10 Reasons the Deficit Commission Proposal Is Still Unconscionable and Unaccepta

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http://www.huffingtonpost.com/rj-eskow/10-reasons-the-deficit-co_b_790639.html

December 2, 2010

Richard (RJ) Eskow.Consultant, Writer, Senior Fellow with The Campaign for America's Future

Commission Proposal Is Still Unconscionable and Unacceptable

The co-chairs of the presidential Deficit Commission released the final draft of their report today, and it's now scheduled for a Friday vote by members of the Commission. We're being told that it's a fairer and more reasonable document than its predecessor. It's nothing of the kind.

In many ways this document is worse than the draft that preceded it, and those much-lauded "compromises" evaporate in the cold light of reality. This new draft is lipstick on a piggy-bank robber, a package of cosmetic changes meant to disguise its true purpose: To raid the future financial security of most Americans in order to benefit a few.

This proposal would still cripple government's vital role in society by imposing arbitrary limits on spending. It would still place great financial burdens on lower- and middle-class Americans while easing those of the wealthy. All in all, it's the most profoundly right-wing policy prescription the nation has seen in decades. Democrats who lack the political courage to oppose it will be remembered for it for a long time to come.

There are more balanced and effective ways to balance the budget. Instead, this plan is so ideologically driven that it actually increases the deficit at times, while the reductions it does achieve are needlessly unfair and destructive. Here are ten reasons why this proposal remains unacceptable and must be opposed -- not just by progressive or Democrats, but by anyone of good conscience who wants to reduce the deficit in a responsible way:


1. It's still a massive tax giveaway for the rich.

Imagine the outcry if a deficit-cutting commission recommended spending more money on government programs. Then imagine it recommended spending that money on programs that weren't needed, and which only benefited the wealthy. When it comes to tax revenues, that's exactly what this proposal does.

Remember, spending's only one-half of the deficit problem, and tax revenue's the other. A responsible plan would increase revenue wherever it's fair and possible to do so. Yet, in the name of "deficit reduction," this plan actually proposes cutting taxes -- for the wealthiest Americans. Its defenders point out that the proposal also ends all sorts of itemized deductions -- but those deductions primarily help the middle class.

Defenders will also say that it no longer eliminates vital middle-class tax breaks (like mortgage interest deductions) completely, which is true. But it would force "Congress and the president" to decide which of these deductions is retained and at what levels. And it would force Congress and the president to offset them with increased tax rates elsewhere, which the authors know is politically almost possible.

It's true that the plan proposes to tax capital gains and dividends as ordinary income. [1] But Wall Street law firms are no doubt already developing workarounds -- and, in any case, the net effect is still a tax break for the wealthiest Americans.

The wealthy even get a break on the payroll tax used to fund Social Security. The plan's defenders boast that it would raise the payroll tax cap to cover 90 percent of all income. But that was the percentage the tax covered back in the 1980s, before the explosion in very high-end wealth distorted the entire economy. This plan doesn't return to that 90 percent level until 2050! That's a 40-year wait before we fund Social Security with as much high-end income as we did twenty years ago.

In a little-noticed observation, the actuaries who reviewed this proposal observed that "lower marginal tax rates are expected to have a large effect on (this tax)... reducing revenue... by roughly 20 percent." The net effect will be to "increase the long-range... actuarial deficit... " Got that? This Commission's co-chairs insisted on attacking Social Security because they claimed to be so concerned about its long-term actuarial deficit (which is easily fixed by asking the wealthy to pay their fair share). Yet, having seized control of Social Security's under that pretense, they then propose tax breaks for the wealthy that make Social Security's long-term deficit worse.

Since this is supposed to be a deficit-reducing Commission, not a party-time-for-the-rich Commission, how are they going to pay for such big giveaways?

2. It still increases the tax burden for everyone else.

That's where you come in. (Unless you're a billionaire, of course.) Unless Congress and the president come up with something else, this proposal would set arbitrary caps on home-mortgage deductions and other tax deductions that are primarily used by the middle class. As we've seen, even that rise in payroll taxes is expected to hit the middle class more than the wealthy.

