So Long, Supercommittee

Well, at least they didn’t drag it out over Thanksgiving.

Shortly before 5 p.m. on November 21, 2011, Supercommittee Co-Chairs Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX) released a joint statement telling the world what it already knew: it was all over. While many had hoped for the sort last-minute compromise we have come to expect from this Congress, this time it just wasn’t in the cards. While the blame game is sure to continue for months (likely all 12 months between now and Election 2012), we turn our attention to what could happen next.

Option 1: Sequestration

It was supposed to be a deterrent, a fate so unthinkable it would force the Supercommittee into action. Now, it may become reality. Under the terms of the debt ceiling agreement, across-the-board spending cuts will be automatically triggered that will equal the $1.2 trillion in savings the Supercommittee failed to create. The first automatic cuts are split equally between security and non-security spending and are set to take effect on January 2, 2013. Security funding includes the Department of Dense, the Department of Energy nuclear-weapons related activities and the National Nuclear Security Administration, among other agencies. Security spending would be capped at $546 billion in FY 2013 and at $556 billion in FY 2014. All other non-security funding—including military construction, Veterans Affairs and Homeland Security funding—would be capped at $501 billion in fiscal 2013 and $510 billion in fiscal 2014. Under sequestration, Medicare will face limited cuts, but Social Security, Medicaid, veterans and civil and military pay, funding for the wars in Iraq and Afghanistan and overseas contingency operations will be excluded entirely.

Option 2: New Supers Save the Day?

We saw the Supercommittee and even heard whispers of a Super-duper committee for a while, but after a long and unsuccessful history of Domenici-Rivlins, Simpson-Bowleses, and now Murray-Hensarlings, it begs the question – Is anyone really going to be willing to take up this losing battle anytime soon? Senate Majority Whip Dick Durbin (D-IL) thinks so. Sen. Durbin suggested this morning that any bipartisan group of 12 senators could produce a “super” deficit reduction plan and bring it to the Senate floor for a vote. “It’s time to move to the committee of the whole. Let’s start moving beyond these special committees and let’s do something pretty basic and maybe radical,” said Durbin.

Option 3: Back to the Beginning

Before the Supercommittee even had a chance to fail yesterday, Republicans launched an assault against sequestration. Both Sen. John McCain (R-AZ) and former Massachusetts Gov. Mitt Romney went on the offensive against defense cuts. In a statement released yesterday, “We are now working on a plan to minimize the impact of sequestration on the Department of Defense and to ensure that any cuts do not leave us with a hollow military,” said Sens. McCain and Lindsey Graham (R-S.C.). “The first responsibility of any government is to provide for the common defense; we will pursue all options to make certain that we continue to fulfill that solemn commitment.” Romney echoed their sentiment, calling for the $600 billion in proposed defense cuts to be shifted to other parts of the federal budget. President Obama has vowed to veto any effort to prevent sequestration.

As Clock Ticks, the Super Committee Hears from Predecessors

On Tuesday, November 1, 2011, the Joint Select Committee on Deficit Reduction held a hearing entitled “Overview of Previous Debt Proposals.” Former Clinton Chief of Staff Erskine Bowles and former Senator Alan Simpson (R-WY), co-chairs of the National Commission on Fiscal Responsibility and Reform, as well as former Senator Pete Domenici (R-NM) and former Congressional Budget Office Director Dr. Alice Rivlin, co-chairs of the Bipartisan Policy Center Debt Reduction Task Force. From the day the Super Committee was formed, its members have said they would draw on previous deficit reduction proposals, specifically naming these two commissions.

During his opening remarks committee co-chair Jeb Hensarling (R-TX) commented that America faces a legitimate fiscal crisis and that structural reforms to entitlements, especially healthcare, are needed if the committee is going to fulfill its statutory responsibility to reduce the growth of the deficit by $1.5 trillion over the next ten years. He said he is especially concerned about the rising rate of Medicare spending and noted that it is not possible for the U.S. federal government to “tax away” its problems. Democratic co-chair Patty Murray (D-WA) reiterated the importance of striking a balanced and bipartisan deal that does not unduly burden the middle class and more vulnerable Americans. She reproached her Republican colleagues, saying that Democrats would be willing to make painful concessions if Republicans would do the same. She went on to say, “It’s not enough for either side to simply say they want to reduce the deficit – now is the time when everyone needs to be putting some real skin in the game and offering serious compromises.”

Simpson and Bowles testified before the committee on the findings of the National Commission on Fiscal Responsibility and Reform. They both urged the committee to take action on a comprehensive fiscal plan that will reduce the deficit. Mr. Bowles stated that the so-call “Simpson-Bowles” plan was based on six guiding principles – ensuring the plan would not disrupt a fragile economic recovery; protecting the truly disadvantaged; doing nothing to jeopardize the safety and security of the country; investing appropriately in education, infrastructure, and research; reforming the tax code; and cutting discretionary spending where appropriate. Simpson commented that he does not believe the committee’s mandate to find $1.5 trillion in deficit reduction is enough and that the Simpson-Bowles recommendation of reducing the deficit by $4 trillion is the minimum amount needed to restore the United States’ fiscal stability, stabilize U.S. debt, and begin to reduce the growing debt-to-GDP ratio. Both Simpson and Bowles warned the committee about the necessity of acting quickly, saying that while they acknowledged that it may not be possible for the committee to have the reforms drafted into legislative language and scored by the CBO by the November 23 reporting deadline, it is crucial that committee agree on an overall framework.

