Simple answers but difficult choices facing Super Committee

WTF simple answers super committee hp 11.14.11

The answers before the Joint Select Committee on Deficit Reduction are simple and straightforward: cut government spending or increase tax revenues – or a combination of both. Choose one, pass the law, and reduce the deficit to avert the “most predictable economic crisis in history.”

“I know that the fiscal path we are on here in Washington is not sustainable, and I know that each of you know it and you see it because it’s as clear as day,” said Erskine Bowles, co-chair of the National Commission on Fiscal Responsibility and Reform.

But if the answers are that simple, then why is there still such heated debate over how to solve the nation’s $14 trillion debt?

Joint Select Committee on Deficit Reduction (aka "Super Committee"). IMAGE SOURCE: DeficitReduction.gov

Because whichever approach the Super Committee’s final plan adopts, there will be tradeoffs and costs. The Super Committee’s decisions – or indecision – will significantly impact the lives of millions of Americans and dramatically re-shape the economic and social path of the country for the coming decades. Balancing the human and economic costs – and doing so in a fair and responsible way – is difficult.

An exchange between Super Committee member Rep. Jim Clyburn (D-SC) and former Sen. Alan Simpson (R-WY), who served as co-chair of the National Commission on Fiscal Responsibility and Reform, illustrates this predicament:

Clyburn’s question:

“…I wanted to focus on the human side of this deficit. So what I would like to ask today is whether or not it is feasible to do $1.5 trillion reduction in deficits by cuts only? What will that do to that bottom 20% that’s seen only 18% growth of in their income over the last 30 years [compared to the 279% income growth for the top 1% of Americans] and those communities where 20% or more of those population have been beneath the poverty level over the last 30 years? What will it do to those people if we were to reduce this deficit only by cuts that have been proposed?”

Simpson’s response:

“The irony to me is that if we don’t get there and the strike comes – the tipping point. Dick Durbin always asked, ‘Where is the tipping point?’ I don’t know where it was, but I do know that it will come swiftly. It will come by the ratings and the markets. It won’t come by anything that any chart has disclosed before. At that point in time, interest rates will go up and inflation will go up. The very people who will be hurt by the very worst in that procedure are the very people that you speak of with such passion. This is a tremendous irony to me. By doing little or nothing and the tipping point comes, the little guy is going to get hammered worse than he or she is now. That’s the irony – the strange, hideous irony.”

So who is right, Clyburn or Simpson?

Both.

On the one hand, Clyburn is right to be concerned about the drastic cuts to social services that will disproportionately hurt those who are most vulnerable – the poor, the elderly, and the disabled. Yes, American needs to balance its checkbook but should it be doing so on the backs of those who are disadvantaged or struggling to stay afloat? Wouldn’t such deep cuts to social services worsen the hardship for millions of Americans? What good is any government policy if it ends up kicking people while they’re down? Is it in the country’s best interest to reduce investments in programs that help people rebuild or pull themselves out of poverty? These are important questions to consider.

On the other hand, Simpson is also right when he pointed out that there wouldn’t be any money to help the “little guy” if nothing is done to reduce the deficit. The more government debt piles up, the more America is at the mercy of its creditors. If creditors lose confidence in America’s ability to stabilize its finances and repay its debts, the country’s credit rating could be downgraded, making it more difficult for the federal government to borrow money to pay its bills. A credit rating downgrade would mean higher interest rates that would result in billions more spent on interest payments instead of funding schools, fixing roads, or providing job training for the unemployed. The interest rate hikes would also make it more expensive and difficult for Americans and businesses to borrow money. For example, small business owners might not be able to obtain financing to help them expand their businesses or hire more workers. Middle-class families would have an even harder time qualifying for loans to buy a house or a car. This could translate to more job losses and cause a double-dip recession.

Clyburn’s approach emphasized compassion whereas Simpson emphasized a pragmatic approach in solving the nation’s deficit problem. Both approaches are needed to craft a truly balanced, fair, and effective deficit reduction plan. Dr. Alice Rivlin, co-chair of the Bipartisan Policy Center’s Task Force on Deficit Reduction, summed up the balancing act confronting the Super Committee when she said, “One is we need to cut the deficits but not by hurting vulnerable people. You should avoid doing that. Secondly, that the importance of avoiding a double-dip recession and a loss decade of growth is extreme and will hurt those people the most if you don’t avoid it.” It’s a difficult and delicate balance to strike. How to translate that into policy is what’s being hotly debated in Washington. Compromise is difficult when the divide between the Republican and Democrat’s positions seem so wide: Republican favor deep spending cuts and oppose any tax revenue increases while the Democrats want a “balanced” plan with both tax revenue increases and spending cuts.

