RALEIGH – Remember how Bill Clinton straddled the fence when asked, as a presidential candidate in 1992, what his position was on going to war with Saddam Hussein the previous year?
“I guess I would have voted for the majority if it was a close vote,” Mr. Clinton was quoted as saying. “But I agree with the arguments the minority made.”
Well, I hope you don’t accuse me of a Clintonian straddle, but when it comes to the work of the deficit-reduction commission co-chaired by UNC President Erskine Bowles and former U.S. Sen. Alan Simpson, I must say that while I agree with many of the arguments the majority of commissioners made, I would have voted with the minority – against the plan.
I think that Bowles, in particular, deserves tremendous praise for taking on the thankless task of heading President Obama’s commission and coming up with a package of spending cuts and tax increases guaranteed to make few people happy. While there was good reason to suspect the commission was little more than a tactic the Obama administration would use to advance the horrendous idea of a federal value-added tax, the final plan included no VAT. Perhaps Bowles and Simpson killed it. Good for them.
The plan did include a number of praiseworthy proposals, such as adjusting Social Security to today’s demographic realities and ending unwise federal tax policies such as exclusions for home-mortgage interest and earnings on municipal bonds. Some of them ought to turn into federal legislation when the new Congress convenes in January. But as a whole, the commission’s deficit-reduction plan relied too much on higher taxes and not enough on achieving real savings by repealing ObamaCare and reforming Medicare, Medicaid, and other health programs.
Commission staffers argued that the vast majority of the deficit reduction in the plan – 75 percent, according to one of the claims – derived from spending cuts. But the Heritage Foundation’s Brian Riedl has taken a closer look at the numbers and thinks the statistic is overstated. He points out that the plan is based on a budget baseline that assumes very large increases in federal revenues not spelled out in its recommendations. These include the end of Bush-era tax cuts and growth in the alternative-minimum tax.
If you compare the commission’s plan to an alternative baseline that doesn’t make these assumptions, it reduces deficits by $8 trillion through 2020. Fully $3.3 trillion of that comes from higher federal revenues, vs. $3.5 trillion in program cuts and $1.3 trillion in lower interest.
Still, the plan calls for large reductions in discretionary spending and slower growth in entitlement spending. Both are needed, though Congress should go further than the commission did in both categories.
The fundamental problem is spending, not revenue. In recent decades, even as marginal tax rates have risen and fallen, federal revenue as a share of the economy has stayed in a fairly narrow band around 18 percent. Yes, the recent deep recession has pulled this figure down to 15 percent of GDP, but revenue will rebound to a normal level as the economy recovers.
The key variable is spending. The federal government has been running deficits in the 1 to 3 percent range of GDP because spending has averaged between 19 percent and 21 percent. Thanks to the recession, the Bush bailouts, and the Obama stimulus, spending shot up towards 25 percent. It won’t fall back down quickly without heroic legislative efforts.
The deficit commission set a target of 21 percent of GDP for fiscal balance. That’s way too high. Policymakers ought to set the target at the historical average, 18 percent. That means larger spending cuts. As for taxes, by all means we should improve efficiency and fairness by eliminating many special deductions and exclusions, while simultaneously lowering marginal tax rates. That would generate more revenue in the long run – 18 percent of a bigger pie is more filling than 18 percent of a smaller one.
So put me down as a “no” on the commission’s plan but a “yes” in praise of Bowles and his colleagues for a productive start to a necessary discussion.
Hood is president of the John Locke Foundation.