Monday, November 21, 2011

The Super Committee Failure—What’s Next?

The stock market today was shocked, simply shocked, that the Super Committee didn’t come up with a debt deal.

I don’t know why. Republicans can’t vote for more taxes unless they're willing to get “primaried” from the right and risk losing their seat. Ditto for Democrats who would face the same punishment from their base if they voted to change the sacred defined benefit entitlements without at least getting tax concessions from the Republicans.

Obviously, neither side has a lot of statesmen in their ranks who would actually be willing to compromise.

In this hyper-partisan environment, where both parties are effectively in the control of their far left and far right bases, it is simply not possible for any meaningful bipartisan compromise.

Some time ago on this blog, I said that we wouldn’t get any meaningful effort to deal with the federal debt and entitlement challenge until there was a bond crisis—when investors would no longer be willing to lend to the U.S. government at reasonable rates without our first getting our unsustainable debt under control. Right now the U.S. government is borrowing about forty cents of every dollar it spends!

We are now watching just such a bond crisis force government into action. But it isn’t our government—it’s happening before our eyes in Europe.

Ironically, and it’s a huge irony, U.S. government bond prices continue to rise and interest rates continue to fall because as bad as our problems are, Europe looks worse. But with the latest American failure to govern, how long will that last? The flight to American “quality” that is propping up our deficit spending is as irrational and unsustainable as any of our other recent economic “bubbles.”

To fix the American debt crisis we will need to fix our entitlement problems. To do that, there will have to be major changes to the biggest entitlement driver—health care costs in Medicare, Medicaid, and even federal employee benefit costs.

As long as we have a divided government we are stalemated—not only over what to do with Medicare and Medicaid but over what we will eventually do about implementing the Affordable Care Act as well.

All of this will now effectively be on hold waiting for the results of the 2012 elections. If the outcome of those elections continues to be a divided government it is hard to see how we’ll have a solution even after 2012—short of an American bond crisis forcing things to change.

I can’t realistically see a Democratic sweep in the next election—that they recapture the House and hold the Senate and the White House.

But it is possible that Republicans will win all three. That would end the deadlock and likely mean the effective repeal of the Affordable Care Act (at least 51 votes in the Senate could gut it), as well as serious efforts toward the Republican “solution” to the entitlements and the under-age-65 health insurance market along the lines of the Ryan defined contribution proposals.

It is also possible that Obama could be reelected and have to face a Republican House and Senate—and even more political confrontation with a Republican Congress sending a Democratic President their health care and debt fixes. Maybe, after the election, both sides would be willing to deal. Maybe not, the current political environment that abhors compromise would have to change dramatically.

Layer on top of all of this the sharp cuts the defense and homeland security budget will now get because of the debt deal fallback provisions—defense will have to sustain $600 billion in cuts. I don’t consider myself a deficit hawk but it is hard to see how these defense cuts can be implemented. Combat forces are already at half of 1990 levels and the defense budget spending is already on its way to the lowest level as a percentage of GDP since 1940.

That the defense cuts are unsustainable likely means the Congress will find a way to reverse them and make the federal debt situation even worse than it is today.

This country is facing one of the greatest domestic political and economic challenges in its history—our debt level as a percentage of GDP is double what it was at the end of the Great Depression! The modern economic way of life we have become accustomed to is literally hanging in the balance. But our political institutions are now clearly unable to confront the problems. The 2012 elections could finally give one side or the other the ability to confront these issues in a way that is starkly different than the way the other guys would have. Or, the election could just give us another divided government still unable to deal with the growing crisis.

More stalemate would leave only one outcome I can foresee—a global U.S. bond crisis that would literally stop the federal government in its tracks and the entire American economy with it. Such a sobering crisis could well force political moderation and compromise—hopefully before it was too late.

The 2012 elections are a big deal. But it will likely take even more—lots of something we haven’t seen in a long while—statesmanship.
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