Monday, November 21, 2011

A Super Failure?

Sen. Patty Murray (D-Wash.), co-chair of the super committee.

The Goal: Agree to $1.5 trillion in negotiated budget reductions over 10 years, or $1.2 trillion in imposed cuts over the same decade. The Results: predictable.

Today (11/21/11 the day the super committee officially “failed”) and the Dow fell by 249 points. As judges of “failure” traders can be decisive, but traders trade and they look for an excuse to buy or sell as part of their existence – so from that perspective “failure” is something to work with...

The cynical view aside, the underlying truth is that some action is required, as the US government debt has passed the $15 trillion. That debt level is equal to around 99 percent of the size of the total US economy; under any analysis this is a serious level of debt.

But even cuts take time. Automatic spending cuts triggered by the failure of the super-committee will not come into force until January 2013 and there is no measure of history that supports a view that congressional action in 2011 (or inaction in this case) will survive to obligate spending levels in 2022. 

Even with the “super-failure” the law provides Congress 13 months to more prudently implement the automatic $492 billion in defense and $492 billion in non-defense cuts (links take you to budget document - see pages 465-466). You may notice that does not add up to $1.2 trillion; the difference is that 18% of the $1.2 trillion of “cuts” are mandated as a “stipulated reduction for debt service.” In layman’s terms that mean Congress must set aside some income to pay the interest on our debts.

Barring future action the automatic cuts will impact federally funded education programs, and the impact will accelerate Washington’s tradition of underfunding the IDEA promise to special education.

But is it going to be the “disaster” some members of Congress have predicted? Consider this before you answer – the yearly “cuts” represent about 7.3% of defense/homeland security 2010 expenditures and 7.6% of other discretionary program expenditures. Is that a disaster? Not in my book – it’s painful to be sure but given the size of those two expense buckets ($689B defense, $660 discretionary), it seems like a workable problem.   

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