In not unsurprising news, the Supercommittee will shortly announce that they have failed to reach an agreement to cut $1.2 trillion from the deficit over ten years. The New York Times reports on why the twelve-member group became deadlocked:
In the end the two sides could not agree on a mix of tax increases and spending cuts and — perhaps above all — on the fate of the tax cuts originally signed by President George W. Bush, which are now scheduled to expire at the end of 2012.
Neither party is blameless. Republicans remain far too resistant to increasing revenue, even by cutting tax expenditures while keeping tax rates the same. The tax code is littered with provisions that function much like “government spending” (read an excellent post by Ezra Klein on the subject), yet the GOP remains firmly against raising revenue by cutting these deductions and credits. Furthermore, as I wrote in July, many of these tax expenditures have dubious economic justifications. For instance, the tax deduction for mortgage interest is overly generous:
Congress could raise $150 billion in revenue over the next decade by ending mortgage interest deductions on second homes and home equity loans, as well as restricting such deductions to mortgages of as much as $500,000 per couple — instead of the current limit of $1 million per couple. By offering interest deductions on $1 million mortgages, we are not promoting home ownership; these people would have bought homes in any event. Rather, we are providing government subsidies for the purchase of large homes by wealthy taxpayers.
The Democrats, on the other hand, are unwilling to address fundamental problems in entitlement programs such as Social Security. If we stick with current policy, the Social Security Trust Fund will expire in 2037, forcing benefits to be slashed by almost 25% at that point. There has been some discussion of changing the measure of inflation so that cost-of-living adjustments (COLAs) become smaller—this would cause the most pain to the most elderly, and would only reduce the 75-year shortfall by 25%.
By contrast, my plan would fix two thirds of the shortfall, and would be progressive. Under my plan, the purchasing power of all benefits would at least remain at their current value, adjusted for inflation. Lower-income individuals would continue to receive their current scheduled growth in benefits, while the growth of benefits would slow modestly for higher earners. This policy is far more progressive than other proposals, such as the changes to COLA—Democrats should be able to get behind it, but the party stubbornly held out against significant changes to the program.
So, what happens next? The automatic trigger, $1.2 trillion in cuts split between defense and domestic non-discretionary spending would take effect after the 2012 elections. While a simple majority vote could repeal these cuts, such a total repeal would be politically doubtful. Instead, Congress will presumably try to work out another deal that would cut the same or lesser amount in exchange for avoiding the sequester. In all likelihood, this means that there will be frantic negotiations in the final weeks before the sequester strikes, replicating the debt ceiling crisis and harming the economy. But whatever happens, Congress should not wiggle out of these triggered cuts: there must be consequences for both parties if they cannot come to a reasonable compromise deal in time.