Gregg Easterbrook

The shock awaiting if the ‘super committee’ fails

November 17, 2011

Action by the debt-reduction ‘super committee’ is due in less than a week. You will not be surprised to learn the super committee may only announce grandiose goals, while “deferring” specifics to some unspecified future point.

If, after months of hype, the super committee turns out to be a Potemkin committee, taking no action against the tide of government red ink, here is what will happen: Absolutely nothing.

That’s why falling dangerously arrears on national fiscal policy is so seductive – in the short term, nothing happens. Greece, Italy, Portugal – their governments made irresponsible decision after irresponsible decision, and nothing happened. So the irresponsible decisions continued.

America’s political leadership can continue to act irresponsibly about money for years to come, and absolutely nothing will happen … until it’s too late.

Consider an analogy to household finances. My wife and I are squares about money. We borrow conservatively, repay early, plan cautious budgets and won’t buy anything unless we know we can cover the cost within a short time. The result is a nice house that’s mostly our own equity, plus retirement savings and a strong credit rating. In fiscal terms, we are pretty much where the United States was a quarter century ago.

Suppose I ran out and bought a high-end sports car for me and a diamond brooch for her. This would be irresponsible, especially from the standpoint of our three children. What would happen the next day?

Absolutely nothing. I could break years of rigorous self-discipline about debt and short-term outlook, but pay no penalty at all.

Observing that nothing happened, suppose I then take my wife on a luxury world tour – first-class flights, presidential suites, Bollinger ’75. I could just sign for it, no questions would be asked. What would happen? Absolutely nothing.

I could go on like this for quite a while, overspending without restraint. The sun would continue to rise. It would seem nothing was going wrong — until my family’s finances were ruined. By the time that point had been reached, it would be too late.

In most of its history, the United States government has been conservative about debt. The nation had to borrow significantly during the early 1940s, but responded with a strict focus on repaying that debt quickly during the late 1940s and early 1950s. As recently as the Reagan deficit years of the early 1980s, there was bipartisan consensus that significant borrowing should be a temporary policy only. In the late 1990s and first two years of the 2000s, the national debt declined as the budget went into surplus and Congress resisted the impulse to overspend.

Then, beginning in fiscal 2003, discipline went out the window. The FY 2003 deficit of $378 billion was considered shocking at the time — the worst, in current dollars, since World War II. Every year since then, save fiscal 2007, has seen a federal deficit that would have been shocking in any previous decade. Yet nothing happened! The sun still rises, and other nations still lend the United States money.

When Congress and the White House discovered they could borrow recklessly and nothing bad seemed to happen, forbidden fruit had been tasted. Since then, neither Republicans nor Democrats in Washington have shown restraint. Republicans want lower taxes and more corporate welfare, Democrats want more spending for their party’s interest groups. Both sides keep ordering cases of champagne – and nothing happens … in the short-term, that is.

Currently the plan is for trillion-plus annual deficits as far as the eye can see. Even if the super committee achieves its mandate of reducing the deficit by $120 billion a year – a “draconian” reduction equivalent to 3 percent of annual federal spending — the national debt still would be projected to bloat from $14 trillion today to $19.6 trillion in a decade.

But the White House and Congressional leaders of both parties know that if the super committee fails, nothing will happen right away. Supposedly automatic budget cuts would be triggered. But they would not take effect until 2013, ensuring that for now, no program is cut and no tax is increased. Waiter, more Bollinger!

Then, in 2013, waivers for the “automatic” cuts could begin. Timothy Noah noted recently in the New Republic that the Gramm-Rudman balanced-budget act, passed to considerable theatrics in 1985, on paper imposed automatic cuts if Congress overspent or under-taxed. The rules proved toothless when lawmakers “realized they did not need to take the law seriously,” and started passing waivers. Same with the Pay-Go legislation enacted to great theatrics again in 2007. On paper it requires disciplined spending – but nearly every appropriations bill since 2007 has included a Pay-Go waiver.

