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Exchequer

NRO’s eye on debt and deficits . . . by Kevin D. Williamson.

Simpson-Bowles Is Dead



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But the deficit lives on, and so does the march toward Fiscal Armageddon.

National Review’s initial editorial take was cautious optimism; as the plan was chewed over, the ratio of caution to optimism increased. Exchequer has been a bit of an outlier in its enthusiasm for the general shape of the plan.

Ezra Klein argues that, as an intellectual framework, Simpson-Bowles will live on. If it does, keep in mind this from Heritage, some of the smartest criticism of the plan from the right. I don’t agree with all of it, but there is much useful thinking here:

Measured against the baseline, the commission would reduce deficits by $8 trillion between 2011 and 2020. Revenues would rise by $3.3 trillion, program spending would fall $3.5 trillion, and $1.3 trillion would be saved in net interest costs. So despite nearly all long-term deficits arising from soaring spending, the commission report nearly splits the difference between tax hikes and spending reductions in the first decade (see Table 1 and Chart 1).

Digging deeper, the commission would reduce Social Security and health spending (the cause of nearly all long-term deficits) by just $442 billion in the first decade—a 2 percent reduction from the projected $20.2 trillion spending level. The growth rate of these programs would merely dip from 6.5 percent to 6.2 percent annually. Other mandatory spending, which has grown immensely over the past decade, would still spend 95 percent of its baseline level over the next decade.

The only real significant spending reductions would come in discretionary spending. And here the commissioners are sorely misguided in their approach to cutting defense spending, which is already under-funded.

I don’t think defense spending is under-funded, not by a long shot — practically every slice of the federal budget pie is due for a reduction. But I do agree that defense is one of the few areas of federal activity in which policy has to take a very strong precedence over budget. (Remind me again why we have all those troops in South Korea? Okinawa?)

Here’s the case for pessimism: You can pass a plan — and you can even, in theory, pass a good plan — but that doesn’t mean that the plan will get enacted. If you can’t make cuts in one  program, you can’t make cuts in a thousand programs.

So, instead, Uncle Same is issuing about $100 billion a month in new bonds. Which is to say, every month we’re expecting the bond markets to absorb new Treasury debt equal to five General Motors IPOs, or roughly twice the total market value of Ford, or the quarterly revenue of ExxonMobil in a decent year — and ExxonMobil usually is neck-and-neck for the title of World’s Largest Corporation — so that’s a  lot of money. Annually, that deficit adds up to something between the GDP of Canada and the GDP of Brazil. The Fed is buying that debt right now — monetizing the debt in the name of “quantitative easing” — but it cannot do that forever. What happens then? And what happens when the markets have had their fill of U.S. debt?

So, Simpson-Bowles or no Simpson-Bowles, we are going to have a balanced budget. The question is whether Washington is going to balance the budget or the bond market is going to balance the budget for them. Which is to say, we have the choice between an orderly transition to a smaller state with more austere finances or a fast-and-dirty, disorderly, banana republic-type transition.

Paul Ryan is possibly my favorite congressman, and he has excellent ideas about the budget, but he does not have an S on his chest. I like Mitch McConnell, but he couldn’t get Republicans behind a measly little earmark moratorium in the Senate. And even if Simpson-Bowles or something like it had advanced, a good number of conservatives would campaign against it in order to preserve preferential tax treatment of mortgages and the like.

So, that being written, I’m going to spend the weekend researching investment options that short Treasuries.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.


Tags: Debt , Deficits , Despair , Fiscal Armageddon , Politics


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