America's Debt Will Get Kicked Down the Road

While much of Gucci row wonders what the Joint Select Committee (JSC) will do to their client’s specific interests, the more objective analysts seem to be split into three camps—just like they were in mid-August when the JSC was created by the Budget Control Act.

In short, nobody knows what will emerge, not even the 12 members of the JSC.

Three outcomes seem at least possible, but all have shortcomings that will cause future Congresses substantial headaches.

A—the least likely outcome is the “Grand Bargain,” a full-scale attack on the roots of the nation’s fiscal crisis that encompasses tax reform that raises, on net, revenues, structural changes to Medicare, Medicaid, TRICARE for Life, and retirement programs. The JSC has it fully within its power under the law to come up with such a plan through mandating a “Fast Track” approach to the relevant Congressional Committees, in addition to the BCA goal of $1.2-1.5 trillion in shorter-term savings.

B—the most likely outcome is “Best We Can Do,” using a variety of small changes to non-discretionary spending, some increases in fees and minor elimination of some tax preferences to achieve the $1.2-1.5, avoiding a sequester in 2013, and putting off indefinitely the tough task of attacking the fundamental structural problems. We have outlined in an earlier piece how that could be done.

C—a 50-50 chance exists that the JSC will yield to the preferences of the Congressional caucuses of both parties and do another “kick the can down the road,” although the can is becoming more like a barrel. That would find the JSC recommending something like $0.6-0.7 trillion in new savings, and asking Congressional committees to find the rest through regular order—a process we attempted to outline last week.

Former Majority Leader Howard Baker once said, “If you have to swallow a frog, do it quickly.” That impeccable logic would yield the “Grand Bargain.” Included with the $1.2-1.5 trillion, and instructions to find another $3-4 trillion sent to the individual Congressional committees, would be a resolution of four items that must be dealt with this year—extension of Unemployment Insurance, the docs’ fix in Medicare, the Alternative Minimum Tax, and a variety of “tax extenders” that expire at year’s end.

Congress rarely follows impeccable logic.

Many budgeteers, present and former, hoped that pressure from ratings agencies and adverse market reactions would put the fear of God into the Joint Select Committee. Sadly, the markets proved more scared of European turmoil than American Congressional sloth, with the result that interest rates on the United States’ sovereign debt have dropped dramatically since passage of the BCA.

Rumors abound that the JSC has been warned privately by rating agencies that another downgrade could occur in the event of “failure” by the JSC, but what constitutes failure or success may not be acknowledged by financial markets until two or three years from now—an eternity in politics.

Meanwhile, the impeccable logic of arithmetic moves on. The Congressional Budget Office has confirmed what most already knew—for the third consecutive year federal deficits will exceed $1 trillion and indebtedness during the next decade will reach more than 100 per cent of our Gross Domestic Product. But as the Greek governments of past and present have shown, politicians have the ability to ignore arithmetic and to lie about statistics for decades before reality’s ugly head rears up.

This Wednesday, CBO Director Doug Elmendorf will outline in public testimony to the JSC the current state of non-security discretionary spending. He will repeat what he has told Congress already—the appropriated accounts of government are not the problem, it is the mandatory entitlement programs that will bankrupt the nation. Just like the analysts who warned the EU 25 years that Greeks don’t pay taxes and don’t keep good figures, he may well be speaking into the wind.

If revenues don’t go up through legislation, and entitlements don’t spend less the next decade, things will get worse.

Taxes and entitlements are the “frog” of politics now; if you are going to eat them, do it quickly and once.

Won’t happen and we will watch the messy business of frog-eating on a piecemeal basis.