Is the Debt \"Super Committee\" Doomed to Fail?
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
2. No Bipartisan Agreement So Far
3. The Dreaded Debt “Sequester”
4. Will a Deal Get Done in Time?
5. Conclusions – What Do I Think?
The Debt “Super Committee”
On August 2, President Obama signed into law the Budget Control Act of 2011. The legislation allowed for an increase in the debt ceiling of up to $2.8 trillion, and will supposedly reduce the federal deficit by $2.3 trillion over the next 10 years. The bill represents a deal agreed to by the White House and most Republicans and Democrats.
The Budget Control Act of 2011 also created the Joint Select Committee on Deficit Reduction, more commonly known as the “Super Committee.” It is made up of six Democrats and six Republicans. The Committee’s charge is to find at least $1.2 trillion in spending cuts over 10 years, and the deadline to do so is November 23, just over a month from now.
If a majority (7) of the Super Committee members agree to spending cuts of at least $1.2 trillion, and presents such a plan to Congress, then the House and Senate must vote on the plan by December 23. If the Super Committee fails to present a plan, or if the plan fails to pass in the House and Senate, then automatic “triggers” go into effect to cut spending by $1.2 trillion over a decade beginning next year – evenly divided between defense and non-defense spending.
The Super Committee has been meeting behind closed doors for over a month, but the members have thus far said very little about any progress being made. The Committee is back in the news now because last Friday was the deadline for submitting ideas or plans for trimming at least $1.2 trillion from federal spending over the next 10 years. In other words, it’s now time for the Super Committee to get down to some real work.
Here are the 12 members that make up the Super Committee:
Co-Chair Patty Murry said the Super Committee has been deluged with recommendations to cut spending, but there is little indication that any big, bipartisan deal is on the table.Many of the ideas have been rattling around the halls of Congress for years: raise taxes, invest in small businesses, cut wasteful spending, cut more deeply at the Pentagon, go after unneeded agricultural subsidies, and so on.
No Bipartisan Agreement Thus Far
Early reports signal that lawmakers have mainly seen this input period as a purely partisan exercise that restates, rather than reconsiders, their long-held priorities along fixed party lines. For Republicans, it’s calls to cut spending and entitlements. For Democrats, it’s calls to raise taxes and avoid entitlement cuts. What else is new?
With the 2012 election cycle looming, few committee chairmen in Congress want to be seen as volunteering spending cuts that are critical to their key constituencies, and could therefore negatively impact their re-election chances. Instead, some chairmen have used the input period to caution the Super Committee against making spending cuts on their turf.
Some committee chairmen took their proposals directly to the Super Committee without releasing their recommendations to the public. Others are recycling proposals that have been fought to a standstill in previous legislative cycles, such as a longstanding GOP plan to cut costs by reining in medical malpractice suits.
For example, House Judiciary Committee chair Lamar Smith (R-TX in my District) proposes capping non-economic lawsuit damages at $250,000 – a longstanding priority for doctors and hospitals. That, together with limits on how and when lawsuits can be filed, could cut federal deficits by $57 billion over 10 years, according to the Congressional Budget Office. Democrats oppose that, of course.
Meanwhile, House Democrats directed the top Democrat on each committee to submit his or her own deficit reduction plans. Rep. Nancy Pelosi reportedly has reportedly submitted a proposal of her own to the Committee but the details are unknown; however, it is sure to include a lot of higher taxes and no cuts in entitlements. Pelosi said, "We want it to be big, we want it to be bold, we want it to be balanced, and in the balance side ... we need to have everyone pay their fair share." We all know what that means!
Letters from the top Democrats on 16 House committees urged the Super Committee to cut deficits by growing the economy – in other words, to take another look at the president’s jobs bill that died in the Senate last week – and by increasing tax revenues significantly. By the way, tax increases are now referred to as “revenue enhancements.”
Some members of Congress worked out Super Committee proposals independently. For example, Democratic Reps. Barney Frank of Massachusetts and Rob Andrews of New Jersey reportedly developed a plan that aims to reverse the 40% increase in Pentagon spending since 2001 that is not related to wars in Iraq and Afghanistan. Leave it to Barney Frank to gut the military!
This proliferation of plans to cut spending set some congressional committees, notably the Armed Services Committees, in defense mode. Congress has already agreed to cut defense spending by $450 billion during the next 10 years. In his first major policy speech last week, Defense Secretary Leon Panetta warned Congress to avoid further steps that could “hollow out” the military. That means a lot coming from Panetta.
The Dreaded Debt “Sequester”
Should the Super Committee fail to produce a plan that can win the support of at least seven of the 12 members – or should the Congress fail to pass it – automatic spending cuts of $1.2 trillion are mandated to kick in beginning in 2013, including $600 billion to come from defense spending and $600 billion from non-defense spending over the next 10 years.
If the Super Committee fails, or if Congress doesn’t pass its recommendation, then the Office of Management and Budget is directed to “sequester” (i.e. not spend) the amount of money needed to meet the $1.2 spending cut requirement over time.
In this scenario, security spending and non-security spending are capped at separate dollar amounts. The Department of Defense would be considered security spending, and the rest of the budget would be considered non-security spending. Cuts in the Department of Defense budget would be at least $60 billion per year, or even more if Barney Frank has his way (as discussed above).
