The Super-Committee of Congress, formed after the battle over raising the federal debt ceiling, appears very close to failure (to achieving the goal of $1.2 trillion in deficit reduction). Under the deal struck at the time of the debt ceiling debate Congress kicked the can down the road by forming the “super-committee” to come up with $1.2 trillion in deficit reduction. That deadline is soon upon us, and it appears that at best the Committee is looking to find a formula to kick the can down the road again. At worst the effort will collapse and trigger the sequestration outlined in the original deal, including about $547 billion of “security” spending (mostly defense) over ten years, and about the same in “non-security” spending. The cuts are not scheduled to go into effect until 2013.

The non-security spending comes from both discretionary and mandatory spending, including cuts to Medicare, which are capped at 2% annually and cannot come from reductions in programs for recipients. The cuts must be to providers and insurance companies. On the non-security front there are a whole host of programs that are EXEMPT from sequestration, including

Social Security, Medicaid, CHIP, the Food Stamp Program, child nutrition, Supplemental Security Income (SSI), refundable tax credits such as the Earned Income Tax Credit, veterans’ benefits, and federal retirement.

Already some Republicans are screaming bloody murder over the defense cuts, saying that a failure by the super-committee should not trip the defense cuts agreed to earlier. The Speaker, to his credit, says he feels bound by the deal and is not in favor of a change.

House Speaker John Boehner (R-Ohio) said last week that he feels “bound” by the triggers and opposes removing them.

“It was part of the agreement. The sequester is ugly. Why? Because we don’t want anybody to go there. That’s why we have to succeed,” he said.

The President has applied his own pressure, saying he would veto any attempt to change the sequestration.

So the Committee muddles on, looking like the November 21st deadline for action will not be met. The Republicans are in a double vise, with the McCain wing adamantly opposed to the defense cuts called for in the sequester, and with the expiration of the Bush tax cuts coming up next year. The Republicans have thrown up some revenues through deduction modifications(the Toomey plan) but called for the extension of the Bush tax cuts and a reduction in the rate for top earners down to 28%. It is really a non-starter for Democrats, who will not impose cuts against Medicare, Medicaid, and Social Security while cutting marginal tax rates for top earners.

The latest kick the can down the road proposal would have the Committee “agree” on an increased revenue number but allow the Congressional tax writing committees to devise the details at a “later date”. We deferred the decision at debt ceiling time, so why not defer again? It is the old Washington two step.

If the Committee fails then in the short term nothing happens. And you can be assured that, as I predicted here when this deal was made, Congress will shred the sequester in 2013. And that will put financial markets into a tizzy.

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