What can the deficit supercommittee hope to accomplish?
The WaPo had a good on the issue but I wanted to clarify one point that I think has been muddied in much analysis.
The deficit-reduction supercommittee聽could always pull a rabbit out of a hat, I guess, but the likelihood of anything but gridlock has been low from the beginning.聽 I give the R鈥檚 some credit for breaking the no-tax-increase-ever pledge, but their offer is so fundamentally unbalanced鈥�$300 billion in revenue increases from closing expenditures in exchange for rate cuts that will amount to almost $4 trillion in tax cuts鈥攖hat it can鈥檛 taken seriously.
But my point here is about something else.聽 There鈥檚 a聽meme developing that if the committee were to gridlock, markets would react badly, interest rates would rise, and the message that 鈥淯S=Greece鈥� would be clear to all.聽 To which I say: nonsense.
In fact, I鈥檇 encourage you to generally respond to the statement: 鈥渋f X happens, markets will react badly鈥� with a healthy dose of skepticism.聽 Half the time, this formulation is scaremongering, used to garner support for your side.聽 And the other half, even experienced analysis don鈥檛 know how the market will react (remember the S&P downgrade鈥搃nterest rates on US Treasuries fell after the announcement鈥o figure).
Most recently, the landscape is littered with Chicken Little warnings about the impact of current US levels of indebtedness on interest rates.聽聽 At the end of the day, these alarmists do a lot more harm than good, because someday Chicken Little will be right, and no one will listen to him.
In this case, market players have of course priced in the possibility of the Supercommittee failing to agree on a plan.聽 I鈥檓 not saying these players are all-knowing or even particularly rational, but if they haven鈥檛 figured out that gridlock is the likely outcome, they鈥檝e got no business betting on markets.
And, of course, the trigger mechanism is there to ensure $1.2 trillion in savings over ten years.聽 But here鈥檚 the thing鈥攁nd my readers know I鈥檓 as far from Chicken Little as you can get.聽 I take this warning more seriously than the 鈥済ridlock=doom鈥� meme:
鈥溾�nalysts are deeply concerned that lawmakers could 鈥渄e-trigger鈥� the automatic cuts, undoing even the modest steps Congress has so far taken to tame the soaring debt.鈥�
If the Supercommittee fails and Congress takes apart the trigger, that could send a worrisome message to markets that our politics are even more dysfunctional than people thought.聽 I鈥檓 not saying that I鈥檓 sure markets will react badly鈥攎y knee continues to jerk with skepticism re the 鈥渋t will tank the markets!鈥� fear-mongering.
I鈥檝e also been outspoken about the undemocratic nature of the whole and the ineptitude of the Congress to do their job as a full legislative body and craft a balanced, sustainable budget.
But if they gridlock and de-trigger, I鈥檒l be nervously watching the interest rates on T-bills.
