Arnold Kling  

Random Thoughts on the Bowles-Simpson Plan

My Big Fat Consumer Surplus... Bad Argument for the Fed...

Washington Post story starts here. One quote:

The Bowles-Simpson blueprint would leave in place the vast expansion of health-care coverage enacted this year, rejecting GOP calls to repeal "Obamacare."

1. This is the huge carrot that Bowles-Simpson offers to Democrats. More than just leaving Obamacare in place, the co-chairmen of the deficit commission rely on Obamacare as the framework for cutting the growth of government spending on health care. So far, only James C. Capretta seems to have commented on this aspect of the co-chairs' deficit reduction plan.

2. I suspect that Steny Hoyer and Nancy Pelosi are feuding. Too much ego chasing too little status. But it would not surprise me to see Hoyer come out with a more receptive comment on the co-chairs' report. Pelosi's "simply unacceptable" verdict would position the Democrats as the "party of no" on deficit reduction. If they want to recover from last week's election defeat, I doubt the wisdom of this strategy.

3. My own personal view is that while Bowles-Simpson is quite far from my ideal budget plan, it represents an improvement over what we have now. It puts our budget on a more sustainable path. If it were enacted, you could then fight the 2012 election over whether to try to move it one direction or another.

What is important, in my view, is to take the status quo off the table as an alternative. The status quo is a dishonest budget, because we know that it leads to a fiscal train wreck down the road. Just about any honest budget is a better starting point than a dishonest budget. Until the status quo is off the table and we have a sustainable baseline budget, Congressional budget debates will be surreal.

4. Assuming that the deficit commission fails to find a consensus of 14 out of 18 members in support of the plan, the President does have the option of pronouncing the commission a failure and ignoring the co-chairmen's proposal. However, where would that leave him? Does he say that he set the commission up to fail? Does he say that he prefers to leave the deficit problem unsolved? Does he come up with a plan that satisfies the Democratic base but would get voted down overwhelmingly in the House?

Bowles-Simpson would provide the President with two achievements. First, it would help protect his health care reform. Second, it would give him an accomplishment on deficit reduction.

I continue to predict that President Obama will endorse Bowles-Simpson as a starting point.

Comments and Sharing

COMMENTS (7 to date)
Philo writes:

"The status quo is a dishonest budget, because we know that it leads to a fiscal train wreck down the road." How far down the road? Politicians have relatively short terms in office; a train wreck that will not come until *after the next election* is of no concern *now*. (And even a train wreck before the next election would not matter to a politician who expected that *he* would not be blamed.)

Dale Moses writes:

about 25-75 years down the road depending on the projection you use. The budget situation is so bad that if we can simply curtail spending increases to lower than GDP growth increases we can grow out of it eventually.

Frankly i find the plan pretty stupid. It cuts a lot of public benefit stuff which has terribly small marginal costs and very large marginal benefits. Are we to believe that CPB has no public benefit and that the private media is going to do better? I find that hard to buy. What I find easier to buy is that conservatives in Washington have been trying to kill the CPB for ages and that this was thrown in to try and get their support.

There are other aspects as well, the social security cuts are not intended to be deficit reducing, they're just kinda there because its political fodder for the right. Are they necessary? Well, the CBO pretty much expects that SS spending is flat over the foreseeable time horizon.

What isn't flat is SS revenues, but SS revenues are either a general fund problem or a general fund problem either way you look at it. Only the most dire predictions expect SS to fail soon, and none of those predictions ever come true. Such we have a situation where either SS is solvent but the general fund won't be willing to pay it back* or we have a situation where we take all revenues and describe them as part of the general fund which makes it a general fund spending and revenue problem. At which point cost benefit analysis is likely to show that SS is largely not a problem as a spending program.

Beyond that, much of the "savings" aren't. Rather than asking the question "should the government be in this business". It simply assumes that private payment will be more efficient. However, when these payments are necessities (or otherwise have highly inelastic demand) this amounts to simply a sifting of costs. This is in effect a tax on those people who were otherwise receiving benefits. Forcing VA beneficiaries to pay co-pays is equivalent to a tax on VA beneficiaries. Moving military base schooling to the state schools simply shifts the funding requirements from the Federal Government to the State. Which does precisely nothing for the general budget position of the many states. Unless we believe that our long term fiscal position is going to be increased by having a less productive population 25-50 years from now.

The cuts to federal government employees make less sense unless you really know what federal government employees are wasteful. After all, how is the government supposed to attract qualified and competent people if it won't pay a competitive wage? To what effect do we get from just simply laying off people? Why don't we instead, hire better management and create internal reform?

Beyond these issues are the things it doesn't address. Which are the inefficiencies involved in government operation which exist for no reason except to pad the bottom line of donors.

Let me digress for a minute into transaction costs, contracting costs, and organizational costs. We can define transaction costs as the costs of purchasing something on the open market, contracting costs the costs of long term contracts for purchases, and organization costs as the costs of doing something in house. Much of the problem in government is that it has no concept of these costs. For instance, why in the world would we consider contracting basic military services?

Contracting costs are lowest when you have specific jobs to do for defined periods of time (typically medium term). Yet, we consistently contract out things that the federal government plans to do continually and more of less forever. The long and short of it is that if we "in house" these things we will save money over the long term. This is especially true of specialized products and services which don't exist to do much of anything except serve the government.

*As Friedman said, "To spend is to tax". When social security was running a surplus, that surplus was borrowed by the general fund and used to reduce taxes. As SS revenues fall, they must be paid back by the general fund. I.E. income tax/corporate tax/capital gains tax increases. They cannot "not" be paid back, because to spend is to tax, the taxes must be raised at some point and every second we delay in raising taxes is just higher taxes that the top marginal rate will have to endure later.

Lord writes:

It wouldn't preserve healthcare reform because that will require large subsidies for the poor that their 21% gdp cap couldn't accommodate just as it will be unable to accommodate the ageing population. Assuming gdp growth plus 1% makes everything work out, but we can assume that without passing anything. It's magic. We should let other members weigh in but I doubt this would even pass the commission. He and Congress can pick it over for what ideas are there, but one shouldn't expect a does everything proposal to make much way.

RPLong writes:
Too much ego chasing too little status.

Hahaha... Classic.

Donald Weston writes:

I believe this is a good start especially attempting something closer to a flat tax with 4 or 5 brackets and no deductions especially no tax credits.
I would also reduce congressional salaries and compensations by 12% and have them pay into their retirement and healthcare.
I would combine DHS, ATF and the federal marshals and reduce management by 15%.
I stop all funding for Freddie Mac and Fannie Mae
I would require all government payback of loans and support from all companies GM and others plus 10% until paid off or reduce all salaries in the company to Federal General Schedule until paid off. If the entire company received payment as a GS-7 until the company was private again they would do it quicker.
Tough time require tough decisions.

Rosemary Holdredge writes:

Just how are cuts in Social Security supposed to reduce the budget or retire the deficit? Social Security is not in the federal budget; it currently sustains itself. The funds are separate by law.

This commission has the issues muddled. Social Security should be taken off the table in any discussion of reducing the budget or retiring the national debt, because slashing benefits won't do either.

This accusation that entitlement programs, "like Social Security," is nothing more than a diversion to take the focus off the real cause of the deficit - the wars in Iraq and Afganistan. Take our military out of those countries, slash the "defense" (read "war") spending, and the budget will be nicely reduced.

Manuel writes:

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