The supposedly mandatory, automatic cuts might later be quietly repealed. Among the most important public policy books of the last decade is Reform at Risk: What Happens After Major Policy Changes Are Enacted, by Eric Patashnik of the University of Virginia. This 2006 book details how Congress enacts what appear to be super-dramatic reforms, but as soon as the media spotlight shifts elsewhere, lobbyists and committee chairs quietly undo the reforms by repealing sentences or paragraphs of the legislation. Often the repeals are hidden in seemingly innocuous “technical corrections” bills deliberately worded so as to be incomprehensible. The supposedly mandatory super committee spending cuts may disappear in this fashion.

A core reason why Washington keeps borrowing too much, and taxing too little, is that national leaders know that if they behave irresponsibly, in the short term nothing will happen.

In the long term, though, the United States will become Greece. At that point, it will be too obvious for Washington to deny what has happened, and it will also be too late to do anything about it.

Photo: An aide peeks in the committee room door as Democratic members of the ‘super committee’ wrap up a meeting at the U.S. Capitol in Washington November 16, 2011. REUTERS/Jonathan Ernst

24 comments so far | RSS Comments RSS

The comparison between your family and the US Government is totally accurate because… because… hey, wait a minute, it’s not an accurate comparison at all! In fact, it’s pretty much deceitful.

The Easterbrook household is a small, open economy where imports and exports exceed GDP. Its constituents have almost no internal-currency-denominated trade and hold no assets or liabilities against one another. It does not have its own central bank. It does not operate in its own currency and its does not float bonds backed by the Central Bank in whose currency its bonds are denominated. These are important characteristics that do not apply to the US economy.

Knowing all that, do we even need to continue with this comparison?

Because to believe that the federal budget is just like a family budget, and that the government must tighten its belt and live within its means just like families do is wrong and it’s backwards. Because when families are tightening their belts, the federal government is the one institution that can actually help the economy (and the belt-tightening families) by loosening its belt and running a deficit. That deficit should be temporary and should return to a surplus when the private economy climbs up off the floor.

This is basic macro, Easterbrook. I’m talking 101 stuff here. Not grad school, not doctorate-level stuff. 101. As in undergrad. Is it really that difficult for you to understand that running deficits in a recession is the right thing to do, but running massive deficits when the economy is healthy is dumb?

And hey, look at that… in the last thirty years, when the economy was healthy, which President ran a surplus? Well, well, well…

Posted by Sprizouse | Report as abusive

What seems inevitable to me is that when “the United States will become Greece”, our leadership will launch a massive war with someone (China?), essentially to cancel debts.

Posted by Thalya | Report as abusive

Sorta. We won’t be like Greece, we’ll be like Italy. But don’t start in 2003, start in the ’80s. Reagan’s deficits were enormous – 10X Carter’s and they were followed by GHWB’s which were even bigger. All the while our national debt became bigger and bigger.

The Republicans have it exactly backwards. Since the government isn’t a household, you can’t starve the beast by cutting taxes. All that happens then is that you run up more and more debt. If you want to shrink big government, you’ve got to cut programs, cut spending. This is precisely what the politicians in Washington have been unable/unwilling to do. At some point, you have to say, OK, we need to raise revenue to pay for all this. When the American people feel the bite of the taxes to pay for what they want, then they may decide that some of what we’re wasting money on isn’t actually so important after all.

Posted by majkmushrm | Report as abusive

Good article with only three minor flaws: Moody’s. Fitch. S&P.

Posted by FBreughel1 | Report as abusive

Or maj, and this is a BIG OR, we could tax the rich to pay for Medicare’s projected shortfall and Social Security’s projected shortfall (a shortfall which doesn’t begin until 2038, by the way, and even afterwards, Social Security would still be able to pay 77% of benefits after 2038, much as Easterbrook tries to obscure and muddy these facts like he did in his last column).

Also maj, could also institute financial speculation taxes, and start ensuring that corporations ACTUALLY pay their taxes. All of this would mean that the people would NOT have to “feel the bite” of taxes and all of which would allow the people to retain these immensely popular and successful programs.

