My plan to reduce our deficits

Over at Daily Kos, many are calling President Obama’s bipartisan commission to recommend was to achieve fiscal stability, “The Cat Food Commission”. If enacted, a proposal released yesterday by the commission’s co-chairs Erskine Bowles and Alan Simpson would certainly require a lot of austerity and painful choices. This is why it doomed to go nowhere. However, it is useful to underscore what it might take to actually achieve a balanced budget.

It’s like Bowles and Simpson tried to produce a document they knew could not possibly garner any support. Even some members of the commission, who were surprised when the co-chairs released it, found they could not support it. Outgoing House Speaker Nancy Pelosi quickly rejected its suggestions for changes to Social Security and Medicare. There are some good ideas in the recommendations. Simplifying tax rates, for example, would make a lot of sense and make it harder for some to avoid paying a fair share of taxes. Overall, the proposal requires too many sacred cows to be slain. As one example, it says that we should stop the home mortgage interest deduction. Good luck on getting that one through Congress. You can bet if it came to a vote, the real estate lobby would target for defeat any member of Congress that voted for it.

So I know a few things already. Congress will not pass some massive, comprehensive budget reform law. That is as likely to happen as a single payer health care plan was likely to pass in this Congress. No, if it happens at all, there will be all sorts of backroom wheeling and dealing, with the big winners likely big business and the big losers ordinary, income-challenged Americans. Most likely, Congress will choose to punt any real reform until sometime past 2012 and hope an improved economy keeps voters from focusing on the problem. While our budget deficit has been a long-standing and chronic problem, what citizens really want from our government now are jobs and some semblance of the prosperity they had ten years ago. The budget deficit issue was mostly fodder whipped up by Republicans and Tea Partiers to add to our anxiety level so they could win political power.

No question about it: our budget deficit is bad. However, it is not nearly as bad as some would suggest. Our debt, as a percentage of gross national product, has been much higher than it is now. Toward the end of World War 2, public debt hit around 110% of GDP. Now we are about 50% of GDP. This number would be a lot less intimidating if we were still not painfully climbing out of a recession. If you produce less output, then of course your debt as a percentage of GDP will be higher. After World War 2, the government generally lived within its means or racked up only modest deficits. We reached a post World War 2 low during President Nixon’s term of office. It has skyrocketed under Republican presidents since that time. As a nation, we have endured much higher levels of relative debt before and came through it, and have done it without draconian solutions like cutting social security benefits.

What disturbs me the most about the Bowles-Simpson proposal are some of its assumptions. One assumption is that tax rates should be as low as they are now. If anything, our current tax rates are too low and need to be higher. In order to keep taxes at that low a level and shrink the deficit, it proposes all sorts of unpopular ways of cutting expenditures, most of which are impossible to pass. Moreover, since they are politically impossible to pass, at some point you must raise taxes to make up the difference.

Their proposal to reduce social security benefits and extend the retirement age is very unpopular with the public, who are happy to pay higher withholding rates in order to keep the current retirement ages. Then there is the good news from the system’s trustees that Social Security is solvent for at least the next fifteen years with no changes to the law. Solvent means that Social Security’s accumulated assets (in U.S. Treasury Bills) won’t be exhausted for at least 15 years, and it only just recently started to draw down from them. In short, Social Security is not causing a drain on the treasury and for now its surpluses reduces our budget deficits. So it needs tweaks rather than the draconian solutions in this proposal. Rather, it appears that the Bowles-Simpson proposal wants to monetize the Social Security surplus to further reduce the deficit. This can happen if the retirement age increases because the U.S. Treasury makes money as long as Social Security collects more than it pays out. Frankly, this and similar “reform” proposals are a scam and taxpayers should be up in arms about it. Many of the new Tea Party members of Congress were elected promoting the false claim about the imminent bankruptcy of the Social Security system.

What are feasible ways to really get to a balanced budget again? The fastest way is to have an economy that is rapidly growing with near full employment, because that means more taxes are collected, obviating a whole lot of painful deficit reduction choices. Arguably, the fastest way to do this is to borrow more money to stimulate the economy some more. That’s not likely to happen and even I agree that the odds it would work at creating lasting growth are dubious. This, combined with modest tax rate increases, say to levels during the Clinton Administration, would do a lot to bring in more revenue and close the deficit gap.

Since Social Security is solvent, the three biggest factors driving the deficit are Medicare, Medicaid and defense spending. (Too low tax rates should go without saying.) The new health care law will, if it is not overturned, squeeze cost savings from Medicare and Medicaid, slowing their rate of growth but not to the point where they keep up with general inflation. It would not be popular, but legislative caps on these programs to a percent of the GDP would be a sane approach. If anything should stimulate efficiency, this should. Caps could be raised, but only if revenues were raised as well, i.e. it was deficit neutral.

Then there is the Department of Defense, which even its secretary admits is a vast, inefficient and bloated bureaucracy, feeding an ever-expanding military industrial complex. Our military is also vastly overleveraged. Frankly, we cannot afford the military we have. It needs to be shrunk. As a nation, we need to make hard choices about where to spend our defense dollars. The Bowles-Simpson proposal at least does us a favor by pointing this out. Reducing our military presence overseas and closing many of our overseas bases makes a lot of sense.

If you look at the drivers for deficit spending, along with entitlements, elective wars also drive up debt. Bush’s two wars in Iraq and Afghanistan will cost at least three trillion dollars, and probably more like four to five trillion after all the costs are paid out. Our current debt is about 13 trillion dollars, which means just these two wars have bloated our debt by nearly 25%. Elective wars have huge financial consequences so they must be much harder to start and need to be paid for. Here is my proposal: strengthen Congress’s right to declare war or any major military incursions. Require that all wars be paid for in higher taxes, unless two thirds of both houses of Congress agree to suspend the rule. Another lesson: diplomacy is a lot cheaper than war!

Do these things and many of the other problems will take care of themselves. Any new entitlement needs to go through a process to ensure it is deficit neutral (which is the case with the health care law, by the way). Congress’s recent pay-go rules need to be codified into law, which will probably require a constitutional amendment.

Politicians often find it more expedient to cut discretionary spending, but excluding defense, this is a small portion of the federal budget. In 2009, non-defense discretionary spending was only 12% of the federal budget, or about $437 billion dollars out of a $3.5 trillion dollar budget. This spending rarely rises much beyond inflation. Entitlements and defense spending are driving up the debt. While there is wasteful non-defense discretionary spending, it’s likely not a lot, and certainly not enough to solve our deficit problem. For most of us giving up our space program, food and drug safety, air traffic control system, national parks, the weather service and such are not negotiable anyhow.

In short, we don’t have to retire at age 69 in order to solve our fiscal problems, but we do have to seriously contain costs for entitlements, decide defense spending is not sacrosanct, keep ourselves out of elective wars, and, yes, raise taxes to something reasonable but not too burdensome. Why would we choose to spend our senior years eating cat food when it is not necessary?

Let’s get to it.

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