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Political Negotiations You SHOULD Worry About


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The problem here, to paraphrase a famous line from the movie Apollo 13, was that failure was an option.  After all, the deadline had no immediate consequences, except that it allowed the politicians on the Committee to make it home in time for turkey. Consider the following:

* The automatic spending cuts that are triggered by the failure don’t kick in until 2013—implying that there is plenty of time to continue the conversation… if they want to.

* Between now and the time the automatic cuts are enacted, there is a major election that both parties are already focused on. Democrats and Republicans have started drawing lines in the sand in order to motivate their bases. And both parties are convinced they will sweep all three branches, meaning they will be able to do what they want with the budget at the start of 2013 regardless of what the super committee did or did not decide.

* Cutting $1.2 trillion out of the deficit over a 10-year period is an almost pointlessly small sum. It doesn’t really cut into the nation’s debt problems in any meaningful way. Currently the United States is $14 trillion in debt, while our social insurance systems are underfunded in the area of $40 to $45 trillion. Making such a small dent in these massive problems is hardly worth committing political suicide.

* Since the Committee was formed the bond market has more or less stopped paying attention to U.S. budget issues and instead is focusing on the slow unraveling of the Euro zone, meaning the pressure is hardly on to start turning the budget corner.

Add it up and the real surprise would have been if they had come up with an agreement. Even if they had, with an election on the horizon, there would be plenty of opportunity to undo whatever the Committee might have done.

Contrast this entire episode to another deadline earlier in the year: the debt ceiling limit. There a failure to compromise would have had severe consequences—including shutting down the government in the short run, and ultimately driving the U.S. economy into a recession if the Federal government was forced into an austerity program. With a real deadline like that at hand, real compromises were reached.

And there is another deadline bearing down on the economy at the end of this year. At risk are extended unemployment benefits as well as the payroll tax reduction American workers have been receiving over the past two years.

The amount involved is roughly $150 billion according to estimates from the Congressional Budget Office. Allowing these benefits to continue will not push the economy into another recession, nor will it make a substantial dent in the overall deficit. But if the benefits cease, the pain of the cuts will fall disproportionally on lower and lower middle-income families—those who have had the toughest row to hoe through this economic cycle. And it would also slow the U.S. economy down yet again in the first quarter of 2012, just as things finally seem to be turning a corner.

While we recognize the need to start balancing the Federal Budget—a process that is going to take years and have a negative impact on the economy—focusing on taxes on higher income households, reforming the corporate tax system, or making cuts in entitlement programs and pork barrel projects seem a better place to start.

Extend the benefits, Congress. This time the deadline is real

CATEGORY: Economic Policy



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