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Debt Super Committee Could Spoil the Holidays

Could the Congressional Joint Select Committee on Deficit Reduction (the "JSC" or "Super Committee") come to our rescue? Recall that the goal of the JSC is to identify $1.5 trillion in U.S. budget savings by Nov. 23, 2011. A simple majority (7 of 12 members) is needed to approve the JSC proposal and forward it to Congress for a "yes or no" vote.

In turn, Congress must approve legislation attaining at least $1.2 trillion in deficit reduction and/or pass a balanced budget amendment to the U.S. Constitution by Jan. 15, 2012. If no legislation is enacted, automatic spending cuts (a "sequester trigger") take place between 2013 and 2021, split between defense and non-defense areas of government.

There certainly are reasons to believe that a JSC agreement will be reached. For one, imagine the political fallout if this committee cannot get their act together. Only 13% of Americans have a favorable view of U.S. Congressmen. Thus, action is needed, and inaction is intolerable. Furthermore, both Democrats and Republicans may have a hidden agenda in reaching an agreement to achieve the desired deficit reduction target.

Democrats want the extension of the 2% payroll tax cut. Republicans want the extension of expiring corporate tax provisions. By achieving an agreement to cut the deficit by $1.5 trillion, the JSC-driven legislation would create the spending cuts to rationalize the continuance of these tax provisions (which certainly do not help with reducing the deficit in the near-term).

To be clear, most pundits do not expect the JSC to find a mutually acceptable $1.5 trillion worth of deficit reduction measures. However, a consensus seems to be brewing that there is some common ground for the Democrats and Republicans such that an agreement that is less than $1.5 trillion in scope may be proposed and enacted by Congress.

Potential areas of agreement include increased cost-sharing to be paid by Medicare beneficiaries, eliminating the ethanol tax credit, decreasing Medicare payments to health care providers, reducing agricultural subsidies, and subjecting Medicare pharmaceutical purchases to rebates (which is already done in Medicaid).

Why do so many strategists have low expectations about the JSC's ability to reach an agreement? One means to reduce the deficit is to increase government revenues. Whereas Democrats are largely focused on generating more government revenues via tax increases, most Republicans do not want to increase corporate or individual tax rates.

Another means to reduce the deficit is to decrease government spending. Whereas entitlement spending (Medicare, Medicaid, Social Security) is the focal point of spending cuts for both parties, Republicans want to drive much larger cuts to entitlements than Democrats are willing to allow. To further muddy the waters, some Democrats want to incorporate some aspect of fiscal stimulus (e.g. an extension of unemployment benefits) as part of the JSC proposal whereas Republicans are not as inclined to allow for more fiscal stimulus in the absence of meaningful spending cuts being approved.

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