What’s So Super About the Supercommittee Farm Policy Study Group December 13, 2011 Jerry Lynch Professor of Economics Krannert School of Management Purdue University

Supercommittee Failure “Despite our inability to bridge the committee’s significant differences, we end the process united in our belief that the nation’s fiscal crisis must be addressed and that we cannot leave it for the next generation to solve.” Rep. Jeb Hensarling (R-Tex) “We remain hopeful that Congress can build on this committee’s work and find a way to tackle this issue in a way that works for the American people and our economy.” Sen. Patty Murray (D-Wash). “Unfortunately for your political careers, there was nothing “super” about that feckless collection of politicians.” Joe Scarborough “You may just be the only 12 people that are hopeful about congress – especially the part about congress working for the American people.” Anonymous blogger

What Brought on the Supercommittee This summer the United States bumped against its Debt Ceiling First established in 1917 at $11.5 Billion Debt Ceiling has been raised 74 times since March 1962 Was at $ Trillion when raised last summer Only the US and Denmark have a Debt Ceiling There is no Deficit Ceiling

The Government Debt Downgrade On August 5, 2011 S&P downgraded US Debt from its list of risk free borrowers. Does this mean if you own a US government bond they may not pay you back? Or, will the real value of future payment fall “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,”

How Did We Get Here If Government spending is greater than tax revenue then there is a deficit Either – Increase Tax Revenue or Decrease Government Spending Why the rise in government spending? Why the decrease in tax revenue?

Where Will We Borrow It - Fed Deficit for 2011 will be over 10% Domestically Depends on People Increasing Saving Abroad Foreigners have to be willing to hold dollar denominated assets Print More Money Fed buys T-bills and Bonds

Haven’t you always wanted to sail on the QE2

Old Wine in a New Bottle -- When the Fed Buys US Government Debt they Increase the Rate of Growth of the Money Supply -- We Expect That to Push Interest Rates Lower – focusing on Long Term --This is what as known as Quantitative Easing – second phase so QE2

Interest/Tax Revenue Year Interest/Tax Revenue

What Does the Future Hold? -If interest rates return to historical levels and the DEBT/GDP ratio keeps growing -Prospect for Tax Increases -Impact on Growth (Reinhart & Rogoff) -Fed has reduced it’s projected growth for GDP 2012 January 2011 – 3.5%-4.2% April %-3.3% June %-2.9% - Be more concerned about the Long Run