America's relentlessly-escalating national debt seems like a problem that defies resolution. Congress and the Obama administration couldn't solve it recently when they agreed to raise the U.S. debt ceiling by another $2.1 trillion.

TUTORIAL: How To Manage Credit And Debt

Instead of agreeing on measures to reduce the country's staggering debt, Congress and the president handed off the problem to a so-called Super Committee. The 12-member, bipartisan committee of national legislators, with an equal number of Democrats and Republicans, will study U.S. finances and recommend $1.2 trillion in budget cuts by November 23. (When hedge funds buy up bonds from bankrupt companies, should investors follow suit? See Why Hedge Funds Love Distressed Debt.)

Reaching an Agreement
If the committee reaches an agreement on budget cut proposals, Congress must vote approval on them by December 23. If Congress votes on them accordingly, the $1.2 trillion in cuts will go into effect. As usual, however, the issues will be what gets cut and by how much.

There are many items on the committee's agenda for discussion, including: raising taxes, revamping the tax code, Social Security, Medicare, Medicaid, healthcare for the elderly and the federal retirement program; these are all major issues that have been long debated in Congress.

Also up for debate and possible reduction is the 35% U.S. corporate tax rate. Many Democrats and Republicans agree that the rate is too high relative to rates imposed in other countries. Democrats, however, have proposed plugging tax loopholes as a means of making up the difference in revenue if the corporate rate is lowered.

So the committee may have a difficult time finding ideas that everyone – including their constituents – can agree on. For example, another particularly controversial tax deduction that some legislators proposed eliminating is the home mortgage interest exemption. A USA Today/Gallup poll conducted this spring asked survey participants if they would approve eliminating that deduction if overall tax rates were also lowered. Sixty-one percent opposed the idea.

What if an Agreement Can't be reached?
In the event that the committee fails to reach an agreement, $1.2 trillion in budget cuts will be automatically imposed in equal amounts on domestic and defense spending.

With committee members divided equally along opposing political lines, many observers believe a stalemate is inevitable.

The 12 appointed members are:

  • Rep. Jeb Hensarling of Texas (Republican and committee co-chair): Chairman of the House Republican Conference.
  • Sen. Patty Murray of Washington (Democrat and committee co-chair): She is a member of the Budget and Appropriations committees.
  • Rep. Chris Van Hollen of Maryland (Democrat): Van Hollen is the ranking Democrat on the Budget Committee.
  • Sen. Jon Kyl of Arizona (Republican): The number two ranking Republican in the Senate behind Mitch McConnell and a member of the Finance Committee.
  • Sen. John Kerry of Massachusetts (Democrat): A former presidential candidate in 2004 against incumbent George W. Bush, he is a member of the Finance Committee.
  • Sen. Pat Toomey of Pennsylvania (Republican): Elected to the Senate last year. Member of the Senate Budget and Banking committees.
  • Sen. Max Baucus of Montana (Democrat): Chairman of the Senate Finance Committee. Also served on Obama's debt commission.
  • Sen. Rob Portman of Ohio (Republican): Former White House budget director in the Bush administration, and a member of Budget Committee.
  • Rep. Xavier Becerra of California (Democrat): A senior member of the House Ways and Means Committee
  • Rep. Dave Camp of Michigan (Republican): Chairman of the House Ways and Means Committee.
  • Rep. James Clyburn of South Carolina (Democrat): The third-ranking Democrat in the House and a member of the Appropriations Committee.
  • Rep. Fred Upton of Michigan (Republican): Chairman of the House Energy and Commerce Committee.

Committee members reportedly will draw upon previously proposed solutions from Republican and Democratic legislators, independent groups, Obama's 2010 bipartisan deficit commission, among others, as a basis for discussion.

The American public, eager for solutions and an end to partisan bickering, have nevertheless been warned by analysts and former policy makers not to expect too much from the committee.

Reaching an Agreement
If the committee reaches agreement, as a political and practical matter, the suggestions are expected to be narrow in focus and likely to win Congressional approval, while the still nagging major issues will remain: long term taxes and entitlements. (Find out what you can do to avoid a financial meltdown when there's a medical emergency. Check out How To Avoid Medical Debt.)</INVESTOPEDIACONTENT/

Related Articles
  1. Economics

    The 2007-08 Financial Crisis In Review

    Subprime lenders began filing for bankruptcy in 2007 -- more than 25 during February and March, alone.
  2. Economics

    Lehman Brothers: The Largest Bankruptcy Filing Ever

    Lehman Brothers survived several crises, but the collapse of the U.S. housing market brought the company to its knees.
  3. Investing Basics

    Rise of the Co-Investment in Hedge Funds

    Learn about the rise of co-investment deals among hedge funds. See how these high-risk and high-reward opportunities are becoming more popular.
  4. Economics

    3 Financial Crises in the 21st Century

    Take a look at several of the most prominent financial crises of the 21st century, and understand why the Great Recession was a truly remarkable contraction.
  5. Economics

    Explaining Too Big To Fail

    Too big to fail means that a business has become so large that its failure would have catastrophic economic repercussions.
  6. Economics

    What is the Paris Club?

    The Paris Club is an informal group of nations that meet to find solutions for problems facing debtor nations.
  7. Economics

    Chances That Mortgage Rates Will Decrease Are Low

    Understand why mortgage rates are not likely to decrease in 2016; in fact, most indicators point to modestly rising mortgage rates.
  8. Investing

    5 Reasons to Rethink Retirement Investing

    Wherever you fall on a retirement crisis, consider these 5 reasons to rethink your investing strategy.
  9. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  10. Investing

    The Enormous Long-Term Cost of Holding Cash

    We take a look into how investors are still being impacted by the memory of the tech bubble and the advent of the last financial crisis.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do negative externalities affect financial markets?

    In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
  3. What is the difference between disposable and discretionary income?

    According to the Bureau of Economic Analysis, or BEA, disposable income is the amount of money an individual takes home after ... Read Full Answer >>
  4. How will a value added tax impact the government budget?

    In 1992, the Congressional Budget Office conducted an economic study on value-added tax, or VAT. At the time, the CBO concluded ... Read Full Answer >>
  5. What are the major laws (acts) regulating financial institutions that were created ...

    Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>
  6. What are the similarities and differences between the savings and loan (S&L) crisis ...

    The savings and loan crisis and the subprime mortgage crisis both began with banks creating new profit centers following ... Read Full Answer >>
Trading Center