A Super Committee "Failure" Wouldn't Hurt The Economy - But a "Success" Sure Would

Some Democrats have come under a lot of criticism lately, much of it deserved, for abandoning popular and important programs that were historically associated with their party. But some of the other Democrats -- the ones who are trying to act in the country's best interests -- are genuinely concerned about what will happen to the economy if the Super Committee fails to come up with a plan.

This message is for them -- and anyone else who has the same concern. You need to know that the evidence is clear: A Super Committee failure won't hurt the economy at all.

But its "success" almost certainly would.

Economic Y2K

Every month it seems as if there's another "bipartisan" process designed to impose austerity on the American people. And every month we're told there will be terrible consequences in the world's markets if it doesn't succeed. These predictions are the economic equivalent of "Y2K" -- always apocalyptic, never true, and all too frequently believed.

Democratic officials and staffers are being bombarded by these predictions, delivered by think-tank operatives from their own party who have been steeped in the cult of austerity. It doesn't matter how many times they're refuted by impeccably constructed papers, or by the observations of Nobel Prize winners. And it doesn't matter how many times these predictions are proven wrong.

Some of the experts warning of doom if the "Super Committee" fails said the same thing about last year's Deficit Commission, too. What happened when that "bipartisan" body deadlocked, and the private plan put forward by its co-chairs went nowhere?

Nothing.

Now the same players are telling us the stock market will plummet without a Super Committee plan. They're saying there will be more downgrades of the US government by credit rating "agencies," and that this will bring disastrous consequences. And they're saying that international markets will lose confidence in Treasury bonds.

But recent history teaches us that the exact opposite is likely to happen.

Over-Rated

Here's the story the doomsayers like to tell about credit ratings: Without the committee's cuts, ratings agencies will stop believing that our country has the "political will" to handle its long-term deficit problem. (It must be remembered that these so-called "agencies" are actually for-profit, publicly traded companies whose clients are the very wealthy individuals and banks that benefit from austerity economics.)

Even so, Moody's has already said that it would be "informative, but not decisive" if the committee fails to come up with a plan. As for S&P -- well, it depends on which S&P is speaking today. Just a few weeks before it downgraded the US economy it was saying that it wasn't concerned about deficits for at least three years. That was a pretty good call, since we'll need about two to three years of government investment in jobs and growth to turn this economy around.

So why did they change their mind so suddenly? That's what a lot of people would like to know. Since S&P benefits from a lot of government regulations, Congress would be smart to hold hearings looking into that question. But there's no evidence that a Super Committee failure would lead to downgrades.

Still, what if it does happen? Fortunately, we already know the answer to that.

Summer Stocks

Today the austerity crowd has rewritten history to suggest that markets plunged when S&P issued its inexplicable downgrade over the summer. But that's not what happened at all. There was a big drop, all right -- after the President and John Boehner concluded an austerity deal to end the debt ceiling crisis. It's the first vertical line on this chart:

The second line marks the "downgrade apocalypse" we'd been hearing about for months -- the long-dreaded downgrade, a moment we were told would lead to a plunge in the stock market. What happened the next day? The stock market went up.

Investors know that austerity programs like that deal -- and the Super Committee's expected proposals -- inflict damage on a nation's economy. So when the last austerity plan passed, they did what any sensible investor would do: they sold. They'd already seen how destructive these programs had done to Great Britain's economy.

Austerity economics suppresses hiring and wages. That leaves people with less money to spend and less confidence about spending it. So companies that provide goods or services lose revenue. That makes investors lose confidence in sales and service-driven stocks.

Investors and other business people may be greedy sometimes -- but they aren't stupid.

The Name Is "Bonds"

What about the bond markets? Inexplicably, a lot of policy types continue to dread what Paul Krugman calls the "invisible bond vigilantes [1]" and the "cruel bond cult [2]," those ruthless -- and mythical -- skeptics of the dollar who will drive the value of our bonds into the ground unless we show political resolve by slashing Social Security and Medicare.

