Yesterday afternoon, the co-chairs of the Joint Select Committee on Deficit Reduction, the so-called supercommittee, admitted defeat in their efforts to reach an agreement to cut $1.2 trillion from the deficit.  In a short announcement, committee co-chairs Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX) said “after months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.”

When the supercommittee was named in August, it was seen as an opportunity for Congress to demonstrate it could overcome its deep partisan divisions, especially on such an important issue as runaway budget deficits.  The law creating the supercommittee even included a poison pill—automatic across-the-board cuts totaling $1.2 trillion over the next 10 years—to encourage success.  However, in the end, nothing changed.  The promise of a congressional bipartisan agreement on reducing the deficit gave way to disappointment and the continuing partisan bickering and legislative gridlock. 

Weeks of hearings, closed-door meetings, public statements, congressional leadership involvement, and some coaxing from the White House, failed to break the stalemate caused by competing interests:  Republicans opposed tax increases and Democrats opposed changes to Social Security and Medicare unless there were acceptable tax increases.  Both sides did make some concessions to increase chances of an agreement, such as a Republican plan to increase revenues by overhauling the tax code and a Democrat proposal to change the way cost-of-living adjustments are made to Social Security payments.  However, internal party bickering and charges of insincerity from both sides blunted any chance of compromise.

What will be the fallout from this failure?  First of all, it will probably reinforce public disenchantment with Congress.  Polls already show congressional approval ratings in the teens.  This failure could further dampen these poor ratings.

The financial markets will likely register their disapproval.  Some argue that the markets have already discounted congressional dysfunction.  However, yesterday, in the wake of the announcement, the Dow lost almost 250 points or over 2 percent of its value, while the S&P 500 dropped about 23 points. 

There is some speculation that here could be another downgrading in the U.S credit rating.  Standard and Poor’s downgraded U.S. debt from AAA to AA+ in August because it said the deficit reduction plan Congress adopted was not bold enough.  In the wake of this latest demonstration of Congress’ inability to deal with the nation’s budgetary problems they may act again.

Now that the supercommittee failed to reach agreement, what will happen?  The congressional agenda for the remainder of the year has just become fuller.  The main task will be to finish FY2012 appropriations.  The Continuing Resolution has been extended until December 16, but time demands to address other issues make it more likely that the remaining nine bills will be rolled up into a single Omnibus bill.

The other issues that Congress must now deal with include extending the temporary payroll tax reduction, extending unemployment insurance benefits, and addressing the expiring Bush tax cuts.  The supercommittee was expected to address these issues in their recommendation.

And then there is the matter of the $1.2 trillion in across-the-board cuts over 10 years that now will have to be implemented in 2013.  One half of this cut must come from security budgets.  Secretary Panetta, the JCS Chairman and the Military Service Chiefs, as well as the House and Senate defense oversight committee leaders, have all warned of the devastating, to use Panetta’s word, effect on military capabilities of a $500 billion or more cut to the DoD budget. 

In response to these concerns regarding defense, Sen. John McCain (R-AZ) has promised to introduce legislation to negate cuts to defense under a sequester.  There is also a strong indication that congressional supporters of other agency budgets may act to try to provide exceptions for domestic programs.  However, president has vowed to resist these attempts stating yesterday that he will “veto any effort to get rid of these automatic cuts to domestic and defense spending.”

So, with the impending sequester as the backdrop, the stage is set for continued stalemate over the next year on how to deal with the impending automatic cuts.  But, before strategies play out on how to mitigate the effect of sequestration, get rid of it altogether, or come up with an alternative that produces $1.2 trillion in deficit reduction, there is more pressing budgetary business. 

The administration is in the process of preparing a FY2013 budget request for submission in February.  The question is what kind of budget the administration will present.  The president’s threat to veto any attempt remove the automatic cuts indicates that the administration is prepared to accept about $100 billion in cuts to the federal budget.  Will he present a FY2013 budget that ignores sequestration, thereby accepting the implementation of across-the-board cuts during execution? Or, will he present a budget that proposes an alternative way of cutting federal funding that still meets the sequester goals?