And, while this needs further study, it looks as if their new tax brackets place more of a burden on you, too. The 10 percent and 15 percent tax brackets seem to be compressed into a 12 percent bracket, which doesn't seem like a dramatic change. The 28 percent bracket goes to 25 percent, which is a little more than 10 percent and is more than offset in most cases by the loss of itemized deductions. But the highest bracket takes a deep plunge, from the current planned level of 39.6 percent down to 28 percent. That's more than 28 percent. Sweet -- if you're rich. But somebody's gotta pay for it.

That would be you.

3. It will result in millions of lost jobs.

As the Economic Policy Institute has demonstrated, this proposal will cost the nation four million lost jobs and damage our economic growth. This new draft demands even deeper discretionary spending cuts, enacted even sooner, so the loss of jobs is likely to be even greater.

That's why Mary Kay Henry, President of the SEIU, said, "This proposal is a jobs killer at a time when our number one priority must be putting America back to work." It's why AFL-CIO President Richard Trumka said that "this whole discussion reeks of hypocrisy. The faux deficit hawks on the commission -- and Senators who claim unemployment insurance must be paid for -- have no problem clamoring for more unpaid Bush tax cuts for millionaires. We need to focus now on the jobs deficit."

The report's defenders will dismiss Henry and Trumka as "special interests" (while criticizing any mention of co-chair Erskine Bowles' position on Morgan Stanley's Board of Directors or the financial interests of other commissioners as an "ad hominem" attack). But these two leaders are aware of proposals like the EPI's and the Citizens' Commission on Jobs, Deficits, and America's Economic Future. These reports demonstrate that these radical changes aren't needed to balance the budget -- and that, in fact, they interfere with that goal.

4. The elderly will face harsh benefit cuts.

The average Social Security retirement benefit today is $1,100, and even less for women ($920). Under this proposal a median earner, someone earning $43,000 in today's dollars, would face a 20 percent (19.1 percent) benefit cut.

It looks, therefore, as if the average benefit would eventually drop to $889 overall, with women receiving an average of $744. These cuts are offset somewhat for lower-income workers, but, as we'll see, those offsets aren't what they seem to be.

5. Most of us will still work longer for less.

You won't just receive less in benefits. You'll work longer to get it, since they're raising the retirement age.

We're told that there will be exceptions for people who would face hardship if forced to work longer. That's a nice thought, given all the benefit-slashing going on. But that decision is kicked down the road and assigned to Social Security administration staff. The cuts are fixed, but the exemptions are left vague and deferred to people who aren't trained in that kind of analysis.

Their definition of "hardship" is narrow, too, and it excludes hardships like discrimination. The net effect of this proposal is to ensure a longer work life for most people while making jobs harder to get. The only small mitigating factor they promise is delayed to a future date and left vague.

6. It punishes the long-term jobless.

This proposal doesn't just ignore the nation's "jobs deficit." It makes it worse, at a time when the number of long-term unemployed Americans is at historical levels. This program doesn't just leave them in the lurch, or ignore their urgent need for unemployment assistance. After having made their situation worse, it then punishes them in their old age too.

Much has been made about the proposal's "generous" suggestion that benefit cuts be made offset for lower-income workers who are at the brink of poverty in old age. But many (if not most) of the workers struggling today would be excluded from this change. As the actuarial analysis of the proposal notes, "workers... (at) the level of the low and very low scaled earners, but with less than 25 years of (qualifying) work... would be subject to the full reduction in benefit for longevity... "

There's more, but you get the gist. These much-vaunted "safety nets" are filled with holes.

7. Women will pay an unfair price.

Women get the short end of the stick here, too. Women already receive less in retirement benefits than men, on average -- right now they receive an average of about $920 per month. They live longer, too. Women have traditionally moved in and out of the workforce more than men, because of traditional gender roles. They'll be punished even more for this difference under this proposal, thanks to rules and loopholes like the one described above. For a "family values" culture, that's not a very family-oriented policy.

Here's the future Simpson and Bowles plan for the mothers of America: First, cut their income by reducing the adjustments to their benefits. That means they'll get less than $920 in tomorrow's dollars. Then offer them a poverty exemption -- but dangle it out of reach for millions of women who chose to stay home with their children for a few years (and all of them who couldn't find work when they looked).