Prediction after prediction of bond-market disaster has proven false, yet the fear remains. Budget expert Stan Collender [3] had it exactly right when he wrote this:

"In spite of the consistent warnings that they were about to unleash the hounds of hell on interest rates, there continues be no sign whatsoever that bond-market vigilantes have returned (or even really exist, for that matter). Quite the opposite might be true: Given the current fragile nature of the economic recovery, the bond and equity markets are just as likely to be spooked by the short-term federal spending reductions and revenue increases the super committee members might recommend ..."

That makes sense. An imploding economy, with unimproved or declining employment and wages, means a loss of tax revenue -- along with the possibility of social upheaval and political unpredictability. These "bond vigilante" scare tactics may create exactly the problem they're claiming to prevent.

The Austerians will tell you that these markets won't be satisfied with anything less than the sacrificial blood of America's seniors, even though Social Security doesn't contribute to the deficit, because entitlement cuts have long-lasting effects. But they don't. Benefit cuts are just as reversible as any other spending reduction -- and they're much more harmful to the economy.

If you throw Grandma from the train to impress somebody that doesn't exist, you gain nothing. But you're sure gonna tick Grandma off.

Stimulus/Response

Ben Bernanke is a Republican and a traditionally pro-market economist. But he's finally stating clearly that this is not the time to cut spending [4]. Last month he said the economy "is close to faltering," that unemployment continues to be a "national crisis," and that "We need to make sure that the recovery continues and doesn't drop back and that the unemployment rate continues to fall downward."

This week Bernanke added this comment [5]: "While I do not shirk the responsibility of the Fed having to do what it can to meet its mandate, obviously a broad range of policies can affect growth and employment and I hope that there will be a range of actions that will complement and supplement the Federal Reserve's efforts."

In other words: Government, get off the dime and start investing in jobs and growth.

Bernanke's Fed is not the only austerity-minded institution to accept the fact that we need more government spending right now, not less. The IMF, which is usually known for forcing austerity on client nations, has been urging European countries [6] to "adjust their austerity programs to a changed situation and consider measures to drive growth."

IMF head Christine Lagarde also said: "If the United States launches a credible middle-term adjustment program (i.e., stimulus spending), there is possibly room to abandon the short-term austerity measures and to introduce some measures to drive growth."

In other words, don't be in a mad rush to do what the Super Committee is trying to do, which is to impose cuts that begin in 2013. That may sound far away. But the Simpson-Bowles austerity cuts sounded far away, too, when the two men proposed them last year. But if they had been enacted, they would have begun taken effect less than eight weeks from now.

The truth is it's reckless to propose arbitrary dates and dollar-figure targets, as the Super Committee is doing. A smart, balanced deficit program would be designed to take effect after the government has done what's needed to fix today's crisis. And it would not be based on figures that were established years before we knew what the overall economic picture was going to look like.

Failing Up

The other concern that policymakers have is political in nature. Democrats in particular are worried about appearing to have failed if they can't reach a compromise with Republicans, and they're afraid the voters will punish them for it.

That's only possible if they keep insisting that a Super Committee agreement is the only measurement of success. But if they make it clear that they weren't willing to accept destructive, one-sided cuts, the voters will reward them for it. Nothing would be more reckless than to pass a budget-slashing plan based on arbitrary dates and figures in an economy that's this stagnant and in this much danger.

Voters already believe that Obama has been acting in good faith to fix the economy, and that the Republicans are not. If Democrats defend Social Security in the process of saving their government, polls show that voters (including many Republicans) will reward them for it.

The committee's members are being warned [7] that all of them will suffer in any future bids for leadership if the committee "fails" to put forward a plan. The economic and polling data make the answer to that clear: Not if they "fail" like leaders.

Now is the time for Democrats to explain why there are more important things at stake than peace at any price within the Super Committee -- and why the kind of deal Republicans want is worse than no deal at all.