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Liveblogging World War II: November 15, 1940

Henry Aaron Really Does not Like SImpson-Bowles

From the Fiscal Times:

All responsible budget analysts agree that the United States faces a daunting deficit problem. It should be addressed soon. But how soon is not clear. After the recovery is well under way, most would agree, and certainly before the debt/GDP ratio gets too large. What is not clear is what “well under way” means and whether it will happen soon enough to prevent to debt/Gross Domestic Product ratio from getting too large. The Bowles-Simpson plan would start deficit reduction in fiscal 2012, which starts on October 1, 2011, not even eleven months from now. Since unemployment is likely then to still be in the vicinity of 9 percent or higher, that is too soon, as premature deficit reduction could intensify and lengthen the recession. This is not a minor issue, as nothing more effectively depresses revenues and generates deficits than a weak economy.

Even more troubling... is the program... 70 percent of the deficit reduction under the Bowles- Simpson “mark” would come from spending cuts.... The steady-state spending level... would be 20.5 percent of GDP. That is lower than spending averaged from 1980 to 2008 when none of the baby boomers had yet retired and claimed Social Security and Medicare and when spending on health care per person was a minor fraction of what it will be in 2020.

Other problems:

  • The plan calls for a reduction from baseline in federal health care spending of about one-third by 2040, but doesn’t say how that target will be achieved.

  • The plan would block grant Medicaid.... The result would be powerful incentives to cut benefits.

  • The plan presents four options for modifying the tax system, but doesn’t endorse any. All would tax capital gains as ordinary income, which means doubling the rate on them.

  • All tax plans would end or curb deductions for charitable contributions... at the same time that the principal programs supporting these very [vulnerable] populations – Medicare, Medicaid and Social Security -- would be slashed....

  • Social Security benefits would eventually be cut by 25 percent for people earning $43,000 today and by 40 percent for those earning $100,000. Note the double whammy—less Social Security and no tax- sheltered savings plans. The plan actually contains some modest increases in Social Security benefits, so that it actually increases the deficit until well after 2020

  • The plan says it would fix the Medicare fee cuts for doctors scheduled for next month, but it doesn’t say how – other than to establish a new payment system to reduce costs and improve quality.

  • The plan would freeze salaries of federal employees for three years, cut the federal work force by 10 percent, and dump 250,000 contract employees. To offset these cut backs, the plan calls for an increase in productivity of federal workers, but it doesn’t say how....

[T]he shortcomings in their proposals are profound. It is vague in key elements, sets targets and then calls on some committee or group to do something unspecified if the targets are not being met.... [T]he draft plan is replete with magic asterisks.... It sets targets for overall spending and taxation so low that it will be impossible to sustain even basic promises to provide pension and health benefits....

There is a better way. The first element should be a large new... value-added tax.... Second... long-term budget reduction... hinges on the control of health care spending. Such control is not possible without vigorous implementation of health care reform.... [T]he Affordable Care Act... is a start. More to the point, it is the only game in town.

Third... Bowles-Simpson... will have to rely on spending curbs. But relying on spending cuts to achieve 70 percent of the deficit reduction requires setting spending targets so low that it calls to mind the quip attributed to the man enjoying a drink in the bar on the Titanic: “I asked for ice,” he said, “but this is ridiculous.” Or, as the British say: “Less would be more.”

As I say, Simpson-Bowles is a significant unforced error by the Obama administration.