U.S. politicians will again test the market’s patience for congressional gridlock, with talks meant to achieve a partisan compromise on constraining the debt on the brink of failure.
The special committee of lawmakers charged in August to come up with a plan to narrow the U.S. budget shortfall by $1.2-trillion (U.S.) over a decade was frozen in a partisan standoff over taxes Sunday, and a compromise before a deadline of midnight Monday appeared doubtful.
Co-chairs Jeb Hensarling, a Republican congressman from Texas, and Patty Murray, a Democratic senator from Washington state, struggled to sound optimistic Sunday.
Ms. Murray all but conceded defeat, telling CNN Sunday that if her committee failed, she was “hopeful” that Congress would find another solution.
Appearing on Fox News Sunday, Mr. Hensarling said he refused to give up hope that a deal could be done by Monday night. However, “reality is, to some extent, starting to overtake hope,” he said.
Failure would surprise few in Washington. Federal politics have been gripped by partisan gridlock since Republicans took control of the House of Representatives in the midterm election a year ago. With the 2012 presidential election in full view, that inertia has grown only more acute.
“From the beginning, this was going to be a difficult task, so it’s not surprising if they fail to get an agreement,” said Phillip Swagel, an economics professor at the University of Maryland and a former chief economist at the Treasury Department. “The gulf between taxes and entitlement reform is too big. The parties haven’t done enough to lay the groundwork for reform.”
The Joint Select Committee on Deficit Reduction, dubbed the super-committee, was formed as part of the last-minute compromise this summer to raise the legislative borrowing limit and avoid default.
The committee was given a deadline of Nov. 23 to come up with a plan to narrow the budget deficit by $1.2-trillion or accept automatic cuts to social programs and defence of an equal amount. Monday is seen by most as the actual deadline because the committee recommendations must be public for 48 hours before the ultimate vote.
Stock markets reacted violently in the summer to the row over the debt ceiling as investors lost faith in the ability of U.S. politicians to make difficult decisions. Standard & Poor’s removed the United States from the elite group of countries that receive the firm’s highest credit rating, citing doubts that Washington has what it takes to restrain debt – on track to expand to 100 per cent of the economy by 2021.
It’s unclear whether Wall Street would react similarly to a failure by the six Democrats and the six Republicans on the super-committee to bridge their differences.
To be sure, it would be a fresh example of a hamstrung political system, a discomfiting sign at a time when business confidence is weak and the U.S. unemployment rate is stuck at 9 per cent.
“There is a real threat that the market will look at Washington again on Monday and say, ‘You can’t get the job done,’” John Kerry, a Democratic senator from Massachusetts and a member of the super-committee, said Sunday on NBC’s Meet the Press.
Yet the backdrop is different now than it was in the summer.
The European debt crisis is now the dominant driver of financial markets, and a far more immediate threat to the global economy than anything happening in Washington. In contrast to the situation in Europe, which is headed for a recession, recent economic data show the U.S. economy is gaining strength.
Also, the stakes are lower. In August, a significant number of Republicans were willing to accept default to get a political win. There’s no such risk this time. In fact, the $1.2-trillion in spending cuts is locked in by law, which could be enough to satisfy the credit rating agencies and bond traders.
“I don’t think there will be much reaction,” Mark Zandi, an economist at Moody’s Analytics, said on Fox. “It’s all relative to expectations,” he said. “No one expected much from the committee.”Report Typo/Error