Deadlocked on their refusals to compromise on recommendations for cutting the government deficit, both Republican and Democrat members of the Super Committee of legislators, appointed to start resolving this problem, have admitted defeat.

TUTORIAL: Macroeconomics

Goals and Conflict
The 12-member, bipartisan committee was unable to agree on a single measure to reduce the immense government debt of about $15,000 billion and growing daily. The committee's mission was to recommend $1,200 billion in deficit reductions, over the next ten years. Among the items on the table for discussion and negotiation were raising taxes, revamping the tax code, plugging tax loopholes, lowering the 35% corporate tax rate, Social Security, Medicare, Medicaid and the federal retirement program. Democrats refused to cut entitlement programs, such as Social Security and Medicare. Republicans refused to increase taxes.

The result: stalemate. However, additional far-reaching results may ensue from the committee's failure. On the day before the official announcement of the committee's failure, the Dow Jones Industrial average, anticipating the deadlock, dropped 248.85 points, a loss of 2.1%. At the close of markets on Tuesday, Nov. 22, the Dow Jones had fallen an additional 53.59 points.

Results of Failure
Without a deal to cut government debt, some economists and financial analysts have forecast a further down-grading of U.S. government bonds, by ratings services such as Moody's and Standard & Poor's. This means the government may have to pay higher interest rates to sell bonds, further increasing its debt. (For more, read How Countries Deal With Debt.)

The super committee's failure automatically triggers $1,200 billion in mandatory cuts in government spending, beginning in 2013, with about $600 billion cut from military spending and the remainder from entitlement programs. Even after the automatic spending cuts for 2013 are made, total U.S. government spending for that year would be above the level projected in 2007 by 32%.

Congress and military officials are justifiably worried about the impact on national security of a $600 billion cut in Pentagon spending. On this issue, the President has the option of introducing a resolution to reconsider the defense cuts, which is likely. Terms of this option prohibit a filibuster as an effort to squelch the move.

Legislators of both the House and Senate were also looking for ways to side-step the automatic cuts in defense spending. The Senate has moved some $10 billion from the general budget to the Pentagon budget, to make up the anticipated reduction in spending. Before the cuts are implemented, however, Congress has at least a year to repeal or reduce the mandated defense spending cuts, and some lawmakers have already begun working toward that end, arguing their case and gathering support. President Obama promised to veto any bill that reduced the spending cuts. Even after the automatic spending cuts for 2013 are made, total U.S. government spending for that year would be above the level projected in 2007 by 32%.

What Does the Future Hold?
Seniors and older baby boomers now entering their senior years are similarly worried about the automatic cut in Medicare benefits. In the wake of the deadlock, a growing public displeasure and frustration with Congress increased even more, according to reports. In an election year, this is especially troubling for both parties, as they look at a possible voter backlash.

If the deficit is not reduced, long term negative results on the U.S. economy may mirror what's currently happening in Europe, according to some financial experts. Several countries in the European union, including Greece, Italy and Spain, face recession and potential defaults on their debts, or they must print more money, causing runaway inflation, to pay down their obligations. (For more, read Breaking Down The U.S. Budget Deficit.)

The Bottom Line
The electorate, at least 9% of whom are unemployed, and many in financial straits, is not happy with the non-results of the super committee. Yet a large percentage of the voting public, both Republicans and Democrat, are against any compromise with the opposing party. The coming Presidential and Congressional elections will reflect the national mood and may be a reliable forecaster of future development in this ongoing crisis.

Related Articles
  1. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  2. Economics

    The Economics of Raising the Social Security Age

    Briefly examine the economics behind raising the retirement age for Social Security benefits and how it could impact the federal budget.
  3. Economics

    China Looking to Deleverage its Existing Debt

    Learn about a possible debt bubble developing in China, and how the Chinese government may be selling assets to deleverage some of this debt.
  4. Economics

    China Owns US Debt, but How Much?

    See how much U.S. debt is actually owned by the Chinese, what it means to the economy, and why China is willing to lend so much money.
  5. Economics

    Sacrifices Necessary to Keep Puerto Rico Afloat

    After years of band aids and significant borrowing to meet its obligations, the time has come for meaningful reform in Puerto Rico.
  6. Economics

    Would More Government Debt Help The U.S. Economy?

    Many economic policy experts are once again asking: “What, if anything, can be done to accelerate the United States’ persistently soft recovery?”
  7. Economics

    The Top Reasons Behind The U.S. National Debt

    National debt, as with a business, is basically the difference between receipts and expenses--but in the U.S., the latter has far outpaced the former. Why?
  8. Economics

    Successful Ways That Governments Reduce Federal Debt

    Governments have many options when trying to reduce debt, and throughout history some of them have actually worked.
  9. Economics

    The U.S. National Spending And Debt

    Just like any average American household, government overspending can carry on for extended periods by rolling over debt and borrowing more and more money in what seems like a never-ending game ...
  10. Economics

    Sovereign Debt Overview

    The national or government debt is a combination of both internal and external debt. The external debt is referred to as Sovereign Debt. Sovereign Debt refers to bonds issued by a nation’s ...
  1. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  2. Budget Deficit

    A status of financial health in which expenditures exceed revenue. ...
  3. Debt-To-GDP Ratio

    The ratio of a country's national debt to its gross domestic ...
  4. Sequestration

    A term adopted by Congress to describe a fiscal policy process ...
  5. Institutional Investor Index

    A measure of sovereign debt risk that is published biannually ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated ...
  1. 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 >>
  2. What austerity measures can a country implement to curtail government spending?

    Broadly speaking, there are three types of austerity measures. The first is focused on revenue generation (higher taxes), ... Read Full Answer >>
  3. What are some historic examples of hyperinflation?

    Hyperinflation is an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of ... Read Full Answer >>
  4. What are the typical day-to-day responsibilities of a Chief Operating Officer (COO)?

    A country's debt crisis affects the world through a loss of investor confidence and systemic financial instability. A country's ... Read Full Answer >>
  5. What are the pros and cons of operating on a balanced-budget?

    Few issues are more complicated, contentious and controversial in contemporary American politics than balancing the federal ... Read Full Answer >>
  6. Which countries run the largest budget deficits?

    The countries with the largest budget deficits as of March 2015, in order, are Kuwait, Macau, the Republic of Congo, Norway, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!