Super Failure?

Was the deficit Supercommittee’s failure a fiscal disaster?

On the face of it, no. Their failure to come up with $1.2 trillion in tax increases and spending cuts over two years will simply trigger an automatic sequester process that will begin in 2013. There’s no risk from this of a government shutdown or a debt default. All three ratings agencies affirmed the US’s credit rating.

But on a deeper level it illustrates that our political system is broken. The fiscal path the nation is on is unsustainable. Government expenditures are running at 25% of GDP. Revenues are 15% of GDP. You can’t run a 10% gross deficit for long before debt service consumes the economy. The Supercommittee was designed to shield its participants from normal political pressures—things like speaker privilege and filibusters. Its demise means any attempt to change the terms of debt ceiling deal must pass these hurdles.

But it’s clear that we need to get our fiscal house in order. If we want government spending equal to 20% of the economy—a naïve, half-way compromise—we need to design a tax regime that meets this goal. The current system is filled with special provisions and gimmicks that distort the economy and make it less efficient. Tax reform is on the table.

But it will have to run through the normal process in an election year. Many doubt whether this is possible, but a looming disaster—as we see brewing in Europe—has a wonderful way of focusing the mind. Let’s hope it does, this time.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T09:22:07+00:00 November 28th, 2011|Global Market Update|0 Comments

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