The probable failure of a U.S. congressional committee to reach agreement on at least $1.2 trillion in deficit reductions by this week’s deadline is the “best thing” that could have happened, said economist James K. Galbraith.
Failure for the committee to reach agreement will lead to across-the-board cuts to domestic and defense programs, starting in January 2013. The lack of a deal would deprive President Barack Obama of a vehicle extending a payroll tax cut and insurance benefits for unemployed Americans, which expire at the end of the year. Lack of agreement also means tax cuts for top earners enacted under President George W. Bush may also be allowed to expire at the end of 2012, Galbraith said.
“As things stand, there will be an examination of the defense budget, and a lot of wailing and gnashing of teeth over that,” Galbraith, an economics professor at the University of Texas in Austin, said in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “And the Bush tax cuts expire,” he said. “If you are doing honest budget accounting, that gives you all of the deficit reduction you could possibly want.”
Today is the deadline for the Congressional Budget Office to receive information for analyzing how a proposal would affect the U.S. budget deficit, in advance of the so-called supercommittee’s Nov. 23 target date for reaching a deal. Yesterday, members of both parties took to the airwaves on the Sunday talk shows to blame the other side for the lack of an agreement, though they stopped short of saying the talks had failed.
“The supercommittee did the best thing it could have done,” Galbraith said. “Any agreement would have caused much more damage than no agreement at all. All of this talk about a failure is really misplaced.”
Galbraith said an accord by the supercommittee that would have included long-term cuts in social security, Medicare and other programs “would have done enormous damage to the remaining bulwarks of what remains of the middle class.”
Lack of agreement also pushes into an election year the difficult work of reaching a bipartisan deal to head off the automatic cuts that Defense Secretary Leon Panetta has called “devastating” for the Pentagon. Many lawmakers cast doubt on whether anything will happen before the 2012 election if the committee doesn’t come up with a deal by this week.
Galbraith said rising U.S. bond prices and falling yields showed there is “no confidence problem” regarding the ability of the U.S. government to fund itself. “It’s about time to wake up to that fact.”
Treasuries rose today, pushing yields to almost a six-week low, as U.S. lawmakers said they are on the brink of failure to agree on spending cuts, spurring demand for the safest assets. The 10-year yield decreased 1.96 percent at 12:48 p.m. New York time from 2.01 percent late on Nov. 18.
Galbraith said he wasn’t concerned about the effects of another possible U.S. credit downgrade, following Standard & Poor’s August move that reduced the nation’s AAA rating by one notch after congress narrowly resolved a debt-ceiling impasse that pushed the country to the brink of default.
“Ratings agencies are obviously a joke,” he said. “They completely missed the subprime debacle and made enormous amounts of money pedaling corrupt securities to the world and now they presume to come and pass judgment on the government of the United States.”
To spur the economy and hiring, he said the U.S. government should increase the minimum wage. “That would have a very strong stabilizing effect across all of the population of this country that has been hard hit by the financial crisis. It would be a form of reparations for the 99 percent” of the population that “has received nothing but abuse for the past three years.”
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