Under the sequester, Medicare would be reduced by up to 2% per year. A number of entitlement programs for the benefit of low income families are exempt from the sequester, but a sequestration would be very ugly in any event. In some ways, it was designed to be very ugly in the hopes that it would never be used. House Speaker John Boehner warned:
“I made it clear to the Republican members of the Super Committee that I expect there will be an outcome, that there has to be an outcome. The sequester that was built behind this is ugly, and it was meant to be ugly so that no one would go there. I don't underestimate how hard it's going to be to come to an agreement by the so-called Super Committee, but we have to get to one.”
Super Committee’s Job Just Got Harder
Aside from all of the political wrangling surrounding the Super Committee’s mission, another deficit reduction headwind has just been put in place by the Obama administration. Last Friday, Health and Human Services Secretary Kathleen Sebelius announced that the Obama administration was going to discontinue the Community Living Assistance Services Act (commonly referred to as the “CLASS Act”) portion of the new ObamaCare law that had been designed to cover long-term care expenses due to illness or disability.
Under the law, individuals would have had the option to voluntarily pay into a long-term care system for a minimum of five years prior to receiving benefits. It doesn’t take much analysis to see why this program wouldn’t work. Making the program voluntary would likely result in fewer healthy individuals participating, which would reduce premium revenue and increase eventual costs. Of course, the bulk of those costs were assumed to happen outside of the 10-year budget window, so that would be a problem for a future Congress.
So how does the discontinuation of this ObamaCare benefit affect the Super Committee? Here’s how. The Congressional Budget Office (CBO) had determined that charging premiums for long-term care benefits would build a $70 billion surplus over the first 10 years of its existence, and the CBO considered that $70 billion surplus in its long-range budget deficit projections.
Now that this program has been discontinued, the $70 billion of deficit reduction is gone in an instant. This decision raises more questions about what else is wrong with ObamaCare, but that’s a subject for another time. Admittedly, there’s no mandate that this $70 billion be made up by the Super Committee, but it does mean that there is a large hole in the federal budget where assumed revenue used to be.
Of course, Republicans have criticized the CLASS Act ever since its enactment as part of ObamaCare. Seen as little more than a way to provide the illusion of short-term deficit reduction while building an unsustainable long-term money pit, conservatives cheered its demise. It makes you wonder what other unworkable provisions remain in ObamaCare that need to be brought into the light of day.
Will a Deal Get Done in Time?
The Super Committee has only just over a month to make some extremely difficult decisions. Both sides of the Committee want to get a deal done, but how they get there could not be more different. Many political observers feel the divide is just too wide, with Democrats wanting substantially higher taxes and no entitlement cuts, whereas Republicans want substantial spending cuts and no (or few) tax increases.
Others feel that in coming days and weeks as we approach the November 23 deadline, members on both sides of the Committee panel will become more flexible, especially as pressure builds from financial markets and credit rating agencies like Standard & Poor's, which in August downgraded US debt from its AAA rating.
Another issue is the fact that 2012 is an election year and those Committee members who are up for re-election, which includes all of the House members, may consider it political suicide if they compromise too much. They could very well be correct.
At the same time, failure to produce a measure would trigger painful across-the-board cuts to the Pentagon budget and a big slice of domestic programs. The idea behind this so-called sequester was to force the two sides to come together because the alternative is too painful.
The across-the-board sequester, however, wouldn't take effect until the beginning of 2013, which is already fueling speculation that Congress would simply revisit the issue after the elections next year. In any event, the Super Committee will be BIG NEWS over the next month or so, and whatever happens could fuel even more volatility in our already crazy investment markets.
Conclusions – What Do I Think?
In closing out this discussion for now, I would simply add this. It is a sad commentary that it could be this difficult to cut $1.2 trillion from our federal budget over the next 10 years. Consider this: Our official national debt is $14.89 trillion; if we add in all unfunded liabilities, our real national debt is in the $60-$70 trillion range and rising rapidly; and the federal budget for fiscal year 2012 is $3.7 trillion.
To think that it would be this difficult to cut $1.2 trillion from federal spending over the next decade is truly saddening. It is politics and partisanship out of control. Everyone knows the problem but we seem content to kick the can down the road rather than take action that could allow us to avoid another financial crisis and another severe recession, or worse.
Sadly, I predict that the Super Committee will NOT agree on a package of spending cuts totaling $1.2 trillion over 10 years just ahead. I predict they will fail via a very nasty and seemingly partisan fight, although I hope I’m wrong. It was purposely set up as a group of six Democrats and six Republicans, with no tie-breaker.
The truth is, I don’t believe that either the Democrats or the Republicans (yes, even the Republicans) really want to cut federal spending by $1.2 trillion over a decade.
If I am correct, that brings us to the next step which is sequester and automatic across the board spending cuts which will decimate our Defense Department. On this issue, I don’t think the Congress will allow that to happen. But that is the current law.
If the Super Committee does not agree on a plan to cut at least $1.2 trillion, I fully expect Congress to change the law before the sequester can trigger these cuts. Call me cynical, and yes I am. But I can foresee the real possibility that Congress will change the law, perhaps as soon as next year’s elections are done, and abolish the spending cuts that were enacted into law back in August when the debt ceiling deal was put into place. If Obama is re-elected, he will surely agree, in my opinion.
How the markets will respond in that case is anyone’s guess. But I think we can all agree that it won’t be pretty! If lawmakers fail to enact the agreed upon spending cuts, then we’ll prove that we have become Europe – in that we can’t make the difficult choices and tighten our belt.
The markets could then decide that not only have we become Europe, we’ve become Greece. It could happen. Time will tell, but I am not optimistic.
Very best regards,
Gary D. Halbert
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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert, Mike Posey (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.