Thursday, December 2, 2010

Deficit Commission Good Place to Start

The Deficit Commission final report is out, and its recommendations are a good place for our country to start the discussion about how to address the federal deficit, and its effect on our cumulative level of debt. I don't like everything in it, but I would take it over the status quo in one second.

The problem we face is that the very large deficits due to the economic downturn will give way to large ones from our paying for several basic governmental functions: Military, Social Security, Medicare, Medicaid and the interest on the debt. Our tax code simply doesn't raise enough revenue to pay for the spending we have. One or both have got to change. In fact, if we do nothing, the 5 line items above will consume all federal revenue in 2020, and every other dime spent would be deficit-financed. The deficit would be over $1 Trillion then, and this assumes a normal economy.

The deficit is a problem because it adds to our cumulative debt. It was around 33% of our GDP in 2000, and at the end of this year it will be around 63% of GDP. Now borrowing costs are low, but if the debt gets too high, investors will be worried, and we will have to pay higher interest rates to finance our debt. No one knows for sure what level of debt will trigger this crisis. It would be better for us to hash it out now while we can have some reasonable debate than to wait and deal with it under a financial crisis.

The broad outline of the Commission report is the same as the earlier draft report from the co-chairs, Erskine Bowles and Alan Simpson.
  • 21% of GDP as the target balance point to be achieved by 2035. This would be a historical tax increase and a historical cut to our spending level. I would probably be willing to spend a bit more, but I think a target is necessary.
  • The future deficit is driven almost entirely by health care costs. The plan caps the tax exclusion of employer paid insurance at the 75th percentile of premium costs nationally in 2014, and holds this amount constant through 2018 which means even more policies will be affected. They propose then moving slowing to eliminate this tax exclusion by 2038. This would be the most consequential cost-control health policy enacted by the U.S. since, well ever. And this policy is flexible, meaning it will work as intended regardless of whether the Affordable Care Act is implemented fully, repealed or anywhere in between.
  • The plan is a bit wobbly over the ACA, and basically comes down with expansion of the Ind Payment Advisory Board, which is the strongest part of ACA to address Medicare cost inflation. Then it notes disagreement on the board about whether ACA and these expanded policies will slow costs. They recommend that Medicare growth be capped at 1% above inflation after 2020 if enough cost savings do not materialize.
  • Bottom line on health care: capping the tax exclusion and beefing up the IPAB would (by far) be the strongest cost control health policies our nation has enacted. There are others proposed such as malpractice reform, but these are the two biggest, and in and of themselves make it a strong health policy package.
  • The plan proposes a profound tax reform, which is essentially a trade of fewer brackets and lower rates for the removal of around $1.1 Trillion in tax expenditures, or aspects of the tax code that benefit one group of taxpayers over another. Progressives need to get on board with this approach, because it is a progressive way to reduce this type of 'spending.' Some of the tax expenditures are proposed to be added back, but the plan makes clear how much they cost. One of the benefits of the debate so far is that (maybe) more people are beginning to understand that the 'outs' include explicit spending and tax expenditures like the home mortgage deduction and the tax exclusion of employer paid insurance.
  • Regarding Social Security, it is in need of tweak, while the health care system is in need of tremendous changes. I would rather not raise the retirement age, but more directly cut benefits for high wage beneficiaries and increase the amount of wages subjected to payroll taxes faster than what they propose (they want to eventually get back to the 1983 standard of the 90th percentile of wages being subjected). We need a deal on Soc Security so we can redouble our efforts on health care costs.
  • Their plan cuts Military spending, and discretionary spending and is filled with symbolic things like cutting the budgets of the White House and Congress. But, symbolism can be important so long as you get to the actual policies needed.
This report is a good place to start. There are now 5 or 6 deficit plans, from liberals, conservatives and everyone in between. This report has the benefit of having been discussed and put together in the context of Democrats and Republicans being involved, many of whom are in Congress. So, it has already been subject to some of the inevitable negotiations. And some Democrats and Republicans have signed on: Conrad and Gregg, for example, the Chair and ranking member of the Senate budget committee are going to vote for the report on Friday. Xavier Becera, a Democrat on the more liberal end is undecided but says this is a template for how we address the problem, and Sen. Tom Coburn who is decidedly conservative is reportedly considering voting yes. That is some progress. The business leaders on the panel are supporting it as the way forward.

The President of course has the ability to propose dramatic changes in his own budget. If he choose to do so, that will ensure continued discussion of these difficult changes next year, and put an end to the hyperbolic discussion of miniscule spending programs as a way to deal with the deficit. It is the correct policy for him to focus our country on the hard things. He has said he would rather be a good one term President than a mediocre two-term one. And because his political fortunes with independents have been on the rocks, perhaps the stars are aligning and what will be good politics for him in terms of maybe wooing back independents which seems necessary for his re-election will be the same thing as the right thing to do. Here's hoping.

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