Deficit Commission

The Bowles-Simpson Band-Aid

I have twice blogged about the Bowles-Simpson deficit-reduction plan (here and here). As I said in the first of the two posts, Bowles-Simpson

aims at too many spending targets, and misses the elephant in the room: “entitlement” commitments, namely, Social Security, Medicare, and Medicaid (and their promised expansion via Obamacare).

How badly does Bowles-Simpson miss the real target, namely, so-called entitlements? Here’s a closer look:

Bowles-Simpson ducks the long-term problem and focuses on the deficit through 2020. From now until then, the annual rate of spending on entitlement programs is expected to rise by $1.3  trillion (that’s projected spending in 2020 less spending in 2010). At
the same time, the annual rate of so-called discretionary spending  (which includes defense) is expected to rise by less than $0.2
trillion. The other big kicker is interest, which is expected to rise by $0.7 trillion.

So, Bowles-Simpson would reduce the projected increases in Social Security and government health-care programs by a “whopping” $0.1 trillion, while  whacking about the same amount out of discretionary spending, jacking  up tax revenues by $0.2 trillion, and saving about $0.2 trillion in  interest expenses. Net result: the projected deficit for 2020 shrinks  by about $0.8 trillion. (I derived the estimates from Figures 15 and 16 of the  appendix to the Bowles-Simpson report.)

What the Bowles-Simpson report doesn’t say is that the bill for entitlement spending will keep growing after 2020. You can tell that by looking at the trends in the “mandatory” spending lines of Figure 15 (the “plausible baseline”). And you can see the trend starkly in figure A-1 of  of CBO’s long-term budget outlook, as of August 2010. Social Security’s share of GDP rises until the 2030s, then levels off. But the expected share of GDP consumed by federal heath-care programs just keeps rising.

The Bowles-Simpson band-aid would merely mask the essential problem for another 10 years, at which point it will be that much harder to trim the “commitments” represented by entitlement programs, and that much harder to find places to cut “discretionary” spending. (Defense, as usual, will be a tempting target.)

The bottom line: If long-term entitlement “commitments” aren’t reduced soon, the tax increases required to bring the deficit under control will be huge and economically crippling. Entitlements will suck up money that could go into growth-producing investments, and the economy will be locked in a death-spiral toward permanent stagnation.

The Bowles-Simpson Report

The National Commission on Fiscal Responsibility and Reform (a.k.a. the Bowles-Simpson commission) issued a report on December 1. Voting on December 3, the 18 commissioners cast 11 votes for the report and 8 against it. Those who voted for it — including some fiscal conservatives — see it as a place to start. Presumably the fiscal conservatives who voted against it see it for what it is:

This report contains a ten-year net tax hike of over $1 trillion and increases tax revenues from their historical 18 percent of GDP to a record and permanent 21 percent.  This report shifts the debate from where it properly should be—spending—and onto deficit reduction, and thereby tax increases.

The report confirms my earlier view, based on the co-chairs’ proposal, that

It aims at too many spending targets, and misses the elephant in the room: “entitlement” commitments, namely, Social Security, Medicare, and Medicaid (and their promised expansion via Obamacare).

The report also confirms my view of Alan Simpson as a Bob Dole Republican: a tax collector for the welfare state.

Yes, there are proposals about Social Security, Medicare, and Medicaid, but their main thrust is to make those programs even more “progressive”; that is, to use them as instruments of income redistribution. Well, that’s to be expected from a gaggle of politicians, most of whom cannot imagine a world in which individuals take responsibility for themselves. There is much to criticize in the report, beyond the permanent tax increase noted above. Here are some of its more egregious statements and proposals:

P. 11 — Rising debt will also hamstring the government, depriving it of the resources needed to respond to future crises and invest in other priorities.

What crises and what priorities? The only crises contemplated by the Constitution are insurrection, rebellion, and war. But that isn’t what the authors have in mind. Is this a signal that the authors approve the federal government’s bailouts and “investments” in failing businesses?

P. 12 — We must ensure that our nation has a robust, affordable, fair, and sustainable safety net. Benefits should be focused on those who need them the most.

Why must “we” have any kind of tax-funded safety net? Family, friends, and private charities could provide an ample “safety net,” if only government would leave the money in the private sector where it could be invested. As a result, there would be fewer persons in need and more sources of private support for those who are. I will not even bother to say anything about moral hazard and the cycle of dependency, except that they are natural and inevitable consequences of things like Social Security, Medicare, and Medicaid.