Domenici noted that the United States faces two major challenges. First, it must accelerate growth and job creation; and second, it must reduce future deficits so that the U.S. debt will no longer grow faster than the economy. He argued that these objectives reinforce one another, saying that faster growth will reduce deficits, and stabilizing the debt will cut future interest rates and reduce uncertainty, spurring growth. In order to achieve these goals, Domenici contended that the committee will have to go well beyond the charge of identifying at least $1.5 trillion in savings over the next ten years, because even savings of this magnitude would still leave the debt rising faster than economic growth. Domenici suggested that they should work on a bargain involving structural entitlement and tax reforms, which would save at leave $4 trillion over ten years. He went on to say that the committee should take advantage of the full scope of its authority by compelling authorizing committees to produce fundamental tax and entitlement reforms and provide for “fast-track” consideration of those reforms.

Dr. Rivlin focused her testimony on the Bipartisan Policy Center Debt Reduction Task Force’s recommendation for reforming Medicare and the federal tax code. She argued that there can be no lasting solution to the U.S. debt crisis without structural changes in the Medicare program to slow its cost growth. She recommended transitioning Medicare to a “defined support” plan that would keep traditional Medicare but give seniors the opportunity to choose among competing private plans that could save them money. Dr. Rivlin also suggested a number of reforms the tax code in order to raise revenue and increase fairness, including a two-bracket income tax with rate of 15 percent and 28 percent; setting the corporate tax rate at 28 percent; and taxing capital gains and dividends as ordinary income.

Time is Running Out, CBO Director Cautions Supercommittee

On Wednesday, October 26, 2011, the Joint Select Committee on Deficit Reduction held its fourth public hearing, entitled “Discretionary Outlays, Security and Non-Security.” The committee heard testimony from Congressional Budget Office (CBO) Director Douglas Elmendorf for the second time since it was empanelled in August.

Dr. Elmendorf offered multiple projections of discretionary spending over the next ten years, projecting what the deficit impact will be if the Super Committee meets its goal of creating at least $1.5 trillion in deficit reduction, as well as if the committee fails, triggering automatic across-the-board cuts. Dr. Elmendorf emphasized that while discretionary spending is certainly an important piece of the conversation, it is mandatory spending that is “overwhelming” GDP. He went on to say that without reforms to Medicare, Medicaid and Social Security, it will be difficult to achieve the needed savings.

Super Committee Co-Chair Sen. Patty Murray (D-WA) said that the Super Committee “is not there yet,” but emphasized that progress is being made and said she is “hopeful” that the committee will be able to meet its November 23, 2011 deadline. Murray also reminded her colleagues that non-defense discretionary spending constitutes less than one-fifth of all federal spending and that the debt-ceiling deal that established the Super Committee already cut $800 billion from the deficit. She asked Dr. Elmendorf what the impact of additional discretionary cuts will be, and he responded that Americans will see a decrease in all services, ranging from national security to police and fire departments to highways.

Super Committee Co-Chair Rep. Jeb Hensarling (R-TX) emphasized the need for the Super Committee to tackle Medicare, Medicaid and Social Security. He listed a number of discretionary programs that have continued to increase their spending, even as the overall economy and family incomes have shrunk.

Sen. John Kerry (D-MA) was the only Super Committee member to speak in terms of specific proposals, questioning Dr. Elmendorf about the potential impact of a $3-$4 trillion deficit reduction, rather than the $1.2-1.5 trillion required by the Budget Control Act. Sen. Kerry said that if the Super Committee only achieves the minimum required, it will be forced to reconvene in a year or two to address the same problems. He said that a meaningful solution requires at least $3 trillion in deficit reduction based on a three-to-one or two-to-one cuts-to-revenue model. During the hearing, several news outlets began reporting that the Super Committee Democrats are expected to produce a plan creating $2.5 to $3 trillion in deficit reduction over the next ten years.

Other Democrats on the committee focused their questions on the impact of increased revenues and the need to reduce defense spending. Dr. Elmendorf emphasized that while increased revenues could have a positive impact on the overall budgetary picture, it would very much depend on what policies were instituted to generate such an increase. Sen. Max Baucus (D-MT) asked about the current levels of defense spending, saying it currently exceeds every other period in history, with the exception of World War II, and questioning whether the Appropriations Committee is misusing designated “war funding” for other purposes. Dr. Elmendorf said Sen. Baucus was correct about the current level of spending and said that sometimes it is difficult to draw clear lines between what constitutes war spending and what does not. Rep. Chris Van Hollen (D-MD) also emphasized that if Congress were to repeal the automatic, across-the-board cuts to defense spending, the deficit would increase.

