on the U.S. of the major credit rating companies,” according to the L.A. Times!
If the Super Committee’s failure results in a broad downgrade to the credit rating of the United States, one of the most immediate effects will be a dramatic increase in the cost of servicing our titanic $15 trillion national debt. It’s tough to predict the precise effect until it happens, but there’s every reason to believe it could exceed the $120 billion in automatic annual cuts from the Budget Control Act. In other words, we might lose as much money to rising debt interest payments as we will to “sequestration.”
Losing billions into the black hole of interest paid on our accumulated deficit sins would hasten another debt ceiling crisis, which might have been in the cards anyway… right in the middle of the 2012 campaign. As National Journal theorized last week:
There is a chance – and not a comfortably small one – that another debt-ceiling fight could rear its sure-to-be ugly head before the November 2012 election. The super committee could mitigate the risk by agreeing to $1.5 trillion in deficit reduction, but a lack of progress toward any deal at all means that’s unlikely.
Twin that with rising odds of a double-dip recession in the United States on the back of a eurozone crisis and weak U.S. housing and job markets, and it becomes clear the Treasury just might need more money, sooner.
“We don’t hit the debt ceiling until after the election, assuming the economy doesn’t crash and assuming that Europe doesn’t pull us back down,” said Ethan Pollack, a fiscal policy expert at the Economic Policy Institute. But if there’s a recession, Pollack said, “there’s a very good chance” the United States would hit its $15.2 trillion debt ceiling before the end of 2012.
That, he said, would be “really ugly. Really, really ugly.”
The Super Committee was doomed from inception, for a variety of reasons. Chief among them was that even if it had succeeded, the results would have been laughable.
The mechanics of automatic government growth have so powerfully warped our discourse that we can’t even talk about fiscal responsibility any more. The Super Committee was touted as negotiating over $1.5 trillion in “cuts,” with $1.2 trillion of automatic “cuts” split between military and domestic spending if they failed. That is arrant nonsense. The Super Committee wasn’t going to “cut” anything. The government would spend more in 2012 than it spent in 2011 – a lot more. It will still spend more, even if the sequestration laws kick in. The national debt will rise ever higher. The government grows without end, and without limit. The Budget Control Act of 2011 only pretended to change that, and it wasn’t a very good pretense.
The Super Committee was also doomed because it was yet another promise of fiscal restraint that could be taken back later. Even the brutal “sequestration” process doesn’t take effect until 2013… on the far side of a major election. The only spending restraint that’s worth a damn is immediate restraint – cuts that go into effect right now. It is beyond belief that any American required further proof that promises of future fiscal responsibility are utterly worthless.
Finally, the Super Committee was poisoned from birth because it was charged with “deficit reduction,” not spending cuts. “Deficit reduction” is a nebulous term that can include all sorts of trickery, most obviously including tax increases… which make the government bigger. Also, tax increases invariably bring in less revenue than anticipated, because the static analysts at the Congressional Budget Office never adequately simulate the depressing effect of high tax rates on the economy, or the efforts of targeted Americans to avoid those elevated rates. Every “deficit reduction deal” that includes tax increases is, therefore, guaranteed to produce a rising deficit.
If the Budget Control Act of 2011 had stipulated that the Super Committee had to come up with $1.5 trillion in spending cuts over the next ten years, it might have stood some chance of reducing the deficit slightly. If it had been charged with producing $1.5 trillion in spending cuts per year, it might have actually reduced the national debt. As it stands, the whole enterprise was nothing but an absurd waste of time, designed to take a little heat off Washington by giving the political heat from the debt ceiling crisis time to dissipate. The concerned American taxpayer could go back to sleep, and the people who brought you $15 trillion in debt could get back to work bringing you $20 trillion in debt.
Now it’s just a question of whether the epitaph for the Super Committee is written by the American voter, or America’s creditors.