Thanks for raising us, Mom, now eat your Friskies and pipe down.

8. That "living longer" benefit bump is a pittance.

We're also hearing about the "benefit bump" America's beleaguered seniors have been promised once they reach extreme old age. But here's what the proposal actually says: "Provide benefit enhancement equal to 5% of the average benefits (spread out over 5 years) for individuals who have been eligible for benefits for 20 years."

Since they're proposing to raise the retirement age to 68 and then 69, that means offering this bounty when a retiree becomes 88 or 89. With the estimates we've made above, that amounts to a "bonus" of $45 per month ($37 for women).

9. The plan still discriminates -- by income and by race.

Even that minimal adjustment is likely to benefit wealthier -- and whiter -- Americans. As Paul Krugman and others have pointed out, average life expectancy has risen by six years for the top 50 percent of earners, but only by 1.3 years for the bottom half.

White Americans still live five years longer on average than African-Americans, too. So who is this really helping?

10. It doesn't solve the health-care problem. It just shifts the cost.

This proposal is filled with irreversible triggers, like the Doomsday Machine in Dr. Strangelove, that are set to go off if targets aren't met. But they're all designed to trigger spending cuts or regressive tax changes. When it comes to the single greatest driver of future deficits -- health-care costs -- there's no trigger for the public option that would significantly lower costs.

Here's a proposal that is in the plan: Repeal the CLASS Act. That's the Community Living Assistance Services and Supports Act, which provides funds that allow people to receive medical care in the home rather than the hospital. Why does this proposal single out the CLASS Act? It's only projected to cost $11 billion in 2015. But then, that's typical of this proposal. It ignores the big issues and then goes out of its way to step on programs that serve the public good.

Their health proposals tinker at the margin of cost and ignore the big picture. Reducing administrative cost support for Medicaid merely shifts costs from the federal government to the states, while freezing provider payments will reduce access to care with minimal reduction in costs. They also plan to cut health benefits severely for federal employees.

They want to force Medicare recipients to pay more out-of-pocket for their care. That's a double whammy for seniors who have already had their Social Security benefits cut.

The authors claim that because "(Medicare) cost-sharing for most medical services is low, the benefit structure encourages over-utilization of health care." That's unproven theory, especially when discussing seniors. Studies have shown that increasing out-of-pocket costs discourages utilization -- it keeps people from getting medical care -- but studies among younger populations that seemed to back this idea have recently come under question, while other studies among seniors suggest they're likely to skip needed care and suffer as a result.

These Medicare changes will impose unnecessary hardship without addressing the real causes of health-care cost. Why? Because private health insurance is one of this Commission's "sacred cows," and any program that would provide public competition for these insurers is deferred (while "all-payer" coverage is buried elsewhere as one of many possible alternatives once other avenues have failed.)

What do they propose for the under-65 crowd instead? One of the main features of their proposals is an increase in the health "excise tax," which would undermine employee benefit health plans and shift more health-care costs on the under-65 set, too. (For greater discussion of this very bad idea, see here.)

"No class act." Somehow that seems to say it all. Commission member Dick Durbin is a good Senator who has provided valuable service. But it's painful to hear him say, as he did today, that he's inclined to vote for this plan because the times call for "shared sacrifice." That's a highly regrettable statement. In this plan, the sacrifice is only shared among those who can least afford it, while the wealthiest enjoy a free ride.

This proposal must not be passed.

(Why not call the key Democrats on the Commission who are still persuadable? Kent Conrad and Max Baucus have endorsed this proposal, but Sen. Durbin's office number is (202) 224-2152. Rep. Xavier Becerra can be reached at (202) 225-6235, and Rep. John Spratt's number is (202) 225-5501. As always, clear but respectful is the best approach.)

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[1] There's a footnote with an escape clause, offering the possibility of exempting a portion of these earnings from that rule by raising the top tax rate instead.

