Many are wondering if the super committee will fail. That is not what matters. The fact that the super committee was created by the Budget Control Act in August is the real failure.
Last spring, many people associated with the financial markets made it clear that politicians in Washington needed to address the massive federal debt problem in a very serious way or the U.S. economy could slip back into recession. Standard & Poor’s downgraded the outlook on Treasury securities to negative while maintaining the AAA rating at that time.
Our level of debt was exploding and the administration was rapidly approaching the statutory limit of the government’s ability to issue debt. Financial markets were looking for passage of legislation that would have a significant impact on reducing the growth of federal debt in exchange for allowing the government to increase the debt ceiling. The figure often cited by financial analysts was $4 trillion in deficit reduction in exchange for an increase in the debt limit of about $2 trillion which would last through the end of 2012. $4 trillion was the minimum amount of deficit reduction over ten years that would be needed to be considered to be significant.
The House of Representatives passed a budget, known as the Ryan Budget, that would have saved over $6 trillion over the next decade. While not perfect, it was a serious effort that would have had a significant impact.
The Senate offered nothing.
In fact, the Senate has not proposed nor passed a budget in over 930 days. This made it impossible to conduct serious negotiations. The Senate Democratic majority decided to run out the clock on the debt limit rather than offer a serious proposal to let Americans know how they planned to achieve the savings. They didn’t want anyone to know how little in spending they wanted to cut. Their strategy was to offer nothing and waste time until the limit was reached. Then they would claim there was no choice but to increase the debt limit by enough to last through the next presidential election with a promise to reduce the deficit at a later date.
The House Republican majority that was elected just a few months earlier pressed for a larger package on the order of the $6 trillion Ryan Budget. However, with no other proposal that the Senate could prove had any votes to pass the Senate, negotiations went nowhere.
Ultimately, the Senate and President Obama got what they wanted in the Budget Control Act (BCA) that passed in early August. It included just enough cuts promised in the future over the next decade in unspecified programs to receive an increase in the debt limit that should last long enough to get all of the politicians through the next election without having to be forced to give details.
The entire size of the package was just $2.1 trillion over ten years. Roughly $900 billion would come from discretionary spending limits and the other $1.2 trillion was to be named later by the newly created super committee.
If the super committee is unable to reach agreement by November 23, the BCA imposes a sequestration in narrow areas of defense discretionary spending and some mandatory spending, but none affecting entitlement benefits that are consuming ever greater portions of the budget. The only mandatory spending affected is for administrative expenses and reimbursements. The sequestration would cover any amount up to the full $1.2 trillion not achieved by the super committee.
Further, none of these cuts would go into effect until 2013, after the next election. However, all of the new debt allowed under the increased debt limit increase is likely to be used up by January 2013 requiring Congress to pass more legislation to increase the debt limit yet again.
Interestingly, the $900 billion in savings from discretionary spending caps put in place by the BCA are not hard limits. They are more like suggestions. Spending can be increased by simply shifting funding to exempt categories.
Defense spending for the war on terrorism is reclassified as Overseas Contingency Operations (OCO) which is exempt from spending caps. Disaster relief is exempt. However, it is limited by a formula using disaster spending from the last 10 years. While this sounds reasonable, it allows you to move money subject to the discretionary spending caps to money that is exempt. Rather than fund disaster relief each year and include it in the budget, Congress will eventually pretend that we will have no disasters in the following year to allow them to spend the money elsewhere. Then when a hurricane hits, they will be able to get more funding that is exempt from the caps to pay for the recovery.
Finally, any spending that the president and Congress agree is an “emergency” is also exempt from the caps. This is the largest loophole of all. This gimmick was used repeatedly over the past few decades to evade spending caps imposed by the old Gramm-Rudman-Hollings Act.
These are just a few of the problems in the Budget Control Act. You also have to look at all of the spending that is not yet included. The BCA assumes that in January, the Alternative Minimum Tax (AMT) will be allowed to increase. This is a provision of the Tax Code created in 1969 to ensure that the very rich pay at least some income tax. It was to affect only about 200 people originally.
Unfortunately, it was not indexed for inflation. Over time it has grown to impact millions of people who would not be considered to be rich even under President Obama’s standards. Consequently, Congress has passed a series of short-term corrections over the past four decades to prevent the full impact of the AMT. The BCA assumes that no more corrections will be made and the full impact of the AMT will be allowed to hit several million unsuspecting taxpayers beginning in 2012. This allows Congress to assume over $650 billion in deficit reduction under the BCA
That isn’t the only expiring provision of that Tax Code that the BCA has already counted as reducing the deficit. There is more than $4 trillion in additional deficit reduction from many other expiring tax provisions that the BCA assumes will not continue over the next ten years in order to achieve its $2.1 trillion in deficit reduction.
On the spending side of the ledger, the BCA has also booked savings from payments to physicians from Medicare. This gimmick has been used by Congress for more than a decade. Congress always claims to get savings by canceling inflation adjustments for Medicare reimbursements in the future. But when the future arrives, the inflation adjustments are restored with a promise to cut them even further in the future.
The future has arrived again and in January current law says doctors will have all of these inflation adjustments erased and their payments cut by about 30 percent for treating Medicare patients. Since many doctors are already treating Medicare patients at a loss to their practice, they won’t absorb this cut and would stop treating Medicare patients. Every year since 2003, this cut has been put off.
If we assume that there will be no 30 percent cut and no increases in payments due to inflation over the next 10 years, that will cost about $300 billion. A more realistic assumption would be that payments to doctors will need to keep pace with inflation which would push the cost north of $450 billion.
All of this means that the $2.1 trillion in deficit reduction assumed in the Budget Control Act is about as realistic as the accounting Enron officials used.
These costs need to be addressed in a realistic manner. The paltry figures being bandied about by the super committee of possible deals they might agree to are just silly. They are avoiding the major policy decisions that need to be made and are continuing to book phantom savings.
That is why the Budget Control Act and its Frankenstein creation, the super committee, are a failure. Every penny of increased debt will be spent before the federal government has to make cuts to programs in 2013.
It is precisely this deal that came out of Washington that the financial markets deemed a failure. It is precisely why Standard & Poor’s downgraded this nation’s credit rating after the passage of the BCA.