Republicans challenged Dr. Elmendorf on the CBO’s election to include the Obama Administration’s announcement that it would not implement the CLASS Act into its projections but not the Administration’s announcement that it will be reducing the U.S. role in Iraq and Afghanistan. Sen. John Kyl (R-AZ) said that CBO was “drawing a distinction without a difference.” Dr. Elmendorf countered that the CBO treats mandatory spending (including the CLASS Act), differently than discretionary spending (including defense spending). Sen. Rob Portman (R-OH) also asked about the role of uncertainty in hindering economic growth, and Dr. Elmendorf said that it is certainly impacting every sector of the economy.

Dr. Elmendorf said that in order for the CBO to conduct a full analysis of the Super Committee’s proposals, it will need to receive them by early November. The Super Committee has until November 23, 2011 to present its proposals to Congress, and Congress has until December 23, 2011 to pass the proposals or automatically trigger across-the-board cuts. If the cuts are triggered, the process, known as sequestration, would begin in January 2013.

The Super Committee will hold its next public hearing on Tuesday, November 1. The Committee will receive an overview of previous deficit reduction proposals, hearing testimony from Erskine Bowles and former Sen. Alan Simpson (R-WY), co-chairs of the National Commission on Fiscal Responsibility and Reform and authors of the “Simpson-Bowles plan,” as well as Alice Rivlin and former Sen. Pete Domenici (R-NM), co-chairs of the Debt Reduction Task Force and authors of the “Rivlin-Domenici plan.”

CBO Director's Sobering Testimony to the Super Committee

The Joint Select Committee on Deficit Reduction, nicknamed the “Super Committee”, held its first substantive hearing today, entitled “The History and Drivers of Our Nation’s Debt and Its Threats.” The committee heard testimony from Dr. Douglas Elmendorf, Director of the Congressional Budget Office (CBO), and a former Brookings Institute fellow, who was named to the post by Democrats in January 2009. Co-Chair Senator Patty Murray (D-WA) chaired today’s hearing as it was held on the Senate side. She will alternate with her co-chairman, Rep. Jeb Hensarling (R-TX), who will chair the hearings held on the House side.

The Super Committee must identify $1.5 trillion in budgetary savings over ten years from spending cuts and increases in tax revenues by November 23rd. If that does not happen, across-the-board cuts will be triggered by the end of the year, including in defense spending. The panel’s work became even more complicated on Monday as President Obama sent his $450 billion jobs plan to Congress and asked that it be paid for by ending certain corporate tax breaks and limiting tax deductions for the wealthy. In advance of today’s hearing, Rep. Hensarling said that Obama’s plan would “make an already arduous challenge of finding bipartisan agreement on deficit reduction nearly impossible, removing our options for deficit reduction for a plan that won’t reduce the deficit by one penny.”

During the members’ opening statements, many of the Republicans on the 12-member Super Committee blamed the rising cost of Medicare, Social Security and other entitlement programs, as the key drivers of the nation’s debt, while Democrats pointed to the economic meltdown, costly wars in Iraq and Afghanistan, the Bush tax cuts, and government bailouts. Rep. Hensarling made it clear during his opening remarks that the key to credible deficit reduction is a jobs program that does not raise taxes. Rep. Jim Clyburn (D-SC), in contrast, stated that, “We must balance the budget with a balanced approach that includes job creation and revenue raisers.” Sen. John Kerry (D-MA) argued that the panel needs to “go big” and reach savings of more than $1.5 trillion over ten years, easily exceeding the $1.2 trillion in savings that the panel has been required to meet. Sen. Kerry’s call for more than $1.5 trillion in long-term savings follows a letter that more than 60 business leaders and former government officials sent to congressional leaders and the Super Committee yesterday, urging that the panel cut more than the savings it is assigned to find. Among those signing the letter were Roger Altman, founder and Chairman of Evercore Partners, and former Senators Judd Gregg (R-NH) and Bob Kerrey (D-NE). Former Sen. Alan Simpson (R-WY), who co-chaired the 2010 debt commission, has also referred to the Super Committee’s savings goal as “peanuts”. Republican members of the Super Committee have argued that any plan to increase its savings mandate would make a bipartisan agreement impossible.

During his prepared remarks, Dr. Elmendorf warned that the nation’s current economic policies make attaining a sustainable federal budget impossible, citing an aging population and rising healthcare costs specifically. He told the Super Committee that the United States must deviate from its current policies in at least one of three ways: (1) Raise federal revenues significantly above their average share of GDP; (2) Make major changes to the sorts of benefits provided for elderly Americans; or (3) Substantially reduce the role of the rest of the federal government relative to the size of the economy.

Throughout the hearing, Elmendorf made it clear that the United States won’t be able to keep up its spending policies while keeping current tax policies in place. He told the committee that recovery is ongoing but is moving at a much slower pace than anticipated and that the CBO has lowered its forecast for economic growth from the agency’s August estimate of 2.3 percent to about 1.5 percent through the end of 2012. He added that he believes the unemployment rate will stay close to 9 percent during that time period.

The Super Committee launched its website today. The link can be found here