— TON - In less than three weeks, you’ll be buying the Thanksgiving turkey and the Joint Select Committee on Deficit Reduction — “super committee” in Washington, D.C. speak — will deliver its plan to cut future deficits by at least $1.5 trillion over 10 years.
Or it will fail and promptly go out of business.
The committee, composed of six Democrats and six Republicans, half from the House, half from the Senate, was created as a product of the Budget Control Act, the August deal in Congress to resolve the debt ceiling impasse.
"Nothing would send a more reassuring message to the markets than taking bipartisan steps to fix the structural problems in Medicare, Medicaid, and Social Security," House Speaker John Boehner said Monday as he urged the committee to come up with a plan.
If the committee can’t do that by Nov. 23, Thanksgiving Eve, then $1.1 trillion in automatic spending cuts over the next 10 years are supposed to start taking effect on Jan. 2, 2013.
In the first year, the automatic cuts mandated by the Budget Control Act would be about $54 billion, an amount equal to about 1.5 percent of FY2011 federal outlays.
But the cuts would bear heavily on defense spending, since Congress put most of the other big chunk of the budget, entitlement spending on Medicare, Medicaid, and Social Security, off-limits to the automatic chopper.
The cuts would get bigger as the 10-year plan proceeded if — and it’s a big “if” — Congress allows it to stay in effect.
Will Congress undo automatic cuts?
While we’ll know by Thanksgiving whether the committee will have succeeded in devising its own plan, it will take longer to find out whether Congress, having created the committee and backed it up with fail-safe spending cuts, will decide that it would rather not allow those cuts to take place after all.
On Tuesday afternoon, committee members heard from the authors of two deficit cutting plans that have been on the table for months.
One plan was devised by the Simpson-Bowles fiscal commission appointed by President Obama in 2010, and the other by the Bipartisan Policy Center, spearheaded by former New Mexico Republican senator and Budget Committee chairman Pete Domenici and former Congressional Budget Office head Alice Rivlin, a Democrat.
Domenici warned members that if those Republicans who oppose tax increases combine with those Democrats who oppose cuts in entitlement spending to block a deficit-cutting blueprint, they are "both complicit in letting America destroy itself."
In the first hour of the hearing, committee members gave few indications of where their bargaining was headed, or whether they’d found areas of agreement.
A warning on tax reform
Committee member, Sen Max Baucus, D-Montana, cautioned that “What’s (tax) reform to one might not be reform to another.”
Baucus said of the $1.1 trillion in tax credits and other preferences, which the Simpson-Bowles report proposed to scrap or shrink: “I think it’s important for everyone to know that only about $200 billion of those are itemized deductions, the rest are other tax expenditures which includes the employer-provided health insurance, for example...”
“So if the proposal is to repeal them all in return for lower (tax) rates and deficit reduction, people have to realize what that means,” Baucus warned. “A lot of people have relied on those provisions: employees have, because that’s income that’s not taxed….”
Baucus indicated he favored turning over responsibility for writing specific tax reform measures to the committee he chairs, the Senate Finance Committee, and to the House Ways and Means Committee, since there is so little time left to meet the Nov. 23 deadline.
Panel member Senate GOP Whip Jon Kyl, R - Ariz., argued that raising the tax on capital gains, as recommended by the Simpson-Bowles commission, would harm economic growth.
“Higher capital gains taxes mean … a higher cost of capital, less activity in the capital markets and less economic growth,” he said. It would “make our deficit problem worse.”
He reminded his colleagues that the health care law Congress passed last year already increases taxes on dividends and capital gains by 3.8 percent
The Simpson-Bowles plan should be all too familiar to four members (two Democrats and two Republicans) of the super committee since they also served on the Simpson-Bowles commission, but voted against its final recommendations.
If you look at what those four “no” voters said about the Simpson-Bowles plan, you will find clues as to why there has been so much bipartisanship — that is, bipartisan rejection of deficit cutting.
“If I believed that the increased revenue would actually be used for deficit reduction, you know, I might reluctantly come to the table, in a global agreement," said Simpson-Bowles commission member (and deficit reduction committee co-chairman) Rep. Jeb Hensarling, R-Texas last December, before voting against the commission's recommendations.
Hensarling cited the lesson he took from President Reagan's agreement to raise taxes in 1982: “Somehow the spending restraint never quite materializes, and yet the increased revenues do, and it seems like the increased revenues simply chase the spending.”
Democrat: Go back to Clinton Era tax rates
Another Simpson-Bowles commission member who voted “no”, California Democratic Rep. Xavier Becerra, faulted the panel for not endorsing a return to the income tax rates which prevailed under President Bill Clinton. “This approach does not require a single vote in Congress to take effect,” he noted. “Who says the only real solutions are complicated and opaque?”
The committee hearing Tuesday comes in the wake of last week’s offer by some of the Democrats on the committee of a plan to cut Medicare and Medicaid by as much as $500 billion over ten years while increasing taxes. Republicans rejected that offer while offering their own plan more weighted toward entitlement spending cuts.
Referring to the Democrats on the committee, AFL-CIO president Richard Trumka said in a conference call with reporters Monday, “I told them that this is the wrong direction to go in.” He added, “I was surprised to see some of the suggestions coming out from the Democratic side.”
Trumka said the labor union confederation might balk at supporting members of Congress running for re-election next year who end up voting for cuts in entitlement spending.
Organized labor is unhappy
“I would have a tough time envisioning us endorsing people who actually voted for major cuts to Social Security, Medicare or Medicaid,” he said. “That would have a dampening effect on any candidate, even if they were endorsed (by organized labor) and it would make our job significantly more difficult in mobilizing our members around a candidacy of a person who voted for cuts in Social Security, Medicare, or Medicaid.”
Some outside observers expect little to result from the super committee’s labors.
“Look, it’s a charade,” said investment banker Kenneth Langone, a supporter of former Massachusetts Gov. Mitt Romney's presidential campaign, on CNBC Monday.
Referring to the cold shoulder that Obama and most members of Congress gave to the Simpson-Bowles blueprint, Langone asked, “What happened with Simpson-Bowles? There was a perfect one; that was a home run! And they could all say, ‘look, here’s two bipartisan guys knowledgeable on the situation, no ax to grind, no re-election, none of that.’ And guess what? Nothing happened. Why is this any different?”
With Eurozone nations going through their own debt trauma right now, investors are paying much closer attention to European sovereign debt than to that of the United States, said Nigel Gault, the chief U.S. economist for economic consulting firm IHS Global Insight.
“It’s not the case that U.S. bond market is demanding huge cuts in spending or huge tax increases here in the United States,” he said, but bond market investors do want to see a credible long-term plan to reduce federal deficits.
“The problem would come if nothing eventually replaces the automatic cuts,” he said.