Beyond the partisan differences, however, there is consensus that the Super Committee must finalize a plan by Nov. 23 to avoid the sequestration that would cut an additional $1.5 trillion in defense and non-defense discretionary spending. But for some, it isn’t enough for the Super Committee to just settle for the $1.5 trillion reduction required by the Budget Control Act. In fact, both the National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force have urged the Super Committee to “go big” and come up with a plan to reduce the federal deficit by at least $4 trillion. With the current national debt estimated at $14 trillion, reducing the federal deficit by $4 trillion would go a long way to show the market that the United States is serious about addressing its debt problem. “$4 trillion is not the maximum amount that we need to reduce the deficit. It’s not the ideal amount. It is the minimum amount we need to reduce the deficit in order to stabilize the debt and get it on a downward path as a percent of GDP,” said said Bowles.

With the Nov. 23rd deadline looming, the Super Committee may opt to build on the policy framework established by the National Commission on Fiscal Responsibility and Reform (“Simpson-Bowles plan”) and the Bipartisan Policy Center’s Debt Reduction Task Force (“Domenici-Rivlin plan”). Both plans endorsed a “balanced” approach that would require spending cuts as well as tax revenue increases. “This is a problem that we can’t grow our way out of. We could have double-digit growth for decades and not solve this problem,”said Bowles. “It’s not a problem that we can solely tax our way out of. Raising taxes doesn’t do a darn thing to change the demographics of a country or change the fact that health care is growing at a faster rate than GDP. And it’s also not a problem that we can solely cut our way out of. I think you [Congress] have all proven that over the last year.”

On the spending side, both plans called for slowing down the rate of health care spending through structural reforms of Medicare and Medicaid. “We spend twice as much as any developed country in the world on health care. Unfortunately, if you look at the outcomes, our outcomes don’t match the outlays,” said Bowles. The Simpson-Bowles plan aimed to reduce the cost of health care to GDP plus 1% through greater cost-sharing between Medicare and Medicaid beneficiaries to reduce over-utilization of care; tort reform to discourage frivolous medical lawsuits; adjusting the payment formulas for providers and drug companies; raising the Medicare eligibility age; moving away from a fee-for-service system to a premium support system; and creating a robust public option for health care insurance. Under the Domenici-Rivlin plan, federal spending on Medicare would be capped at GDP growth plus 1% and beneficiaries would be given the option to choose between the existing fee-for-service plan or a premium support plan offered by private insurance providers competing in a regional exchange. “We believe that the competition on a well-regulated exchange would lead providers and plans to deliver care more cost-effectively and reduce spending growth,” said Rivlin.

The Simpson-Bowles and Domenici-Rivlin plans also called for tax reform to generate more tax revenue. “While growth and spending must be controlled, we do not believe that the projected tsunami of retirees can be absorbed by federal programs without increasing revenues. Stabilizing the debt by spending cuts alone would cripple essential government functions and responses to human needs,” said Rivlin. Both plans called for broadening the tax base, simplifying the tax code, and reducing overall tax rates. Under the Simpson-Bowles plan, all “tax expenditures,” or tax deductions or credits, would be eliminated to bring down the federal income tax rate to 8% for individuals earning $0 to $70,000; 14% for $70,000 to $210,000; and 23% for everything over $210,000. The federal corporate tax rate would be reduced from 36% to 26%. The Domenici-Rivlin plan would also get rid of most tax deductions and exemptions, including eliminating deductions for employer-paid health insurance as well as state and local taxes, in favor of lowered tax rates. The plan called for a two individual tax rates of 15% and 28% and a 28% corporate tax rate. Capital gains and dividends would be taxed as ordinary income with the highest rate capped at 28%. The Domenici-Rivlin plan would also limit tax deductions for charitable contributions, mortgage interest, and retirement saving contributions.

While the Simpson-Bowles and Domenici-Rivlin plans provide a helpful framework to tackle the nation’s debt, it is now up to the Super Committee to figure out the details and make the hard choices. There is a lot at stake, and their decisions will significantly impact the lives of millions for decades. Both Republicans and Democrats need to strike a balance between compassion and pragmatism in how they proceed to address the debt problem. More importantly, both sides must have the political courage to compromise and do what’s best for the country in the fairest way possible. Otherwise, as former Sen. Pete Domenici (R-NM) warned, both sides “will be equally complicit in bringing the nation to fiscal brink.”

The answers are simple but the choices are difficult.
 

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3 Comments on “Simple answers but difficult choices facing Super Committee

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