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November 17, 2011

Supercommittee Failure to Rein In US Debt Threatens Global Recovery

by Mil Arcega

A so-called U.S. Congressional "supercommittee" has less than one week before a deficit-cutting deadline on November 23.  Some economists say the prospects for success are poor while others say failure is not an option.  Many are urging the bipartisan committee of six Republicans and six Democrats to make big changes to get the huge U.S. debt under control.  Economists say failure could seriously hurt the world's largest economy, and countries that do business with it.

With an economy about one fourth the size of the world's GDP (gross domestic product), any threat to the U.S. economy is a potential threat to other countries that do business with it.  Jason Peuquet, a policy analyst at the New America Foundation says it does not take a large economy to see how interconnected the world has become.

"We saw that one smaller country in the EU, Greece, could really almost bring down Europe and threaten the global economy," he said.  "So if we can see that in just one smaller country, imagine what would happen in the world's largest single economy, the United States."

Some say U.S. debt - now edging close to $15 trillion - is growing too fast.  That's why economists say the congressional committee tasked with trimming the nation's deficit must act decisively. Unless politicians deal with the problem now, Diane Lim Rogers, chief economist at the Concord Coalition, says worries about the nation's ability to repay its debts will make the U.S. less attractive to investors.

"The scary part from an economic perspective is we're not going to know we've reached that point where we've borrowed so much that we're not looking like a safe investment," she said.  "We're not going to know that until it happens - very rapidly.  It's sort of like you don't known you're near the edge of the cliff until you're already off the cliff."

 

U.S.Debt

Like Greece and Italy, experts say if that happens, interest rates on U.S. securities will spike, making it costlier for the country to repay its debts.  Lim Rogers says it's a burden the next generation would be forced to carry.

That's why New America Foundation's Peuquet says the supercommittee can not afford to fail.

"Extending the deadline would be much better than failure, because it keeps the conversation going," he said.  "We've got the focus of the world, the markets, businesses, the American public.  And this is a real opportunity, so we hope the supercommittee recognizes that."

Failure to reach a deal by November 23 would trigger automatic spending cuts worth more than one trillion dollars.  Those cuts would come primarily from defense and domestic spending programs - without the benefit of new revenue.

"So it's a spending side only approach, it leaves us with a very spending heavy strategy for deficit reduction at a time when we're still struggling to come out of our recession," said Diane Lim Rogers.

Such "brute force" spending cuts could hurt social programs for unemployed and lower income Americans and hamper the country's military readiness.  

Some economists warn a political deadlock could also lead to another downgrade of U.S. debt, sending markets into a tailspin that would further weaken the world's economy.