Daniel Gross

Superfail: Why D.C.’s Fiscal Clown Show May Still Yield Results

Contrary Indicator

To the surprise of nobody, the Congressional Supercommittee tasked with coming up with $1.2 trillion in deficit-cutting measures has completely failed.

If the definition of insanity is doing the same thing over and over again and expecting different results, then Washington is officially bonkers. The entirely predictable face-plant of the Supercommittee came on the heels of the highly predictable failure of the Simpson-Bowles Commission and the Obama-Boehner grand bargain talks.

You don't have to have a Ph.d. in political science to grasp the dynamic at work. The White House has a set of preferences, which it has laid out here. But it doesn't spend a lot of time campaigning for them, and it doesn't believe that getting intensely involved in the negotiations will help move the ball. Democrats aren't entirely sure what they want, though they insist any large deficit reduction deal must include significant tax increases, preferably on higher-income earners and companies. Otherwise, they won't consider significant changes in entitlements that their forebears created, like Social Security and Medicare. As for Republicans, there are two things they aren't interested in: (1) raising taxes; and (2) doing a large deal with President Obama that will give him an achievement going into the next election..

Oh, and the overwhelming majority of people who parade around Washington posing as fiscal hawks are frauds. They're the ones who created a tax system that collects revenues that can't fully fund the spending system they also voted to create. And when push comes to shove, those who cry most loudly about the deficit shy away from doing what's necessary. When the Republican presidential candidates all indicated that they'd reject a deficit plan that included 10 dollars of spending cuts for every dollar of tax increases, it was an extremely clear signal that the Republican party as currently constituted isn't interested in a grand deal. Democrats, for their part, figure there's no point in making massive concessions on entitlements if there's no reciprocation on taxes. And for both parties, these postures make complete political sense.

As the Supercommittee met, there simply wasn't any space for a deal. And the Supercommittee's secret weapon turned out to be a dud. In theory, if the Supercommittee failed to come to an agreement, the default position would be automatic cuts of $1.2 trillion split between social spending and defense. The theory was that such reductions would be so odious to both sides that they'd simply have to come to terms. Here, too, the design was flawed. The cuts aren't set to take place until 2013, which lessens the urgency. And this thing called the Constitution allows Congress to change laws through a process called legislation. Even before the Supercommittee failed, there was talk of simply ignoring or overturning the proposed defense cuts.

While the Supercommittee drama played out, Washington continued to stage a theater of the absurd. The House, led by its Republican majority, last week voted on a Balanced Budget Amendment, a change to the Constitution that could finally force fiscal discipline. But Rep. Paul Ryan, the Republicans' lead voice on budget issues, didn't vote for it. Why? He realized that the budget plan he has proposed, the one which his colleagues have adopted as their own and that creates trillions of dollars of new debt, would be unconstitutional under the amendment. Never mind. Almost all the Congressmen who voted for the balanced budget amendment also voted for the Ryan plan.

The silver lining is that this failure is not likely to matter much to the bond and stock markets over the long-term. And it's quite possible our salvation may come from the same set of conditions that has inhibited action, as The Daily Ticker's Henry Blodget and I discuss in the accompanying video.

While the Supercommittee tried to set up a fake trigger for deficit reduction, there are some real triggers out there that have the potential to take a bite out of deficits. If Congress and the White House simply argue, grandstand, and refuse to come to an agreement over the coming year, some $7.1 trillion in deficit reduction could be on the way. This is what Washington Post columnist E.J. Dionne dubbed the do-nothing option. The full details are here. There's $3.3 trillion from letting the Bush-era tax cuts on income, capital gains, and dividends expire at the end of 2012. The alternative minimum tax isn't indexed for inflation. And so each year, it catches more people up in its maw, unless Congress enacts a temporary patch. Simply doing nothing on the AMT would raise $700 billion over the next several years. A law passed in the 1990s cut the reimbursement rate for Medicare providers. But Congress has enacted a series of temporary fixes to forestall the cuts. If Washington locks grids over the issue, Congress would effectively cut $300 billion in spending. And don't forget the $1.2 trillion in automatic cuts that stem from the Supercommittee's failure.

The best chance for doing something about the deficit, in other words, may be to do nothing. And if there's one thing this divided Congress has proven it can do, it's nothing.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

His most recent book is Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.

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