Bloomberg View: The Supercommittee’s Common Ground; Europe, Centralize Now!
WHERE THE CUTS ARE
On Sept. 12, 60 business leaders, along with former lawmakers, budget directors, and Treasury officials, urged the congressional supercommittee to “go big” by adding trillions more to its deficit-reduction target of $1.2 trillion. It’s a laudable goal—and with elections only 14 months off, increasingly unrealistic. Instead of aiming for the sun, the supercommittee should settle for a planet, even a moon.
Many good ideas live on common ground. The Committee for a Responsible Federal Budget, part of the New America Foundation, an independent, nonpartisan policy institute, recently outlined 40-plus proposals from House Republicans and various bipartisan panels, including the deficit commission led by Alan Simpson and Erskine Bowles. It also listed ideas very nearly agreed on (until a last-minute blowup) during this summer’s debt-limit negotiations.
One such proposal involves what economists call a “chained consumer price index.” The current CPI measures inflation in a fixed basket of household goods but doesn’t account for the substitutions consumers make when, for example, the cost of a steak increases but chicken legs do not. By accounting for such shopping decisions, the chained CPI would lower cost-of-living adjustments to government programs, including Social Security. The 10-year savings: $232 billion.
Several overlapping proposals would reduce Medicare costs. One would save $125 billion over a decade by gradually increasing the age when Medicare benefits begin, to 67 from 65. Another would shave off some $75 billion by discouraging overuse of the health system. (This would be done by increasing Medicare cost-sharing with a $550 deductible and a 20 percent co-payment, balanced by a cap on out-of-pocket costs beyond $7,500.) To prevent dilution of such cost-sharing incentives by Medigap plans—the private insurance policies that cover much of what Medicare doesn’t—first-dollar coverage could be barred at the same time, for a $53 billion savings. A final Medicare proposal would means-test Medicare to increase premiums for high earners, trimming $38 billion.
There are similar ideas for Medicaid. For starters, states could be given more flexibility to use managed care. The government could also stop paying matching funds for state taxes paid by health-care providers—a gimmick many states use to inflate federal payments. Taken together, these reforms equal about $110 billion in savings.
Prominent members of both parties have voiced agreement on reducing farm subsidies, such as lowering direct payments to farmers and overhauling the crop insurance program, to cut $28 billion. Similarly, there appears to be bipartisan resolve to increase pension contributions by federal employees. The U.S. could save about $47 billion by raising worker contributions and basing the benefit formula on the highest five years of earnings instead of the highest three years. In 2009, President Barack Obama opened the door to overhauling the medical-malpractice system, a high priority for many Republicans who think the legal system is skewed toward plaintiffs. By deducting workers’ compensation and insurance payments from jury awards, allowing safe havens for providers who follow best practices, and capping noneconomic damages, the U.S. could save about $62 billion.
There’s little overlap between the parties when it comes to Obama’s job-creation proposal, with one big exception—the payroll-tax cut for employers. House GOP leaders have spoken approvingly of the cut, to 3.1 percent from 6.2 percent, in the employer portion of payroll taxes, as well as the small-business tax break for those creating jobs or increasing wages. This tax break would cost $65 billion.
Add it up, and the 10-year savings comes to $705 billion. Not exactly a $4 trillion grand bargain, but more than halfway to the mandatory $1.2 trillion target the supercommittee must hit to avoid triggering automatic cuts. In a sclerotic era, that more than qualifies as progress.
WHAT THE ECB CAN DO
If the summer showed us anything, it was this: Europe’s leaders are unwilling, unprepared, or unable to take the necessary measures to solve the Continent’s financial crisis. Ultimately, Europe should create a centralized authority—like the U.S. Treasury—with the power to collect taxes, issue debt, and provide temporary support to countries that run into economic trouble. Such an authority could replace the euro zone’s panoply of government obligations with jointly backed euro bonds, creating a market large and liquid enough to rival the one occupied by U.S. Treasury bonds. The bonds’ sound backing would provide markets with assurance that any debt-reduction deal for Greece and other governments would be final, allowing banks to draw a line under their own losses, recapitalize, and move on.
Unfortunately, the signals from Europe’s markets have yet to generate the political will needed for what amounts to a deepening of the European Union.
In the short term, somebody other than German Chancellor Angela Merkel and French President Nicolas Sarkozy will have to take on the task of avoiding disaster. The only candidate is European Central Bank President Jean-Claude Trichet, who has access to an almost unlimited resource: the power to print euros.
In its simplest form, ECB intervention would entail the central bank buying Greek and other euro-area government bonds at an artificially high price, leaving the central bank to suffer losses if and when some of the debts are written off.
ECB intervention would not substitute for a real fix to the euro area’s flaws. Europe is reaching a point, though, where aggressive ECB action could be the lesser of all possible evils.