Politics & Policy

An Opening Volley against the Deficit

We are both pleasantly surprised and modestly encouraged by the program outlined by Erskine Bowles and Alan Simpson, the co-chairmen of the president’s deficit-reduction task force. There’s no VAT in sight, nor is there unrealistic happy-talk about balancing the budget through a federal Taylorism campaign or symbolic assaults on the unholy trinity of waste, fraud, and abuse. Instead, there is a serious series of concrete proposals for constraining entitlement costs, simplifying the tax code, and putting a leash on future federal expenditures. Whereas the Obama-Reid-Pelosi triumvirate had put the country on the road toward a national debt topping 200 percent of GDP — with $1 trillion a year in interest payments alone — the Bowles-Simpson program would stabilize the debt and begin reducing it. The program would keep the debt to 40 percent of GDP in 2037 and would bring annual deficits down to a more manageable 2.2 percent of GDP by 2015, and 1 percent in the following years.

The plan has serious defects, the main one being that it establishes a historically high level of federal claims on the economy — with government revenue equal to 21 percent of GDP — as the new normal. But it is a good start, and it represents the sort of bipartisan starting point that even the most Tea Party–steeped Republican insurgents could begin with while remaining true to their core conservative values. That is not something we’d expected to write about a proposal produced by a go-along-get-along Republican retiree and Bill Clinton’s old chief of staff.

There is no getting around the fact that the plan contains a very large tax hike in the form of abolishing such familiar and cherished exemptions as the mortgage-interest deduction. Mr. Bowles estimates that the program is three-quarters spending cuts and one-quarter tax hikes. But in giving up the complex menu of special-interest tax write-offs, the Bowles-Simpson proposal greatly simplifies the tax code and enables an across-the-board reduction of tax rates — leaving three tax brackets at 8 percent, 14 percent, and 23 percent — with additional savings accruing to taxpayers in the form of lower IRS-compliance costs. We would have preferred two brackets, more generous tax treatment of investments (including investments in children), and deeper reductions in, if not the abolition of, the U.S. corporate-income tax as well — American companies pay the world’s second-highest rate — which could contribute significantly to growth in both employment and economic output. And while the mortgage-interest deduction should indeed be phased out, that is a policy that should be implemented with the utmost care: It will likely further reduce housing prices, a necessary development that should happen — but happen slowly, lest we set off a new round of crises in the securities markets.

The proposals for entitlement reform are likewise painful but necessary: raising the age of eligibility for Social Security and reducing future benefits payments under that program and Medicare. A steeper and more straightforward means-testing approach would be welcome, as would the addition of voluntary Social Security add-on accounts that would give retirees more control over their own futures.

There is an ideological oddity in the proposal’s treatment of discretionary-spending cuts in that it creates two arbitrary categories, defense and non-defense, and insists on separate cuts to each. Specific defense programs may be ripe for reductions or reform, but Pentagon spending is not at historically high levels — or even at historically high peacetime levels — unlike much of the rest of the federal government. It would be more sensible to establish a single target for reductions in all discretionary spending and then to proceed as our national priorities dictate, since there is no reason to presume that the Pentagon must be the target of specific directed cuts when Washington offers such a target-rich environment. If abolishing the Small Business Administration saves a brigade or two, that may very well be a trade worth making, and national defense remains one of the few core federal priorities in which policy cannot be subordinated to strictly budgetary concerns. If federal departments are to be singled out for cuts, we recommend the Departments of Energy, Labor, and Education. (The USDA’s byzantine agribusiness-welfare program already is in the crosshairs.)

Mr. Simpson says too much when he claims that he and his co-chairman “have harpooned every whale in the ocean and some of the minnows.” There are plenty of fat fish in the federal sea, and at least one Kraken: The Bowles-Simpson proposal studiously avoids mention of Obamacare, which, most budget realists appreciate, promises to add trillions of dollars to the national debt over the years, particularly if, as expected, its spending targets are exceeded while other fiscal mechanisms — specifically, cutting doctors’ Medicare payments by 21 percent or more (as promised by separate legislation) and imposing the “Cadillac” tax on expensive health-care plans such as those enjoyed by President Obama’s union constituents — are put off. The law of the land has for years called for precisely the same Medicare cuts that the new legislation alleges to require, and each year Congress has declined to administer that bitter pill to America’s physicians. Sensible health-care reform — and Obamacare is not it — will be necessary to ensure the long-term solvency of American government. Which is to say, Republicans should regard this as a starting point, not as the finish line. But Mr. Bowles and Mr. Simpson have performed a public service by beginning the conversation on mature and realistic footing.


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