Thank the Supercommittee for Dying

11/18/2011 10:48 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

Republicans are insisting that any deal for a purported $1.2 trillion in budget savings perpetuate tax cuts worth $3.8 trillion, writes MoneyShow.com senior editor Igor Greenwald.

Europe’s a train wreck, China a clumsy menace, Afghanistan a steady drain. Unemployment’s too high and home prices too low, and riot police need to occupy some of our plazas and parks just to make sure they can be “enjoyed by everyone.”

And on top of all that, there’s another budget staredown under way in Washington, and everyone remembers how well the last one worked out. Congress already has a lower approval rating than BP (BP) during the oil spill, Paris Hilton, and communism. The next embarrassment might bring out the pitchforks.

But whether you are a paragon of fiscal rectitude or sure, as I am, that spending cuts are one of the very worst things we can do right now, we can all rest easy on one score. As Herman Cain should definitely rap before he bows out, we’ve got nine-nine-nine problems, but the supercommittee ain’t one.

You remember the supercommittee, of course: 12 respected lawmakers drawn evenly from the two parties and chambers of Congress. Good people. Held hearings. Had several months to come up with a more sensible savings of $1.2 trillion over ten years—chump change, really, to avoid automatic cuts likely to prove far more painful and unpopular.

So now the deadline is next week, and the offers and counteroffers have petered out, replaced by rehearsal of recriminations.

So, game over for the republic? A sign of the impending budget apocalypse? Hardly.

At this point, given the positions of the combatants, failure to strike a deal would in fact be a victory for fiscal common sense. Because, while saving $1.2 trillion sounds praiseworthy, the Republican Party—the balanced-budget-amendment party—has asked for one eensy-weensy favor in return: It wants to dispense with the fiction that the ten-year-old Bush tax cuts were ever meant to be temporary.

The cost of not letting them expire next year: $3.8 trillion over a decade. And as soon as Democrats agree, the supercommittee can declare victory and go home.

Fat chance, of course. Democrats are willing to sacrifice revenue the Treasury can’t afford to lose to perpetuate the tax cuts for those making less than $250,000 annually. But they see no reason to burden the supercommittee with this when it could be debated separately next year, before the election, nailing Republicans as the party of the 1%.

Meeting Republican demands would require pretending that the $1.2 trillion in supercommittee savings exists in a separate universe from the $3.8 trillion cost of the “temporary” tax cuts that would otherwise go away in a year.

Failure here seems preordained, especially because Wednesday’s deadline is the phoniest ever. Ingeniously, those doomsday automatic cuts to all the “discretionary” agencies that manage air-traffic control, inspect produce, and fight wars would not take effect until 2013. Which means the real deadline is sometime next fall, before this Congress hits the campaign trail.

So, a year to avert a looming tax hike that would do much to repair federal finances, a year to dodge badly overdue but untimely and unpopular defense cuts. All entities, even ones as dysfunctional as this Congress, possess an instinct for self-preservation.

But what about Standard & Poor’s and another dreaded downgrade? That’s a hollow threat, considering how Treasuries have performed since the first shoe dropped. The ten-year Treasury yield has dropped from 2.46% on Aug. 4, the day before S&P downgraded the US from AAA, to a low of 1.72% in September and 1.99% today, responding mainly to fears of a recession and the European debt crash.

The S&P cited government’s inability to agree on essential medium-term reforms; it would hardly be cheered by a newfound consensus to max out the credit card. But in any case, bond buyers don’t care about the budget crisis of 2017—what they care about most these days getting their principal back next year, if not the next minute.

A Hail Mary supercommittee deal is worth rooting for, if only because the stock market would get a boost, and everyone would be spared a reprise of this debate next year.

But this desperate invention was never meant to tackle our long-term budget issues. Its failure can hardly come as a surprise.

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