P. 13 — We need to implement policies today to ensure that future generations have retirement security, affordable health care, and financial freedom.

We” do, do “we”? See the preceding comment.

P. 21 — RECOMMENDATION 1.2: CUT BOTH SECURITY AND NON-SECURITY SPENDING. Establish firewall between the two categories through 2015, and require equal percentage cuts from both sides. — In other words, balance the budget on the back of national defense. This, combined with later recommendations about war spending, suggests that Bowles-Simpson believe in instant defense. There’s no need, in their view, to build and maintain defense capabilities against undetected and unforeseen threats. No, the necessary capabilities will materialize magically, as they are needed.

P. 23 — [F]ederal budgets rarely set aside adequate resources in anticipation of such disasters, and instead rely on emergency supplemental funding requests. The Commission plan explicitly sets aside funds for disaster relief and establishes stricter parameters for the use of these funds.

What is the federal government doing in the business of disaster relief, anyway? “Stricter parameters” will vanish in a bleeding-heartbeat. And, with a permanent fund to milk, the idiots will continue to build homes and businesses in places where floods, tornadoes, hurricanes, and wildfires are as predictable as sunrise. Talk about moral hazard and cycles of dependency!

P. 24 — RECOMMENDATION 1.7: FULLY FUND THE TRANSPORTATION TRUST FUND INSTEAD OF RELYING ON DEFICIT SPENDING. Dedicate a 15-cent per gallon increase in the gas tax to transportation funding, and limit spending if necessary to match the revenues the trust fund collects each year.

How far we have come from the Constitution’s grant of authority to build “post roads” and make interstate commerce regular (i.e., regulate it) so that it flows freely. This proposal, like the one about disaster funding, is simply designed to ensure that an unconstitutional function enjoys a permanent claim on tax dollars. And it opens the door to more bridges and roads to nowhere. I would like to put Bowles and Simpson on a flight to nowhere.

P. 25 — The Commission recommends creating a new, bipartisan Cut-and-Invest Committee to be charged each year with identifying 2 percent of the discretionary budget that should be cut and identifying how to redirect half of that savings, or 1 percent, into high-value investment. Over the next decade, the Cut-and-Invest Committee will be expected to recommend more than $200 billion in discretionary cuts, freeing up $100 billion for high-priority investments America will need to remain competitive, such as increasing college graduation rates, leveraging private capital through an infrastructure bank, and expanding high-value research and development in energy and other critical areas.

It is depressing to think that a bunch of politicians and bureaucrats get to decide how the hard-earned income of citizens should be spent, and to presume that their judgments are better than the judgments of individuals and businesses acting cooperatively through free markets. A serious deficit-cutting exercise would include a proposal to get government completely out of “investing” in anything other than defense and law enforcement.

Pp. 29-30 — Maintain or increase progressivity of the tax code. Though reducing the deficit will require shared sacrifice, those of us who are best off will need to contribute the most. Tax reform must continue to protect those who are most vulnerable, and eliminate tax loopholes favoring those who need help least…. The Commission proposes tax reform that relies on “zero-base budgeting” by eliminating all income tax expenditures….

In other words, Bowles-Simpson would raise taxes by cutting so-called tax expenditures, while trying to disguise that fact by advertising lower rates. And they would shift the burden of higher taxes in the direction of high-income earners. It so happens that high-income earners already “contribute” a disproportionate share of their incomes. (You know you’re up against con-men when their word for “taxes” is “contributions,” and they view as “spending” anything that reduces the tax-collector’s take.) Greater progressivity is a recipe for slower economic growth because it will (a) further reduce the incentive to acquire and apply skills and (b) further reduce the amounts invested in capital formation.

P. 37 — RECOMMENDATION 3.3: PAY FOR THE MEDICARE “DOC FIX” AND CLASS ACT REFORM. Enact specific health savings to offset the costs of the Sustainable Growth Rate (SGR) fix and the lost receipts from repealing or reforming the CLASS Act. To offset the cost of the SGR fix and recover lost receipts in the first decade from repealing or reforming the CLASS Act, the Commission proposes a set of specific options for health savings that, combined, total nearly $400 billion from 2012 to 2020.

Everything that follows on pages 37-40 could — and should — be done anyway. This isn’t deficit reduction, it’s window dressing.