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http://www.minyanville.com/businessmarkets/articles/david-stockman-unemployment-bush-tax-cuts/12/2/2010/id/31457?page=full

Simpson-Bowles: $4 Trillion of Beltway Mumbo Jumbo
By David Stockman Dec 02, 2010

In the here and now, where it counts, the plan amounts to an earnest pinprick and little more.

Based on the wailing in Washington DC you might think the deficit commission co-chairmen, Erskine Bowles and Alan Simpson, have gored some sacred cows. In fact, they have produced 59 pages of nearly incomprehensible beltway mumbo jumbo and gimmicks -- an alleged deficit-slashing plan that actually takes a powder on every one of the core fiscal issues.

And that starts with the gushing river of budgetary red ink itself. In order to “get real” as former Republican Senator Simpson is wont to say, you must account for incremental deficits of about $350 billion per year from the inevitable lame-duck deal to extend the Bush tax cuts, the AMT patch, the various expiring tax credits, the doc fix, the estate tax fix, extended unemployment benefits, Build America Bonds, and all the other hide-the-ball phony program expiration tricks now embedded in the budget. Then, add a couple hundred billion per year more in red ink because the commission’s economic assumptions -- such as 5% unemployment and 5% per year nominal GDP growth by 2015 -- are way too optimistic. Lay all that over the so-called “current law” budget baseline and you have a minimum federal deficit of $1.2 trillion per year through 2015; that is, $6 trillion of new bonds and bills that need to find a home over the next five years.

And what does Simpson-Bowles do about this tidal wave of US Treasury paper? Well, it urges a fat zero in fiscal year 2011 and then a pinprick savings of $56 billion, or 5% of the built-in deficit, in 2012. After that, the reductions get bigger, but still total only $875 billion over the full five-year period, or less than 15% of the deficit baseline. Stated differently, after all of the alleged “tough choices” and policy heroics recommended by the co-chairmen, we would only need to finance $5 trillion of new Treasury debt, not $6 trillion, through 2015.
The surface reason for this timidity is the assumption that the US economy is too “fragile” to absorb any material tax increase (or spending cuts) over the next several years. Therefore we must borrow another $5 trillion from our children and grandchildren -- so that not a single middle- or upper-class taxpayer will be denied the spending power to buy a few more Coach (COH) bags, iPads (AAPL), barbecue grills, and Caribbean cruises.

Besides the rather ignoble intergenerational heist implied in this proposition, the main problem is that it assumes the required massive deficit financing sources -- the international monetary system and global bond markets -- are not equally as fragile as the US economy is alleged to be. And that wholly unexamined assumption is by no means obvious.

At the moment, the Fed is monetizing 100% of the deficit. This means that it's crediting the deposit accounts of government bond dealers with money made out of thin air to the tune of about $100 billion per month in exchange for existing bonds and notes. In turn, dealers and traders use these deposit account proceeds to take down an equivalent $100 billion monthly of newly issued Treasury paper, thereby keeping Uncle Sam’s checks from bouncing.

But only $600 billion of QE2 monetization has been so far announced by the Fed -- meaning that at the current $100 billion monthly rate, the bucket will be drained by next spring. In theory, of course, the Fed could resort to QE3, QE4, and so forth -- printing its way through the entire $5 trillion of new federal financing that would be required after the Simpson-Bowles “savings” have been fully implemented. Yet by 2015 that means the Fed’s balance sheet would reach an elephantine $7.5 trillion -- a figure nine times greater than the central bank’s footings on the eve of the Lehman heart attack in September 2008.

Assuming that not even Helicopter Ben would go for a money drop that big, the true “fragility” issue then presents itself. When the Fed’s big fat POMO bid disappears from the Treasury market, or the post-meeting press release merely hints that it's coming, or especially when the Fed’s PR mole embedded at CNBC leaks the news, won't the smart money, the fast money, and the wise guys go sellers -- if they haven’t done so already?

