It may be about time for the supercalifragilisticexpialidocious committee to step in. If there was any process under which America could fix its fiscal trajectory, it was through locking a small, bipartisan, bicameral group in a room, giving it a deadline to exercise unprecedented power, and putting a gun to its head. What is more, those relieved by the bond market?s relaxed response to the supercommittee?s failure are truly blessed with magical thinking. The real power of compound interest, however, means that even a delay of two years will require further cuts to primary spending equal to a percentage point of gross domestic product over 25 years, based on Congressional Budget Office data.
And the CBO?s assumptions are far too sanguine even under its more pessimistic ?alternative? scenario. For example, a benign effect of the crisis and quantitative easing has been that net interest expense was only 1.4 per cent of GDP this year. That is expected to triple in a decade under the alternate scenario using quite low interest rate assumptions. When the US reaches Hellenic debt levels in 2031, it is still expected to pay a real rate of 2.7 per cent. Meanwhile, non-mandatory spending is expected to contract by a quarter to 9 per cent of GDP, leaving mere scraps for items other than defence. And revenue assumptions just hum along, ignoring the crowding out effect of deficits as well as assuming that political no-nos such as allowing the ?alternative minimum tax patch? to expire, worth a percentage point of GDP, will happen.
The scenario envisioned by economists Kenneth Rogoff and Carmen Reinhart that hard decisions are most likely to be taken under external pressure, by which time it is often too late, looks prescient. Mary Poppins may have prescribed a spoonful of sugar for the medicine to go down, but it looks more and more likely to be a spoonful of vinegar.
? The Financial Times Limited 2011