P. 41 — RECOMMENDATION 3.6: ESTABLISH A LONG-TERM GLOBAL BUDGET FOR TOTAL HEALTH CARE SPENDING. Establish a global budget for total federal health care costs and limit the growth to GDP plus 1 percent.

What follows is a classic cop-out. Some of the commissioners want more government intrusion into the health-care business, others want less. Ho-hum. The “compromise” is a victory for those who want more government intrusion, which is a main reason for the growth of government-funded and private health-care costs in the first place. They’re like idiots who try to put out a fire by pouring gasoline on it.

P. 45 — IV. Other Mandatory Policies

Slightly less than one-fifth of the federal budget is dedicated to other mandatory programs. These include civilian and military retirement, income support programs, veterans’ benefits, agricultural subsidies, student loans, and others.

These mandatory programs are not projected to be the main drivers of rising deficits over the next ten years, but they nevertheless should be part of a comprehensive plan to correct our fiscal path. This is especially true because mandatory spending is not subject to the scrutiny of the annual appropriations process – so poorly directed spending can continue for years with minimal oversight. The Commission’s goals in reforming these policies are:

Protect the disadvantaged. About 20 percent of mandatory spending is devoted to income support programs for the most disadvantaged. These include programs such as unemployment compensation, food stamps, and Supplemental Security Income (SSI). These programs provide vital means of support for the disadvantaged, and this report does not recommend any fundamental policy changes to these programs.

End wasteful spending. The first place to look for savings must be wasteful spending, including subsidies that are poorly targeted or create perverse incentives, and improper payments that can be eliminated through program integrity efforts.

Look to the private sector. Some mandatory programs, like federal civilian and military retirement systems, are similar to programs in the private sector. When appropriate, we should apply innovations and cost-saving techniques from the private sector. (p. 45)

Gee whiz, how compassionate and original. The “compassion,” of course, is the cheap kind that politicians purchase with other people’s money. The “originality” is found in the bankrupt view of government as business: “end wasteful spending” and “look to the private sector,” indeed. Government is neither a charitable institution nor a profit-motivated one. It is an instrument of force, and ought to be recognized and treated as such. What follows, on pages 45-47, is mostly pap, when it isn’t merely wrong-headed.

Take government pensions and government pay, for example. Studies that purport to compare the compensation of government employees with the compensation of private-sector employees are simply a waste of time and money, and usually end up justifying government’s largesse toward a large, safely Democrat, voting bloc. The way to attain pay and pension equity is as follows:

  • Abolish all the unconstitutional departments, agencies, and bureaus.
  • Cut the pay of the employees in the surviving departments, etc., until the government quit rate rises to the level of the private sector. (Exclude from the private sector any firm that derives more than, say, 50 percent of its revenues from government contracts. Such firms tend to have padded salaries and benefits.)
  • Add 25 percent to resulting pay level, in lieu of benefits. Government employees would have the choice of how to take allocate the 25 percent between cash compensation, participation in a health-insurance plan (e.g., a local Blue Cross-Blue Shield group), and tax-sheltered contributions to a private retirement plan. The accrual of government pension benefits would cease immediately upon adoption of this plan, and active government employees would receive a tax-free, lump-sum settlement in lieu of future benefits, based on length of service and years spent at various pay grades.

Now, that’s the kind of deficit reduction the overburdened taxpayers of this country deserve.

P. 48 — V. Social Security

Social Security is the foundation of economic security for millions of Americans. More than 50 million Americans – living in about one in four households – receive Social Security benefits, with about 70 percent going to retired workers and families, and the rest going to disabled workers and survivors of deceased workers. Social Security is far more than just a retirement program – it is the keystone of the American social safety net, and it must be protected….

The Commission proposes a balanced plan that eliminates the 75-year Social Security shortfall and puts the program on a sustainable path thereafter. To save Social Security for the long haul, all of us must do our part. The most fortunate will have to contribute the most, by taking lower benefits than scheduled and paying more in payroll taxes. Middle-income earners who are able to work will need to do so a little longer. At the same time, Social Security must do more to reduce poverty among the very poor and very old who need help the most.

There’s nothing in these pages (pp. 48-55) but recommendations that would increase moral hazard and reinforce the cycle of dependency, topped off with a healthy dose income redistribution. There’s not even a hint of real reform, which would be to phase out Social Security and replace it with private accounts. Those would fund actual investments in economic growth, raise incomes, and reduce the incidence of “poverty,” which isn’t the fault of high-income earners in the first place.