By the way, here’s Felix Salmon pointing out the effect of corporate tax loopholes on government revenue:

http://blogs.reuters.com/felix-salmon/20 11/11/17/charts-of-the-day-corporate-inc ome-tax-edition/

Posted by Sprizouse | Report as abusive

@CarlOmunificent: “Before the USA could become Greece-like, it would have to enter a currency union with about 17 other nations, 16 of which were stronger than the USA, and that currency union would have to lack a fiscal union”…

Guess what! The USD is already used by most of the world, for global trade. It’s already kept under the mattresses of half the people in Africa… Other countries’ currencies are already pegged to the USD. You’re already in a sort of currency union! And there’s no fiscal union there – you have no direct control over the fiscal affairs of most of the people that use the USD! OK, there’s a difference: other countries have their own central banks… And they can decide to de-peg their currencies. Other countries (which are collectively as powerful as the USA, or much more powerful if you consider trade & economics) can decide to stop using the USD for world trade. And this might actually happen if people stop believing that Uncle Sam is good for his word…

Therein lies the danger for the USA. At the moment, the USA enjoys an artificially high credit-rating due to the fact that the US government can (as Russia’s Putin has rightly pointed out) shift part of their fiscal burdens onto the world markets (that are forced by present circumstances into keeping a USD balance of working capital, a form of debt which the “Federal Reserve” can inflate away almost at will.) If confidence in the USD falls, the results could be precipitous:
1. People could start selling the USD in a competitive race to the bottom.
2. Alternative currency gains prominence in world trade. (Steps 1 and 2 not necessarily in this order).
3. U.S. interest rates on external debts increase to something more like what European nations are paying. Foreign creditors start demanding US government pay debts in more stable currency.

This can only happen, however, if there is something to convert your USDs into – a viable currency that is recognised to be stronger than the USD. Step 1 cannot happen until there’s confidence in something else… Hence why the U.S. politicians are desperate to remind everybody on a daily basis how shaky the Euro is, along with every other world currency except the USD… The only possible option is gold. Hence why gold is so expensive at the moment… Nobody has any REAL confidence in the USD, or any of the other currencies ultimately based on it through world trade (in which the USA is STILL dominant)…

You’d better pay down your debts now while the USA is still dominant in world trade (a situation that cannot continue indefinitely if you continue bleeding manufacturers etc. to the Far East). The Chinese won’t tolerate “paying through the nose” forever for the privilege of trading in USD whilst they’re the ones slaving away to make the world’s goods (and controlling the same). If you wait much longer, you’ll end up in the situation Gregg Easterbrook has just explained.

Time to balance your financial affairs – now! A final note – on a more positive subject: balancing your financial affairs would NOT be as expensive as many of you think:
http://www.slyman.org/blog/2011/07/reaga nomics-and-prudent-taxation/
America needs higher average taxation: either through shutting down corporate welfare tax loopholes, or through general increases in tax rates. Contrary to intuition, it will boost GDP…

Posted by matthewslyman | Report as abusive

Good article for the most part. Not sure how you single out Republicans for corporate welfare though. Doing that means you believe rhetoric and ignore reality. More Democrats than Republicans voted for the bailouts. It is reported that Warren Buffett had a meeting with many Congressional Democrats right before the bailouts. That his hedgefund, that many of the politicians are invested in, bought tens of millions of shares in the stocks of banks that would be getting bailed out. Making Buffett and his investors billions.

Then you have GE which is considered to be a Democrat friendly company that made $14 Billion last year, but paid no taxes. Not that Republicans are angels in this regard, but conservative ideology doesn’t support subsidizing specific businesses. That is the work of corrupt politicians which exist on boths sides of the aisle.

If we want a less corrupt government we need to have it do less. To have it stop picking winners and losers in industry. To have crystal clear regulations that are enforced across the board for a very specific purpose to protect mutual interests(ex: environment). Though we also need to recognize that even when the interest is genuine that such regulation can be and currently is abused. We block things like solar plants in the desert due to concerns of lizards that might make the site a future habitat. We mandate environmental impact studies just to help a city like New Orleans buy new light bulbs for lights that already exist. I wish I was making that stuff up.

