What’s So Super About the Supercommittee

Farm Policy Study Group

December 13, 2011

Jerry LynchProfessor of Economics

Krannert School of ManagementPurdue University

Supercommittee Failure

“Despite our inability to bridge the committee’s significant differences, we end the process united in our belief that the nation’s fiscal crisis must be addressed and thatwe cannot leave it for the next generation to solve.” Rep. Jeb Hensarling (R-Tex)

“We remain hopeful that Congress can build on this committee’s work and find a way to tackle this issue in a way that works for the American people and our economy.”Sen. Patty Murray (D-Wash).

“Unfortunately for your political careers, there was nothing “super” about that feckless collection of politicians.”Joe Scarborough

“You may just be the only 12 people that are hopeful about congress – especially thepart about congress working for the American people.”Anonymous blogger

What Brought on the Supercommittee

This summer the United States bumped against its Debt CeilingFirst established in 1917 at $11.5 BillionDebt Ceiling has been raised 74 times since March 1962Was at $14.294 Trillion when raised last summerOnly the US and Denmark have a Debt CeilingThere is no Deficit Ceiling

The Government DebtDowngrade

On August 5, 2011 S&P downgraded US Debt from its list of risk free borrowers.

Does this mean if you own a US government bond theymay not pay you back?Or, will the real value of future payment fall

“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,”

How Did We Get Here

If Government spending is greater than tax revenue then there is a deficit

Either – Increase Tax Revenue orDecrease Government Spending

Why the rise in government spending?Why the decrease in tax revenue?

Where Will We Borrow It

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Fed Deficit for 2011 will be over 10%Domestically

Depends on People Increasing Saving Abroad

Foreigners have to be willing to hold dollar denominated assets

Print More Money Fed buys T-bills and Bonds

Haven’t you always wanted to sail on the QE2

Old Wine in a New Bottle

-- When the Fed Buys US GovernmentDebt they Increase the Rate of Growth of the Money Supply-- We Expect That to Push Interest RatesLower – focusing on Long Term--This is what as known as Quantitative Easing – second phase so QE2

Interest/Tax Revenue

Year

Interest/Tax Revenue

What Does the Future Hold?-If interest rates return to historical levelsand the DEBT/GDP ratio keeps growing-Prospect for Tax Increases-Impact on Growth (Reinhart & Rogoff)-Fed has reduced it’s projected growthfor GDP 2012

January 2011 – 3.5%-4.2%April 2011 -- 3.1%-3.3%

June 2011 -- 2.7%-2.9%

-Be more concerned about the Long Run