Bad start to a new beginning

Nov. 21, 2010

Here we go.
The co-chairs of the budget deficit commission, former Clinton Chief
of Staff Erskine Bowles, and Allan Simpson, a former GOP Senator from
Wyoming, have created quite a stir with their preliminary report on
reducing the federal deficit. The report is both dramatic and
pragmatic. It is also a stark reminder of just how difficult this is
going to be.
Nothing the commission does has the force of law. It provides
recommendations and those already put forward by Bowles and Simpson
are nothing more than preliminary ideas. But illuminating,
nevertheless.
The proposals are both broad and specific – raising the eligibility
age for Social Security, massive cuts in defense spending (including
the bloated procurement process), a reduction in the federal workforce
through attrition, significant reductions in the size of federal
departments and programs that will result in additional federal
workforce reductions, a three-year wage and benefit freeze for all
federal employees except the military, significant reductions in
income tax rates, the elimination of Congressional earmarks.
They also call for premiums to be charged for Medicare coverage, a 15
cent per gallon increase in the federal gas tax, ending the home
mortgage interest tax deduction, ending the tuition tax credits,
ending virtually all tax deductions and credits for individuals and
reducing corporate tax rates.
There’s much more, of course, but you get the idea. About 75% of the
deficit reduction the commission proposes comes from cuts of one kind
or another and the other 25% comes from tax and fee increases.
The plan here is to try and stop a runaway train of deficit spending.
The commission’s suggestions, according to them, will reduce spending
from an unsustainable 24% of the Gross Domestic Product (GDP – the
value of everything we produce) to 21% by 2015. That is still slightly
above historical levels but would at least be tenable. It would
reduce the deficit to just 2% of GDP in the same time frame, a level
that is manageable.
So, how did our new budget-slashing, fire breathing members of
Congress respond? Or the stodgy incumbents? No politicians seemed to
like it very much.
Republicans on the right howled at the notion of any kind of tax
increases for any reason. It seems even considering the Bowles-Simpson
plan is a violation of their sacrosanct no-new-taxes pledge. Never
mind that on balance the vast majority of individuals and corporations
would be paying significantly less in taxes than they do now. Doesn’t
matter. They believe they can cherry pick social programs with which
they have some philosophical issue, chop away at them and everything
will be fine. They are wrong.
As for the Democrats on the left, their howls of anguish were even
louder. Cuts to social programs? Oh, my God. What about the poor
children? No, no, we can’t accept any cuts to much of anything. They
believe they can fix the budget mess on the backs of the wealthy and
corporations. They are wrong.
The loudest whining of all came from the special interest groups that
have been feeding at the public trough in porcine splendor one way or
another for decades. They’ve already unleashed their lobbyist hounds,
40,000 strong, telling us there must be some other way.
But, if we’re serious about reducing the deficit, there is no other
way. None.
Unfortunately, Congress, having long ago lost touch with reality, will
do nothing but bloviate and then dislocate their collective shoulders
patting themselves on the back after making some insignificant cut
somewhere that doesn’t do much of anything. Like ending earmarks, an
excellent and necessary bit of political stagecraft that will be
popular but the impact on the deficit will be less than one-tenth of
one percent.
Nor can the Federal Reserve fix this by constantly printing more
money. In fact, they have been wrong on almost everything for a very
long time. They didn’t see the tech bubble coming, didn’t see the
housing bubble coming, assured us the entire sub-prime catastrophe
wouldn’t happen, didn’t see any problems on Wall Street and were quite
convinced that spending $2 trillion dollars we didn’t have for various
stimulus programs would fix everything. They were wrong on every
count.
The Fed has now flummoxed two presidents with their mystifying
economic gobbledegook and equally mystifying decisions or lack
thereof. It’s clear they not only don’t know what they’re doing but
their efforts have consistently made things worse. Sometimes their
actions defy common sense and include unsavory overtones.
Consider the following: The Fed, which controls the flow of money,
recently announced they are going to purchase $600 billion in Treasury
bonds. They will do this because they fear deflation and would rather
cause inflation which they believe will increase job growth. (Don’t
ask – the Fed and common sense are not related.) The treasury note
transaction will be handled by the New York branch of the Federal
Reserve. These notes can be purchased directly from the U.S. Treasury
Department at face value. Alas, we’ll be purchasing these notes
through Goldman Sachs and paying fees. Oh, yeah. The head of the New
York branch of the Federal Reserve? That’s right. A former partner
at Goldman Sachs.
With the Bowles-Simpson trial balloon we have at least a preliminary
proposal on the table that actually addresses the deficits. It
requires sacrifices from nearly everyone, as it should. It requires
political compromise in order to achieve a greater good, as it should.
Instead of working together, as the public wants, and embracing these
proposals as an excellent place from which we could start, both the
left and right have responded with great wailing and gnashing of
teeth.
We’re left with the same vapid polemics and opaque rhetoric that
befouled our airwaves and souls during the campaigns. Our “new”
Congress, even before they’re sworn in, is looking, sounding and
acting pretty much like the old Congress.
Our new beginning is off to a bad start.