The fact is, the $9 trillion US Treasury market will reach $14 trillion, or 100% of current GDP -- even after all the Simpson-Bowles savings have been harvested. Yet the marginal buyers of US Treasury issuance in the recent past -- China, the other East Asian mercantilists, Brazil, and OPEC -- can no longer afford to renew a heavy bid without importing virulent inflationary pressures into their own over-heated economies (by printing even more of their own currency to buy dollars). So when the Fed’s bid ends and the fast traders go sellers, the global bond market is likely to provide a thundering demonstration of what “fragility” in the economic sense really means. Needless to say, it will be a lot more unpleasant than the 10% sales drop at Target (TGT), Ford (F), Home Depot (HD), or Carnival Cruise Lines (CCL) that might result from requiring American citizens to pay at least some portion of their government’s bills.

To be sure, the esteemed co-chairmen aren't known to be card-carrying Keynesians of the orthodox creed -- so they probably don't believe in the spending and tax “multipliers”, and for good reason. After a 30-year borrowing and money-printing binge, the US economy is freighted down with $52 trillion in public and private debt, which represents an excess burden of $30 trillion compared to the pre-1980 leverage ratio on national income. Under these conditions, an incremental dollar of debt-financed consumer spending catalyzes nothing. Like Cash for Clunkers and credits for new homebuyers, it pulls purchases forward on a one-time basis and then disappears without a ripple.

The explanation for Simpson-Bowles’ giant whiff on the one true here-and-now-deficit reducer -- letting all the Bush tax cuts including the AMT patch expire at an immediate gain of $300 billion -- is thus straight-forward: The Wall Street propaganda machine has vaccinated nearly the entire beltway population -- include its few brave denizens like the co-chairmen -- with a politically convenient strain of ersatz Keynesianism. Unlike the real thing, the latter holds that consumption spending on anything -- even by people who already have everything -- is to be embraced without question. On that meretricious point, of course, the questions should start, not end.

In fact, the question of serious revenue raising is never really addressed by the Simpson-Bowles plan -- not even in the by-and-by a decade from now when the current macro-economic “fragility” has presumably passed. Thus, compared to current policy, the co-chairman’s plan would raise the grand sum of $100 billion by 2015 or just over one-half of 1% of GDP. Yet any honest plan to close the nation’s massive structural deficit needs five times that much new revenue -- $500 billion per year or upwards of 3% of GDP.

Worse still, the co-chairmen’s plan gets to its paltry $100 billion revenue gain through the most convoluted route imaginable. It launches a frontal assault on $1 trillion worth of annual tax expenditures that are literally anchored to the K Street sidewalks in order to drop 80% of the revenue gain into tax rate reduction, not deficit reduction. Stated differently, the plan calls for the expenditure of nearly unfathomable amounts of political capital to shrink tax preferences for mortgage deductions, employer health plans, municipal bonds, and corporate loopholes of every shape and size. Yet it ends up with so little net revenue gain that taxes as a share of GDP would be only 19.3 % in 2015 -- a target lower than projected for the original Reagan tax cut way back in 1981!

This whole bizarre scheme was undoubtedly designed to win Republicans over to the task of revenue raising by hiding the broccoli in the garden salad. But that’s too clever by half because it also means that the 39.5% tax rate on the richest Americans that would become effective in 2011 would be reduced instead by one-third -- to 28% -- under Simpson-Bowles. There’s no way on earth so-called progressives are going to sit still for that.

And they shouldn’t because the world has long ago passed beyond the time and circumstances in which the Republican theology of low income tax rates was relevant. Back in the 1980s, when the nation had a comparatively clean balance sheet, an eager baby-boom population, and hadn't yet outsourced large parts of the middle class production and business service economy to Asia and the emerging markets, there was a compelling case for income tax rates geared to entrepreneurial advance.

But 30 years later our objective circumstances are a far cry from morning again in America. It's more like sundown, if the truth be told, owing to the massive debt deflation now underway and the imminent retirement of 80 million baby boomers who have saved comparatively nothing and will therefore consume massive fiscal transfers on their way off the stage. Under these conditions, the days of rising living standards and robust economic growth are long gone. What's relevant now is maintaining national solvency -- and that requires equitable burden sharing of the massive taxes due bill, which is relentlessly coming our way in the decades ahead.

