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Some Good Recommendations, Some Bad Basic Assumptions



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After taking a first brush through the fiscal commission co-chairs’ 50-page report, my initial conclusion is that the authors are headed in the right direction but remain trapped in a philosophical framework that misunderstands the role of government.

The plan starts with ten “Guiding Principles and Values.” Many of them actually are good, including recognition that it will take painful sacrifice to get the deficit under control, that we need to cut red tape and inefficient, unaffordable spending, that the tax code needs to be simplified, and that we must reform structural debt problems including Social Security, health care, and national debt as a share of GDP.

However, several of the principles are poorly focused. The report perpetuates the belief that we need to wait until recovery sets in to start making reforms, and it argues that government should be investing in education, infrastructure, and high-value R&D to promote growth.

These wrong-direction ideas are all well-intentioned and understandable. But we can’t start cutting the deficit without recognizing that true recovery will only take hold once the current government interventions — stimulus spending, cash-for-clunkers, quantitative easing, HAMP, etc. — preventing the realignment of resources in the economy are removed. Moreover, any deficit-reduction plan that continues to believe government investment in the economy will promote growth is likely to be a failure.

Throwing more federal money at education has not proven to be successful, while local-level reforms — such as Washington D.C.’s — have yielded much higher returns. While there is certainly a role for government in maintaining a national infrastructure, continuing to focus on infrastructure spending as a means of boosting recovery is reaching levels of cognitive dissonance. And the argument that the private sector picks winners and losers in development better than government is a tired one, but still accurate and applicable.

 Nevertheless, when it comes to specifics for cuts in the plan, there are some good ones. Here is a sample:

— Cut the federal workforce by 10 percent; two-for-three replacement rate
● Freeze federal-worker wage increases through 2014
● Eliminate 200,000 federal jobs by 2020 and cut 250,000 non-defense contractor jobs by 2015
● Sell excess federal property
● Lower tax rates, simplify the code, and broaden the base
● Increase Medicaid co-pays
● Index retirement age to increases in longevity by increasing the age by one month every two years after it reaches 67 under current law (meaning the normal retirement age would reach 68 in about 2050 and 69 in about 2075)
● Eliminate subsidized student loans, in which the government makes interest payments while the student is in school

Anthony Randazzo is director of economic research at the Reason Foundation in Washington D.C.



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