Nov. 17 (Bloomberg) -- Give credit for courage to Erskine Bowles and Alan Simpson, leaders of the White House bipartisan commission on the U.S. deficit. Their proposal gores some sacred cows on spending and taxes, and is a good first stab at repairing the budget.
Now accept that their plan falls short. The reason is that Simpson-Bowles tries to return the budget to where it was before the financial crisis. But due to deeper, longer running budget problems, there is no going back. Over the last two years, the government’s deficit has soared to a record $1.4 trillion.
That’s the result of a bizarre triple play of budget woes. First came the Sept. 11 terrorist attacks, which sparked higher defense spending. Then came the Bush-era tax cuts, leading to a loss of tax receipts. Finally, the financial meltdown.
Logically, reversing those budget hits would return the deficit to its previous level of a few hundred billion or so a year. But it won’t.
First a little background. Over the past generation, the revenue of the federal government has averaged about 18 percent of the U.S. gross domestic product. Spending was generally in the range of 21 percent of GDP. In other words, we typically ran a deficit equal to about 3 percent of GDP.
In the last two years, the recession has caused revenue to plunge to only 15 percent of GDP. Expenses, in turn, have soared because of increased benefits for the unemployed, bailout money for Fannie Mae and Freddie Mac and stimulus spending. The government budget now is close to 25 percent of GDP. Thus, the deficit has widened to 10 percentage points.
Back to the Beginning
Simpson-Bowles basically tries to reclaim the status quo ante, and adds a few bells and whistles such as simplifying the tax code. It caps the mortgage deduction for housing. That’s a good step, although an even better one would be to eliminate the deduction. The mortgage deduction is a subsidy to homeowners and real-estate agents paid by everyone else; arguably, it helped to spur the housing bubble.
Simpson-Bowles also raises the gasoline tax by 15 cents a gallon and proposes slicing $100 billion a year from defense spending. All good steps. And there are more.
But the problem that Simpson-Bowles attacks -- the gaping budget hole that opened in 2009 -- will largely go away on its own, as the economy returns to normal. We could eliminate almost half of it overnight by not renewing the Bush tax cuts. That would be a prudent move but it wouldn’t significantly address the deeper problem.
Simply put, over the next 20 years, as the population ages, the budget will be hit with an entitlement time bomb. And when it is, throw the numbers from past budgets into the trash.
Today, spending on Social Security amounts to about 5 percent of GDP; spending on three health insurance programs -- Medicare and Medicaid as well as Children’s Health Insurance Program, or CHIP -- is roughly another 5 percent. With a few exceptions, everything else the government spends money on, from defense to education to veterans benefits to transportation to food stamps, is discretionary, voted by the Congress every year. Spending on them equals about 15 percent of the GDP.
The approach of Simpson-Bowles is to cap spending at its historic level of 21 percent. But over the next two decades, as baby boomers retire en masse, combined spending on health care and Social Security will rise to something like 16 percent of GDP, according to Congressional Budget Office projections. And interest payments on the debt, which will be mushrooming, will soar from a relatively small sum to another 6 percent of GDP.
Not Adding up
Those add up to more than Simpson-Bowles envisions for total spending. In other words, there will be nothing left for homeland security, school meals, medical research, government pensions and salaries and myriad other items. We can’t eliminate the discretionary budget. We can’t even come close. And we can’t stop paying interest.
That means any serious attack on the long-term deficit has to focus on the nondiscretionary part -- entitlement programs. The Simpson-Bowles plan does chip away at Social Security by gradually raising the retirement age to 69. But Social Security isn’t the major issue. From now until 2030, its share of GDP is expected to rise by only a percentage point.
Health-care programs are the biggie, because they are affected by both the number of seniors and the rising cost of care. In total, as a share of the economy, such spending is expected to double. Mother Jones’ website isn’t off base when it calls health care “our only real long-term spending problem.”
The issue has been looming for years; newer sources of budget distress, like Mideast wars and the recession, are more like expensive distractions. To cure the future deficit, we have to find major savings in health care.
Simpson-Bowles lavishes attention on ways to cut defense spending and agriculture subsidies. But it is disquietingly vague on health care. It promises to “contain growth in total federal health spending…after 2020 by establishing a process to regularly evaluate cost growth, and take additional steps as needed if projected savings do not materialize.”
But cutting health-care inflation has proven excruciatingly difficult. The suggestion here is to attack it in every way possible: lower spending, higher taxes, and higher patient co-pays. The experience of the past decade is that starving the beast by cutting taxes doesn’t work. Taxpayers feel no pain; under the illusion that services are free, government spending continues to rise.
In contrast, during the 1990s, under the first President Bush and Clinton, taxes rose. Confronted with evidence that government does cost money, taxpayers accepted budget cuts. That should be the template for entitlement reform, which can no longer be delayed.
(Roger Lowenstein, author of “The End of Wall Street,” is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Roger Lowenstein at firstname.lastname@example.org
To contact the editor responsible for this column: James Greiff at email@example.com