P. 56 — VI. Process Reform

The few pages under this heading (pp. 56-58) deliver more pap and mirrors. Here’s a sample, consisting of paraphrases (bold italics) followed by my comments:

Hide the rising cost of living by switching to chained CPI. — Not that I’m a big fan of CPI-indexed pay and benefits — I’m not. But a chained price index is simply a dishonest way of representing price increases. If the price of apples rises relative to the price of oranges, and consumers buy fewer apples and more oranges as a result, simple introspection will tell you that consumers (most of them, anyway) are worse off unless their “real” incomes have risen and they switch from apples to oranges as a matter of taste.

Adopt a “debt stabilization” process to enforce deficit reduction. — If it ain’t happening, it ain’t happening. A spendthrift Congress can change the law at a whim, and that’s exactly what will happen with this idea. What’s needed is a balanced-budget amendment to the Constitution that very strictly spells out what’s in the budget (namely every red cent spent by government for any reason), and imposes harsh civil penalties on the president, Senate majority leader, speaker of the House, and other leading lights if the budget is not balanced. Period. No excuses about economic conditions. (We’ve seen how “stimulating” the “stimulus package” has been.) Just do it.

Replace ad-hoc extensions to unemployment benefits with automatic triggers. — In other words, make Congress even less accountable than it is now.

*     *     *

I am sorely underwhelmed by the work of the Bowles-Simpson Commission. “The Moment of Truth” — the grandiose sobriquet applied to the report (by Bowles and Simpson, presumably) — is nothing more than a waste of time, money, paper, and electrons.

The report begins with what seems to be a honest effort to estimate the size of the problem. But in the end it amounts to nothing more than a quibble about how to spend our money.

I’ll tell you how to spend my money. Just defend the country, administer justice, and send me a bill at the end of the year for my share of the cost — and don’t try to pad the bill, because I’ll be watching what you do.

There’s nothing to see in the Bowles-Simpson report, folks. Move along.

The Deficit Commission’s Deficit of Understanding

There are only three problems with the work of the Deficit Commission to date, as it has been revealed to us in the co-chairs’ briefing slides:

  • It will not survive the onslaught of special interests because it contains something to offend almost everyone, from homeowners, lenders, builders, and realtors (kill the mortgage interest deduction, indeed) to affluent retirees (bend the SS benefits curve downward, indeed).
  • It proposes higher taxes.
  • It aims at too many spending targets, and misses the elephant in the room: “entitelment” commitments, namely, Social Security, Medicare, and Medicaid (and their promised expansion via Obamacare).

The looming debt crisis and the cycle of dependency on government can be solved and broken, respectively, through the straightforward act of announcing that Social Security, Medicare, and Medicaid benefits will shrink steadily toward zero. The degree and rate of shrinkage would vary according to the age of the prospective recipient; for example:

  • Everyone now over the age of 55 would receive their current or currently promised benefits, as adjusted for inflation but not for wage growth (see next item).
  • The costly wage-parity feature of Social Security would be abolished. (Why should we subsidize retirees to keep up with the Joneses?)
  • Future benefits for persons aged 25 to 55 would be reduced on a sliding scale: from 95 percent for 55-year-olds to 5 percent for 25-year olds.
  • There would be no future benefits for persons under the age of 25.

The costs would be defrayed by a unified payroll tax, which would rise (initially) to cover persons who are older than 55 when the plan is adopted. The tax would decline — by law — as persons who are 55 and younger when the plan is adopted become eligible for benefits (or not, as the case may be).

How would individuals fund retirement and pay for health care when they have retired? A plan like the one I’ve outlined would be a great inducement to save more — and individuals could save more without sacrificing consumption as the payroll tax declines. Unlike the Social Security Ponzi scheme — where one’s “contributions’ merely pay off those who got in earlier — the higher rate of saving would generate economic growth and, thus, real returns on saving (as opposed to the phony returns on SS “contributions”). As for health care, insurance companies could get back into the business of competing to insure older Americans. And I have no doubt that joint ventures by insurance companies and health-care providers would lead to innovative and less costly ways of delivering medical care.

Following the tradition of William of Ockham, I shun the turgid, Rube-Goldbergish proposal of the Deficit Commission in favor of a frontal attack on the main cause of the deficit problem: “entitlement” commitments.

Related posts:
Economics – Growth & Decline
The Economic and Social Consequences of Government