Deficit-Battle Gains Demand Spreading the Pain: Albert R. Hunt

Russell Long, of the famous Louisiana political dynasty, loved to tell how his Uncle Earl, the governor, advised a city slicker politician, hit by redistricting, how to successfully court rural voters.

He should rumple up the fancy white suit, loosen the tie, toss dirt on those shiny shoes, and reach into his pocket, bring out that big wad of bills and “spread the joy.”

That is the mirror opposite of what the fiscal deficit commission, Congress and the White House should do if they want to seriously address long-term budget deficits. They have to spread the pain.

The odds, in a politically polarized environment, are long; yet the co-chairmen of the commission, Erskine Bowles, a former Clinton White House chief of staff, and Alan Simpson, a former Republican Senator from Wyoming, started a constructive dialogue with a proposal that would slash spending, rein in Social Security and Medicare, boost the federal gasoline tax and end many tax write-offs while lowering rates.

The Bowles-Simpson initiative, floated last week, predictably received a bipartisan assault. The U.S. political left charged it would balance the budget on the backs of the poor, and the political right claimed it was a sneaky vehicle to increase taxes to unacceptable levels.

There are important details still missing from the plan, which seeks to reduce the deficit to 2.2 percent of gross domestic product by 2015, from 9 percent today, and cut the overall debt to 60 percent of GDP by 2024; under current projections, it would rise to 87 percent by 2020.

14 Votes

The 18-member deficit commission’s report is due Dec. 1. Anything resembling the co-chairmen’s proposal almost certainly won’t win support from the necessary 14 votes to send it to Congress. It may be reshaped a little as a menu of policy options.

There are valid criticisms. Bowles, the Democratic chairman, compromised too much in what’s likely to prove a futile attempt to win Republican support. The almost $4 trillion deficit reduction over the next decade would involve $3 in spending cuts for every $1 in higher revenue. Economically and politically, a one-to-one ratio would be more in keeping with spreading the pain.

Critics say that ultimately would lead to taxes rising to more than 21 percent of gross domestic product, the ceiling recommended by Bowles-Simpson. That would violate Hauser’s Law, a formulation put forward by a San Francisco investment economist 17 years ago positing that regardless of the tax rates, revenue in post-World War II America traditionally remains around 19.5 percent of GDP.

Tax Revenue

Changing demographics have altered such considerations; today, tax revenue is only about 15 percent of GDP. Recently, at a private Brookings Institution conference, mainstream economists, ranging from moderately liberal to moderately conservative, were asked to estimate, under a reasonable long- term budget plan, what percentage revenue would ultimately take up: the responses ranged from 23 percent to 25 percent.

To its credit, the Bowles-Simpson recommendation treats Social Security changes separately from deficit reduction, and tries to make the system slightly more progressive. By shaving benefits a little, however, hardships would ensue. Today the average beneficiary of Social Security gets around $1,100 a month, and for most seniors, that’s the majority of their income. The chairmen do propose raising the retirement age to 69, and increasing from the current $106,800 the base on which Social Security taxes are levied.

Accelerated Changes

Those changes wouldn’t take effect until 2050; again, in keeping with spreading the pain it would have been better to expedite those changes and minimize benefit reductions.

The proposal to increase the gasoline tax by 15 cents to pay for transportation projects probably is too timid. A much bigger hike, with most of the revenue devoted to an infrastructure bank and some to deficit reduction, would make for better energy, economic and investment policy.

There are constructive elements to the controversial measure. Generally, it seeks balance in health care that tries to reasonably take care of physicians’ needs while further clamping down on costs. Interestingly, these two knowledgeable and honest political figures don’t even consider the notion of repealing the health-care bill enacted this year. Instead, they seek to improve the cost containments, even raising the possibility of a public option.

Sacred Cows

It puts heretofore sacred cows, such as farm price supports, on the budget-cutting agenda. Simpson and Bowles insist that defense spending has to be part of any shared sacrifice; it’ll be interesting to see how a thoughtful member of the commission such as David Cote, chief executive officer of Morris Township, New Jersey-based Honeywell International Inc. (HON), a major defense contractor, reacts to this proposal.

It’s also instructive that they suggest reducing all discretionary programs by $49 billion in the next fiscal year. This compares to the unrealistic House Republican pledge to slash $100 billion out of these programs.

The conventional wisdom is the Bowles-Simpson plan is a fiscal fantasy, a realpolitik charade.

Still, it is instructive to recall the most analogous initiative in recent years: the 1985-1986 proposal to eliminate many tax preferences and lower the rates. When it was launched, it was pronounced dead on arrival.

Earlier Proposal

During the next year and a half that was a familiar refrain. “The obituary then was written multiple times,” said former Senator Bill Bradley, a New Jersey Democrat who was an architect of the initiative. It became the landmark Tax Reform Act of 1986.

That was possible because of powerful bipartisan support, starting with President Ronald Reagan and his political strategists, Treasury Secretary James Baker and his deputy, Richard Darman, and important members of Congress, principally House Ways and Means Committee Chairman Dan Rostenkowski, Bradley and Republican Senator Bob Packwood.

It is unlikely that a comparable figure will emerge today, especially on the Republican side. Last week, 13 Republican senators proposed amending the Constitution to require a balanced budget. The press should demand that each lawmaker submit a plan specifically spelling out when and how they would achieve this. Anything less makes the proposal a fraud.

(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Albert R. Hunt in Washington at ahunt1@bloomberg.net;

To contact the editor responsible for this column: Max Berley at mberley@bloomberg.net.

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