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Thursday, November 11, 2010

Simpson-Bowles Plan: No Magic Bullets, Just Long, Tedious Discipline

The co-chairs of the President's fiscal reform commission, especially former Republican Senator from Wyoming Alan Simpson, are straight-shooters who are done kissing butts to get elected. If anyone can propose strong medicine for the federal budget, these guys can. Yet even these relatively free radicals are proposing balancing the budget no sooner than 2037. Under their proposal, we keep borrowing more for 27 years. Now that's a disappointment.

Even these fiscal hawks acknowledge that the economy is too shaky to start their plan until FY 2012. In the whacky world of macroeconomics, America is too poor right now to cut its budget. We revert FY2012 spending back to FY2010 levels, cut 1% a year through FY2015, then allow spending to grow at 2% a year. If inflation runs at historical levels of 3.43%, then by 2040, our annual spending would be about 30% behind spending levels that would keep pace with inflation. That's a valuable change for our grandkids, but it takes long-term discipline to get there.

Where do we start with the cuts? Simpson and Bowles offer suggestions that hack $100 billion from defense and $100 billion from domestic spending. The big-ticket savings:

  • Overhead savings proposed by Sec. Gates: $28 billion.
  • Reduce Pentagon procurement: $20 billion.
  • Freezing noncombat military pay at 2011 levels for three years: $9.8 billion.
  • Reduce overseas bases by one third: $8.5 billion (HS policy debaters! Check your Inherency arguments!)
  • Eliminate 250,000 contractors: $18.4 billion.
  • Eliminate all earmarks: $16 billion (even Rand Paul doesn't have the guts for this idea).
  • Freeze all federal pay for three years: $15.1 billion.
  • Cut federal workforce 10%: $13.2 billion.
More disappointment: the plan takes until 2040 to get the national debt down to 34% of GDP, just a little better than the 36% debt-to-income ratio recommended for regular folks shopping for mortgages. We spend the next three decades carrying more debt that responible homeowners ought.

The plan notes that right now, our federal outlays are 23.8% of GDP, while federal revenue is only 14.6% of GDP. The plan calls for aligning outlays and revenue by 2040 at around 21%. Look closely at those numbers: as I read it, for every dollar we reduce spending, we still need to raise revenue two dollars. The plan actually reduces and simplifies rates: one option drops the income tax rates for the top income bracket from two rates of 36% and 39.6% to one rate of 23% and reduces the corporate rate from 35% to 26%. But those decreased rates are contingent on whacking all deductions. Another option lowers rates less and leaves in some deductions, but cuts things like mortgage deductions for second homes and mortgages over $500k (oops: there goes the Lake Madison vote).

Other noteworthy recommendations in the Bowles-Simpson proposal:
  • Rein in health care costs by cutting payments to doctors and drug companies, capping malpractice damages, and possibly adding a robust public health insurance option.
  • Cut farm subsidies by $3 billion a year (good thing Kristi Noem just got a new job in Washington).
  • Keep Social Security solvent by increasing the retirement age by one month every two years, to age 69 by 2075, with a hardship exemption for folks who can't work after age 62.
Folks who thought electing Kristi Noem and her fellow Teabaggers would bring instant fiscal reform and wipe out the deficit are in for the same rude awakening as the handful of Obama dreamers who thought the 2008 election meant we'd reached the Promised Land. Fixing decades of fiscal irresponsibility will require decades of unpleasant spending cuts and increased tax collection. Given the cynical backpedaling of even the most arch of arch-conservatives and the inability of Tea Party faves to take their small-government slogans seriously (Kristi Noem has already pledged her continued support for the expensive Lewis and Clark water system), I am not optimistic that the new GOP majority in the House will take the Simpson-Bowles plan seriously. The Republicans are too focused on 2012 to lay the groundwork for real deficit reduction that will take until 2040.


  1. In my opinion, this plan addresses the problem well. I'll actually end up better off day-to-day (in terms of taxes paid) if all these proposals become law (a mighty long shot), but worse off in terms of the value of my investments (mostly real estate).

    I would have proposed more dramatic and more accelerated increases in the so-called retirement age, for which people would become eligible for Social Security benefits -- say, to age 70 by 2030.

    We have a huge problem here, and we can't solve it in the near-term. It will take a "sea change" in our whole way of living -- for good. As Hillary Clinton has said (I think), "We don't get a free lunch." Not today, not tomorrow, not the day after that, not ever.

    I'm glad that Bowles and Simpson steered clear of any value-added tax (VAT) proposal. However, in the long term, I suspect the VAT idea will come up again and again. I could think positively about such a tax in only one situation: That it be devoted entirely to, and only to, a well-administered Kucinich-type universal health care system, and that such a commitment be backed up by a constitutional amendment. But I digress.

    This proposal contains some goodies as well as some pain for all. Everyone should read the whole proposal right from the source (Cory's link "Under their proposal").

  2. Stan, I want to get excited by this proposal as well. I am constitutionally opposed to debt. But then I run into Robert Reich, who says reducing the deficit is much more about reining in health care costs and getting the economy moving than slashing government spending. He even takes on the analogy to family budgets:

    "No smart family would choose to balance the family budget over borrowing money to send the kids to college. The same logic holds for the nation as a whole. If certain government spending generates higher future productivity, we’d be nuts not to make the investment just to avoid a larger deficit [Reich, 2010.11.11].

    It's tough: we can't keep spending money we don't have. But at the moment, we can't stop spending money we don't have.


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