Posted by AustinG | Report as abusive


You posted a link to that before. It has the same problems now as then. Your analysis shows a real serious problem in your understanding of how taxes work in this country. We have a progressive tax code. People get taxed as they earn more money and less when they earn less. The tax code is roughly the same today as it was in 2007 and yet taxes as a percentage of GDP are way down since then.

You seem to want to prove that higher taxes cause or at the very least don’t hinder growth. When in reality periods were you have growth in GDP have higher taxes simply because people are making more money and reaching higher tax brackets. From 2007 to 2009 the number of people with taxable income of greater than $1,000,000 decreased by 40%. Taxes collected from that group decreased by $700 billion as a result. This shouldn’t be earth shattering to someone who has an understanding of our tax system and what has gone on in our economy the last few years. Yet it would seem to be to one who draws the conclusions that you do from your link.

Posted by AustinG | Report as abusive

@AustinG: I really appreciate the peer-review (it’s a point that I had considered, and I’ve prepared some answers to this very point). I’d love to respond in more detail but I kind of worry that I’m almost spamming Reuters (nobody’s complaining yet but I’m growing more cautious of posting this link)… I don’t want to hijack Gregg’s discussion. Can you post your criticisms on my article please, and I’ll deal with them there?

Posted by matthewslyman | Report as abusive

Ahhh… gotta love AustinG huh? Here’s what he says this time:

“We block things like solar plants in the desert due to concerns of lizards that might make the site a future habitat. We mandate environmental impact studies just to help a city like New Orleans buy new light bulbs for lights that already exist. I wish I was making that stuff up.”

Evidence for any of this AustinG? As per usual, I’m betting not. Which means you probably are “making that stuff up”.

Also, you’re attack on Slyman is off-base as well. Unfortunately, Slyman is categorically wrong about the US being like Greece… but I’ll leave that aside.

I think the point he’s trying to make can be summed up thusly: the best two decades of GDP growth in this country happened in the 1950s and 60s when the top marginal tax rate wavered between 77% and 91%. I’ve included two links to these facts below… the first link is to the BEA which shows that our best two decades of GDP growth were the 50s and 60s(click on the link that says, “percent change from preceding period” and download it to excel).

And the second link shows the top marginal tax rates every year (from the Tax Policy Center).

Taken together, these two facts absolutely IMPLODE any argument that high taxes impede growth. High taxes may not encourage growth, but they sure as hell don’t impede it. More interestingly, the 50s and 60s were also decades of strong regulations and strong unions. But since that doesn’t fit with your ideology it’s probably best to pretend the 50s and 60s never happened, amirite?


http://www.taxpolicycenter.org/taxfacts/ displayafact.cfm?Docid=213

Posted by Sprizouse | Report as abusive

@AustinG: It’s getting late in England so I’ll respond tomorrow, once I have your remarks on my article’s comment thread. A synopsis of the answer you can expect: your point is partially valid, but the general point of my article still applies for a number of reasons I intend to discuss.

Posted by matthewslyman | Report as abusive

@Sprizouse: Acknowledged and thank you. Your points are actually more concisely and convincingly framed than the defense I intend to write myself. Once I receive AustinG’s criticisms on my own thread, I’ll explain why your points continue to be valid (indeed, increasingly so, which is frightening considering that America has been leaning in the opposite ideological direction); throughout the 1970s, 80s, 90s and early 21st Century.

Posted by matthewslyman | Report as abusive

Sprizouse: “in the last thirty years, when the economy was healthy, which President ran a surplus? Well, well, well…”

You’re forgetting two things. First, Republican Congresses after the 1994 election played a large role in forcing budgetary discipline on President Clinton. Second, by saying “when the economy was healthy” I think you’re trying to paper over the fact that, in the ’99 to ’00 time frame, a huge tech stock bubble was inflating and driving massive tax revenues from the capital gains so many people were making in the market. When the bubble burst, the tax revenues plummeted.

