The chairs of the deficit reduction commission, Erskine Bowles and Alan Simpson, have put forward their draft plan for cutting the deficit. More accurately, plans, since many of the elements are, to put matters kindly, vague
We all agree that we have a daunting deficit problem that should be addressed soon. How soon is less clear. “After the recovery is well under way,” most would agree, and certainly “before the debt/gross domestic product (GDP) ratio gets too large.” What is not clear is what ‘well under way’ means and whether it will happen soon enough to prevent to debt/GDP ratio from getting too large.
The commission chairs would start deficit reduction in fiscal 2012. That means starting in October next year, which is too soon, since unemployment is likely then to still be in the vicinity of 9 percent and could be higher. This is not a minor issue, as starting too soon could deepen the recession, and nothing is more likely than continued recession to depress revenues and generate continuing deficits.
But, let’s move to the program. Over the first nine years, 70 percent of the deficit reduction under the Simpson/Bowles ‘mark’ would come from spending cuts, 30 percent from added taxes. The steady-state spending level, as a share of GDP would be 20.5 percent of GDP. That is lower than spending averaged from 1980 to 2008 when none of the baby boomers had yet retired and claimed Social Security and Medicare, and when per person spending on health care was a minor fraction of what it will be in 2020.
Some of key elements of the plan are as follows:
● The plan calls for a reduction from baseline in federal health care spending of about one-third by 2040, but doesn’t say how that target will be achieved.
● The plan says it would fix the Medicare fee cuts for doctors scheduled for next month, but it doesn’t say how.
● The draft plan presents four options for modifying the tax system, but doesn’t endorse any. All would tax capital gains as ordinary income, which means doubling the rate on them.
● All tax plans would end or curb deductions for charitable contributions. That would curtail the capacity of the private sector to provide relief to vulnerable populations, at the same time that the principal supports of these very populations, Medicaid, Social Security, and Medicare, would be slashed.
● The deductions for mortgage interest and property taxes would be curbed or eliminated—this, during the most severe housing price collapse in at least seventy-five years.
● Deductions for contributions to IRAs, Keogh plans, and 401k plans would be ended.
● Social Security benefits would eventually be cut by 25 percent for people earning $43,000 today and by 40 percent for those earning $100,000. Note the double whammy—less Social Security and no tax-sheltered savings plans. The plan actually contains some modest increases in Social Security benefits, so that it actually increases the deficit until well after 2020.
● The plan would freeze salaries of federal employees for three years, cut the federal work force by 10 percent, and dump 250,000 contract employees. To offset these cut backs, the plan calls for an increase in productivity of federal workers, but it doesn’t say how.
A Mixed Verdict
My reaction on reading the plan is profoundly mixed. On the one hand, it highlights a problem about which budget analysts, liberal and conservative, are aware and worried. It contains a number of proposals that are admirable and that have been on reformists’ agendas for years. But it is vague in key elements, setting targets and then calling on some committee or group to do something unspecified if the targets are not being met. All in all, it is replete with magic asterisks, that infamous device in President Reagan’s first budget that promised spending cuts that never came.
The plan sets targets for overall spending and taxation so low that it will be impossible to sustain even basic promises to provide pension and health benefits to the elderly, disabled, and poor. The spending cuts are so numerous and so deep, the tax changes are so large and disruptive, that they are not only unlikely to be adopted but would have needlessly adverse effects if they were.
A Better Way Forward
There is a better way. The first element should be a large new and quite general tax on consumption, a value-added tax. Some of the revenue from this tax should be used to lower the deficit. Some should be used to lower overall personal income tax revenues. We should recall why passage of the Tax Reform Act of 1986 was possible. Anticipated reductions in total personal income tax collections permitted Congress to reduce or eliminate targeted tax breaks and to compensate losers with reduced tax rates. The Simpson/Bowles plan proposes to increases total income tax collections, making it impossible to compensate those who lose from the ending of specific deductions, credits, or exclusions.
Second, it will be impossible to control spending in the long run without vigorous implementation of health reform and the various cost-reducing pilots and experiments in that bill. Not all of them will succeed. Controlling the growth of health care spending will require a lengthy and difficult transformation of the way we deliver and pay for health care. The Affordable Care Act is a start. More to the point, it is the only game in town.
Third, various spending reductions will be necessary, in discretionary and mandatory spending. The Simpson/Bowles plan and all other deficit reduction plans will have to rely on spending curbs. But relying on spending cuts for 70 percent of the deficit reduction and setting spending targets so low calls to mind the quip attributed to the man enjoying a drink in the bar on the Titanic: “I asked for ice. But this is ridiculous.” Or, as the British say: “Less would be more.”