On Nov. 10, Erskine Bowles and Alan Simpson upended Washington with a 50-page draft proposal for fiscal reform. The two co-chairmen of President Obama’s National Commission on Fiscal Responsibility and Reform gave America’s political class a blueprint for slashing the structural deficit below 3 percent of the Gross Domestic Product. They propose entitlement reform, massive cuts to discretionary and defense spending, and the elimination of tax loopholes for high earners. Their proposal has been lambasted for its drastic measures, but the authors make no apologies in light of ongoing trillion-dollar deficits.
The urgency of the Bowles-Simpson proposal is warranted. The Congressional Budget Office predicts a rapid deterioration of America’s fiscal health, with the deficit escalating every year after 2020 and exceeding 100 percent of the GDP by 2025. Worrisomely, these dire CBO forecasts are actually best-case scenarios, as the CBO naively assumes that no “black swan” events, like wars or major financial crises, will occur in the future. Given escalating tensions with despotic regimes like North Korea and Iran, as well as the likelihood of a major financial crisis resulting from European defaults, it’s safe to say that the CBO’s seemingly apocalyptic predictions are actually Pollyannaish.
We don’t have much time before the need to roll over America’s debt — that is, to make mandatory payments on existing debt by issuing new debt — creates a self-feeding cycle of dependency. The Bowles-Simpson proposal is thus a necessary and urgent step to staunch the fiscal bleeding.
It calls for tough but doable cuts to defense spending, freezing civilian workers’ pay in the Department of Defense, reducing the use of overpriced private defense contractors, cutting overhead costs, and reducing military arsenal procurement. The proposed slashing of domestic discretionary funds are equally tough, but also doable, and include major cuts to private contractors, freezing the high salaries of non-defense federal employees (currently, the median is $85,000 a year), eliminating all congressional pork projects, and slowly cutting the size of the federal workforce beginning in 2012. Yalies may groan at proposed cuts to aid for graduate and medical students, not to mention decreased government hiring of college graduates — but sacrifices must be made.
The proposal also calls for a wonkish but justified tax increase. So-called “tax expenditures,” special tax exemptions for specific groups and industries, are phased out completely over time. Tax expenditures disproportionately benefit the top income quintile; the elimination of subsidies to the upper class and upper-middle class would both close a large hole in America’s balance sheet and eliminate dangerous distortions in the market. The proposal ends disproportionate rewards for owning a house, making money through dividends and earning capital gains.
The proposal is actually too gentle with entitlement programs. Certain proposals are laudable, like tort reform, reducing Social Security benefits for the wealthy, reducing Social Security cost of living adjustments, and creating a universal deductible for those receiving government insurance. However, the proposal tiptoes around the obvious way to stabilize Social Security and Medicare: increasing the eligibility age for the programs. Americans live a decade longer than they did when the programs began; people need to work longer than they did before.
Yet, the Bowles-Simpson proposal only calls to increase the eligibility age by one month every two years; under that plan, the eligibility age would not rise to 69 until 2075. A more reasonable proposal would be to increase the eligibility age by one month every year beginning in 2012, so that by 2036 all Americans born after 1960 will have to be 69 to start receiving benefits. That one aggressive step, combined with the aforementioned reforms, would make Social Security solvent and reduce America’s unfunded Medicare liabilities by trillions of dollars.
The proposed fiscal reforms are making their way through the blogosphere, attracting both praise and criticism. Liberals like Paul Krugman and Brad Delong don’t think the tax plan is progressive enough. Many conservatives are edgy about taxing capital gains and dividends as ordinary income and everyone has critiques about some proposed spending cuts. For example, I’m hesitant about cuts to defense research and development, as America’s advantage is in high-tech warfare.
Nevertheless, the Bowles-Simpson plan is necessary, bipartisan and already has built-in compromises. We can only hope that Washington takes it seriously and accelerates the proposed reforms and cuts, many of which are too gradual. Washington is currently focused on sluggish economic growth and stagnant unemployment, but we cannot forget that our debt is increasing astronomically. Today, it equates to $30,400 per person; by 2035, that figure will rise to about $100,000 per person if major reform doesn’t come soon. We need to act now by passing long-term fiscal reform as soon as possible. If we delay, we will find ourselves a nation of eternal debtors scrambling to make the interest payments on our debt, one financial crisis or war away from total collapse.
Trevor Wagener is a senior in Pierson College.