You do make some good points, however, and your writing is very articulate.

Posted by Realist99 | Report as abusive

@Realist99: > “Republican Congresses after the 1994 election played a large role in forcing budgetary discipline on President Clinton.”

CORRECT. The situation was more complex than my article (or Sprizouze’s comments) suggest – Congress’s role is mentioned by Gregg Easterbrook in his article (above). I’ve been planning to amend my article to reflect this fact: every great economic success story is usually a double-act with significant tension in the relationship:
* Republican congress restraining Clinton,
* Gordon Brown restraining Tony Blair…

However, it’s interesting to see what happens when those double-acts break down. Give Republican-leaning congress a Republican president, and they start giving him a free pass on debt. Give Gordon Brown the position of prime minister, and he starts overspending on his own ideological pet projects that Tony Blair has been stalling on for a decade. Discipline goes out of the window, in the manner that Mr. Easterbrook has described, and the ultimate results if unchecked…

Acknowledged, various stock bubbles have played a short-term role in distorting the picture: but slap a big enough lens on your camera, or get a wide-enough & general-enough data-set, and you can filter out many such distorting effects from your picture of what’s going on. That’s what I’ve attempted to do in my article (and where detailed effects confound my overall trends, I’ve examined the historical record of what the politicians and economists say they were doing to the tax code / budget, to make sure I’m not misleading people).

Posted by matthewslyman | Report as abusive

Mr Easterbrook, reality is just beginning to dawn but you remain a long way from daylight.

The US will not go bankrupt in the long term. But in the medium term. Why has it taken this long for Italy to find itself in hot water? The reason is Greece.

When will the US start to feel warm? After Italy, or maybe France, or the UK. This is not long term.

You are right to note that the Reagan years are when this began. The absolute refusal to raise taxes ever since has made fiscal discipline impossible, irrespective of spending.

At what point is it too late? When Obama was elected and failed to raise taxes in his first year.

There is no way back now, US debt is over 100% GDP. Default is the only way out. Sincerely I advise you to get on with it and start to rebuild.

Posted by Dafydd | Report as abusive

Some how most you are missing the whole point. raising taxes is never the answer. Cutting spending and waste is the only answer. If the government only had the amount of money it needed and actually spent it for the purpose that it was raised, there would never be any kind of deficit. Raising taxes is never the answer! Like any in household, when you don’t have it to spend only two things can happen, you borrow (hence debt) or you do without (no debt.) what an amazing concept! If the government borrows the only way to pay the debt is to tax the citizens or it continues to incur more debt in interests. There are so many programs and the federal government should not be into. Schools! Bailing out private and public enterprises. Look at Fanny Mae and Freddie Mae, the bozos are giving themselves well deserved million dollar bonuses because they were able to get free money (waste) from the federal government. All the banks that received money loans at 1% interest rates and turned around and loan the money back to the government at 3%. Without making a single loan to any individual they were able to give themselves ridiculous bonuses. let me stop, you get the picture, i hope. Oh, yea, all the money the the banks loan back the federal government, no one is talking about, actually helped to increase the deficit almost three times. I’m all for reelecting this president. I think he has done an admirable job of wasting our money. There are many in powerful folks in government that have been there more than half their lives and have not fix the government. Guess what? They are the problem. Should we really trust the government with our money? I definitely say NO, but i hear a lot of you saying otherwise.

Posted by losman14960 | Report as abusive

It looks to me like, from the timing, that the root cause of the current deficit is the Bush tax cuts. I received one too, but it wasn’t that much and I would gladly pay it going forward to help the country get out of debt. Of course the wars and the prescription drugs (how can anyone not be astonished at what these drugs are costing, hidden by insurance and Medicare payments) are another big factor in the ruining of the federal budget, not to mention the bailout of the state and local governments which collapsed along with the housing market that is directly tied to their tax revenues. But at the root of it all are the Bush tax cuts which should expire across the board, no exceptions. Start with that and go from there.

