‘The bigger problem’

U.S. financial markets are off to a very rough start this morning, and at a superficial level, it’s easy to make a connection to political developments — the super-committee failed, so investors are rattled.

But there are two key angles to keep in mind. First, there’s no reason for markets to react to one debt-reduction alternative failing to come together. The law still mandates $1.2 trillion in cuts regardless, so for those worried about fiscal pressures, the super-committee’s ineptitude is irrelevant.

Second, and more important, is appreciating “the bigger problem.”

“You’re looking at a potential double whammy,” Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, said in a telephone interview. “The bigger problem is that a deal in the supercommittee was expected to pave the way to extend the stimulus that is in the system. If you don’t get a deal, which is probable, you get a big hit to the economy in the first quarter right at the point when the economic fallout from the European debt crisis is hitting.”

Got that? The real issue here is that Democrats intended to use the super-committee to advance measures intended to improve the economy. The problem with the committee’s failure isn’t about debt reduction, which is supposed to happen anyway, but rather, it’s about economic stimulus that the United States needs but which Republicans refuse to allow.

Ezra Klein had an item this morning noting that the super-committee debacle matters, but not for reasons that have anything to do with the debt.

The supercommittee was widely expected to extend the payroll tax cut and the expanded unemployment benefits. Those policies alone are expected to add 1-2 percentage points to growth next year. Some of the proposed deals included further stimulus measures like increased infrastructure spending, which would have given the economy a further boost. There was also talk of patching Medicare’s payments to doctors and the Alternative Minimum Tax, neither of which is specifically a stimulus measure, but both of which would hurt the economy if allowed to expire now.

The supercommittee’s failure throws those deals into doubt. Many Republicans are balking at extending the payroll tax cut altogether … and that means the growth picture for next year is dimming.

If growth falls by 1-2 percentage points next year, that could well mean we’re only growing by one percent or so. If events in Europe take a turn for the worse, it could mean we’re back in recession. That, and not our deficit, is the immediate threat. And it’s one the supercommittee made worse.

Republicans know this. They’ve been reminded of these relevant details over and over again, and yet, they don’t seem to give a damn. On the contrary, for whatever reason, Republican policymakers seem eager to kill every idea currently under consideration — a payroll tax cut extension, expanded unemployment benefits, increased infrastructure spending — that might help keep the economy afloat in 2012, deliberately creating conditions that make a recession more likely.

I wonder why that is.