The co-chairmen’s plan is equally hostage to the vestigial ideology of the Left. Spending for the retirement entitlements -- Medicare and Social Security -- will total nearly $1.5 trillion by 2015 but the plan includes less than $30 billion of net savings -- that is, just 2% of the preponderant core of the welfare state budget. To be sure, the plan includes considerable arm waving about raising the retirement age 40 years from now and the need for new health cost containment mechanisms. But what the plan doesn’t do is utter the two words that could actually make a material difference in the fiscal equation: “means test.”

The fact is, probably two-thirds of the $1.5 trillion in retirement entitlement spending goes to elderly who have virtually no private assets, pensions, or other income, and literally could not survive without the full measure of current law income and medical-care benefits. But the remaining $500 billion goes to the top quarter of the retired population, which does have private means -- and in the case of the very top ranks, very considerable private wealth. A properly structured means test that treated Medicare and Social Security as a combined cash equivalence, could efficiently, fairly, and reliably extract $100 billion, or 20%, of the spending that would otherwise go to the top quartile of the elderly. Such measures would make a difference in the here-and-now fiscal equation when the true fragility of the global bond market and monetary system is certain to be tested.

Just like in the case of the missing revenue-raising plan owing to Republican tax theology, however, the missing entitlement means test is attributable to the “social insurance” mythology held by the Democrats. But contrary to the latter, almost no beneficiary “earned” the benefits they are entitled to under current law. And the trust fund is a pure accounting artifact with $3 trillion in paper “reserves” that represent payroll taxes collected long ago and have been fully spent on general fund programs or squandered on farm subsidies, middle-class student loans, and bribes to Afghan tribal leaders, as the case may be.

Thus the social insurance myths are basically a cover for a pure fiscal operation that's essentially an intergeneration transfer scheme. Unfortunately, the benefits promises made to the baby-boom generation can't be kept without turning the generation still in the work force into virtual tax serfs. Undoubtedly, the co-chairmen choose to take a powder on the means-test issue in part to spare themselves of inane Republican lectures about “privatizing” this Ponzi scheme for those under 40. But at the end of the day, the Democrats are so fiercely dug in against means testing that they didn’t even try to raise the issue.

Finally, the co-chairmen also took a powder on the last big chunk of the budget -- the $1.4 trillion that goes to “discretionary” spending. To be sure, they propose to save about 12%, or $175 billion, by 2015 by means of various “caps” and “freezes.” But it doesn't take a commission and a whole regiment of beltway staffers to imagine a cap at an altitude of 10,000 feet above the budget nitty-gritty, where real programs live and fierce bureaucratic and interest group defenders are dug in behind nearly every dollar.

The fact is, $800 billion, or two-thirds of the discretionary spending, is for national security, including homeland security. A mere “cap” is an earnest wish and little more. The only thing that can come even close to the savings projected by the commission is a sweeping demobilization of the nation’s vast and far-flung military establishment. That means elimination of numerous army and marine divisions and air force air-wings; mothballing of dozens of navy warships and several carrier-battle groups; elimination of hundreds of bases and overseas facilities; and cancellation of a fair share of new weapons procurement programs currently in the pipeline.

The reality is that the days of policing the world and foreign policy adventurism of the type embodied in George Bush’s two unnecessary wars are over -- not just because such policies are wrong-headed but also because they're profoundly unaffordable. It would have been helpful, therefore, if the co-chairmen had said something to that effect. But in 59 pages of beltway mumbo jumbo, the reader won't find a single policy declaration that supports the magnitude of Pentagon shrinkage that will be necessary to restore fiscal solvency.

So forget the $4 trillion headline -- that’s just reflective of the old Washington game of projecting a decade’s worth of guesstimates into the foggy future. The truth is, in the here and now, where it counts and where the coming conflagration in the global bond and currency markets might have been forestalled, the co-chairmen’s plan amounts to an earnest pinprick and little more. But it’s not their fault. Instead, it reflects the degree to which the nation’s fiscal governance has fallen hostage to partisan ideologies that are utterly detached from the real-world conditions we face. It’s a certainty that the plan -- however it's finessed on Friday -- will be DOA in the new Congress. The stalemate now runs so deep that only a thunderous crack-up of the global financial system is likely to make any difference, and when that day of reckoning actually comes it will be too late for Washington to do anything about it.