Posted by lhathaway | Report as abusive

Ihathaway, I agree, except that allowing all the Bush tax cuts to expire at the end of 2012 would be bad for the economy, as well as that result being a lasting excuse for the GOP to blame the continuing troubles on a “big Obama tax hike”.

Why not phase them out over a number of years beginning in 2013?

Also, it would be useful if the government or media would publish just how much taxes would increase for each income group under various scenarios of tax cut phase-out. I for one have long forgotten how much my taxes went down following those two big cuts.

Posted by Bartolo | Report as abusive

I think something this time around something WILL happen.
I think our two party system will evolve into a three party. Currently, in my state, we just elected a new senator and voted out a “lifer.” The old senator was
considered by many nationwide to be a “reformer.”
Our state went with the ultra-conservative Tea party
guy and since then our state has been really liking him.

Now, the Tea Party is not messing around. They have their heads on straight (most of the time.)
AND as has been evident this last legislative term, the
Tea party is gaining every day to make adjustments in
the old school.

All is not hopeless if this committee fails. The nation
just has to elect more Tea party into a majority of BOTH
the House and Senate….and then America will rebound

So….plan on voting conservative and throw the other bums out of office —Harry Reid for one.

Posted by limapie | Report as abusive

The American people should use the power of voting to change the current Congress and future Congressional individuals. Since the current Congress cannot and have not, been able to work together and resolve the budget crisis that we are in, the people should replace all the current members. In the upcoming election, do not vote for any existing member. In replacing all members, let the new Congress can agree on anything. If they cannot replace them next election. The same should be done with the Senate. Our constitution says “We the People….” and everyone should accept the responsibility of voting to make changes.

Posted by Newbeginning | Report as abusive

We always seem to remember those who harmed our way of life. There will be no exception here, politics will not save the individuals who failed to resolve this crisis. We the People are not responsible for this mess. When we voted them into office, we gave a mandate to be responsible. But once in office we cannot do too much other than impeachment or voting them out of office which all take time. That mandate will be our best weapon in getting them to respond to us, The People.

Posted by opuntia | Report as abusive


I don’t have a link saved about solar plants being blocked by local lizards. A quick internet search lead me to this recent article in the NY Times.
http://www.nytimes.com/2011/02/24/busine ss/energy-environment/24solar.html?pagew anted=all

A project was blocked because it threatened the Mohave ground squirrel. Which I am sure is completely different than other local squirrel populations around the nation. Populations which seem to survive no matter what is developed around them. These projects can even win their lawsuits, but ultimately lose because they run out of money due to the cost of the delay. The article repeatedly makes the claim that these desert wastelands are “pristine” environments. So environments that few people want to visit that contain relatively little life are now “pristine”?

I don’t even know where to start on the taxes thing. The top marginal rate isn’t really a good indication of what taxes are overall or for a specific group. Between 1981 and 1982 the top rate went from 70% to 50%. The effective tax rate on income for the top 1% went from 21.5% to 20.4%. In 2000 the top rate was just under 40%, but the top 1% had an effective rate of 24% which is higher than it was when the top marginal rate was 50% or 70%.
http://www.cbo.gov/publications/collecti ons/tax/2009/effective_rates.pdf

That is before you get into things that effect economic growth. It is easier to grow a smaller economy than a larger one. You reach a point where it isn’t worth it for some people to work more. In their own minds they are better off with less work and less stuff than more work and more stuff. If you want that in numbers 10% of $500 billion is less than 3% of $15 trillion.

Posted by AustinG | Report as abusive


“You reach a point where it isn’t worth it for some people to work more. In their own minds they are better off with less work and less stuff than more work and more stuff.”

You nailed it! This is also good for society when someone who has already “got theirs” steps back and allows the next qualified person to step into the vacated position.

Posted by OneOfTheSheep | Report as abusive

Comments on my article about “Reaganomics” (link in my first comment above) now include AustinG’s basic criticism, and a defensive response from the author.

Posted by matthewslyman | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/