Deficit Reduction Super Committee Fighting the Battle of New Orleans

I realize it's not a perfect analogy, but due to poor communications, the battle of New Orleans was fought well after the War of 1812 had ended. Likewise, the Congressional super committee is fighting the battle for deficit reduction long after the vaporization of the primary reason driving that move towards deficit.

The main difference is the stakes are much higher this time, with the real cost of the lost output from the excessive, ongoing, global output gap far exceeding all the real losses of all the wars in history combined.

The headline reason for deficit reduction was the rhetoric about the immediate danger of the United States suddenly becoming the next Greece, with the U.S. government being cut off from credit, with interest rates spiking, and with visions of the US Treasury Secretary on his knees, hat in hand, begging the IMF for funding and mercy. The looming flash point was the threat of a downgrade to the U.S. if a credible deficit reduction package wasn't passed before the August 2 deadline, when the congressionally self-imposed U.S. borrowing authority was to expire.

After a prolonged Congressional process that was even uglier than the healthcare process, with already dismal Congressional approval ratings moving even lower, the debt ceiling was extended with a measure that contained some deficit reduction, and also set up the current super committee to ensure further deficit reduction.

Soon after, however, Standard and Poor's decided it all wasn't enough, and the dreaded downgrade was announced. Then the unexpected happened. Rather than spike up as widely feared, market forces drove U.S. Treasury interest rates down, substantially,

What was happening? Where had the mainstream gone wrong? Former Fed Chairman Greenspan and celebrity investor Warren Buffet both immediately had the answer. S&P was wrong. The U.S. is not Greece. The U.S. government prints its own money, while the Greek government does not. The U.S. always has the ability to pay any amount of dollars that markets can't take away. Everyone agreed.

The driving force behind deficit reduction was suddenly not there, and the rhetoric of becoming the next Greece vanished from the national TV screens. Unfortunately, just like the news that the War of 1812 had ended didn't get to New Orleans in time to prevent thousands from losing their lives in that bloody battle that would otherwise not have been fought, the news that the U.S. isn't Greece apparently hasn't gotten through to the Congressional members of the super committee now fighting the current battle over deficit reduction.

What was learned after the downgrade was that there is no such thing as a solvency problem for the U.S. government, either short term or long term. True, excessive deficit spending may indeed someday cause unwelcome inflation, but the U.S. government is never in any danger of not being able to make any payment (in dollars) that it wants to.

And yes, the discussion could be shifted to a discussion as to whether current long term deficits forecasts translate into unwelcome inflation in the future that may demand action today.

However no specific research has been done along those lines. In fact, inflation forecasts, which all assume our current fiscal trajectory, don't show any signs of an inflation problem. Nor are the long term U.S. Treasury inflation indexed bonds flashing any inflation warnings. In fact, the Fed and most other forecasters remain more concerned over the risk of deflation. Also, Japan, with a debt to GDP ratio about triple that of the U.S., has been fighting its battle against deflation for nearly two decades.

So, clearly, shooting from the hip on this issue, by suddenly declaring long term deficits must be immediately addressed with cuts to Social Security, and with tax hikes, to prevent a looming inflation problem (now that the prior errant reason, that the US could be the next Greece, has been dismissed), could only be considered highly irresponsible behavior on the part of the super committee.

An informed Congress might recognize the reason for the urgent action to reduce the federal deficit, and the reason for the super committee, is no longer there. Therefore, an informed Congress might suspend the super committee, regroup and reconsider before taking action.

It is widely agreed the current problem is a massive lack of aggregate demand. It is widely agreed that a combination of tax cuts and/or spending increases will restore sales, output and employment.

However, instead of a compromise where the Republicans get some of their tax cuts and the Democrats some of their spending increases, and the economy booms, both sides are instead going the other way and pushing proposals to reduce aggregate demand, even though they no longer have good reason to do so.

The battle of New Orleans was fought after the reason for fighting it had ended.

The battle of New Orleans was fought after the reason for fighting it had ended. Likewise, long after the reason for deficit reduction vaporized, this battle continues to be fought with both parties continuing to act counter to their political agendas of serving their voters who want jobs.