The five serious flaws of Bowles-Simpson

Yesterday, a selection of past members of the Bowles-Simpson commission, anti-deficit groups like the Peterson Foundation and the Committee for a Responsible Federal Budget, and a handful of retired politicians launched the Fix the Debt Campaign in order to push a deficit reduction package in line with the original Bowles-Simpson framework (full disclosure: I served on the Bowles-Simpson commission staff in fall 2010). The event was characterized by high-minded rhetoric about coming together and solving problems and little in the way of specific policies, a reflection of the fact that in the year-and-a-half since its initial release, the Bowles-Simpson proposal has become more a symbol of seriousness and bipartisanship than an actual set of discrete recommendations that can be analyzed. This is unfortunate because the proposal itself is pretty detailed, and although it has some good components, it also has some major flaws that—without serious revision—should render it an inappropriate template for deficit reduction.

1) It would weaken the economy by cutting way too fast

The proposal admits that Congress should not cut too soon “in order to avoid shocking the fragile economy,” but addresses this by “waiting until 2012 to begin enacting programmatic spending cuts, and waiting until fiscal year 2013 before making large nominal cuts.” Given the current weak state of the economy, it’s clear that this timetable was way off. But it’s not like this was unexpected: In Aug. 2010 (three months before the Bowles-Simpson proposal was released) the Congressional Budget Office projected that the unemployment rate would be still be 8.4 percent in fiscal year 2012. Of course, it was possible that the economy would outperform this projection, but it was also possible it would underperform. Given this uncertainty, the proposal should have included an economic trigger and not just a simple-minded timeline—for example, the cuts would only take effect if the economy was experiencing healthy growth and well on its way to full recovery. At the time, EPI had recommended this trigger be set at 6 percent unemployment for six months, which in retrospect looks quite prescient.

2) It had an unbalanced ratio of spending cuts to revenue increases

The advertised ratio of spending cuts to revenue increases was 3-to-1. This isn’t totally accurate: Excluding interest savings (which are a function of both spending and revenue decisions) and including the additional revenue assumed in the baseline (i.e., the assumed conditions against which the proposal is measured) from the expiration of the high-income Bush tax cuts, the ratio was closer to 55-to-45.

But that’s still too heavily weighted towards spending cuts. Over the last two decades, budget deals have skimped on tax increases in favor of heavy spending cuts, and the most recent deal—the Budget Control Act—was 100 percent spending cuts. Furthermore, the Bush tax cuts themselves account for nearly half of the total debt accrued during this period. Finally, spending cuts exacerbate the massive and growing income inequality in this country by generally falling on middle- and low-income households (Paul Ryan’s budget, for example) while federal tax increases can be designed to ensure that high-income individuals pay their fair share.

3) A completely counterproductive and politically-driven revenue cap

As a policy matter, the revenue cap that Bowles-Simpson proposes—21 percent of GDP—makes no economic sense. Remember, deficit reduction packages are supposed to reduce the deficit. Yet this provision would “prevent” future Congresses from reducing the deficit through tax increases above 21 percent, which would effectively rule out the federal revenue levels that nearly every single other developed country already achieves—and that rising costs of health care provision all but guarantee the United States will need in coming decades. The best thing to say about this provision is that there isn’t an enforcement mechanism, which also suggests that even its authors didn’t think it was good policy.

4) Inexorable cuts to public investments

The proposal doesn’t explicitly cut items like education, infrastructure, and research and development, but it does prescribe funding levels for the broader non-security discretionary (NSD) portion of the budget that houses nearly all non-defense public investments. As my report last year shows, it is pretty much impossible to make drastic cuts to NSD without cutting public investments.

So why do public investments matter? Because the whole economic point of deficit reduction is to improve the living standards of future generations by ensuring that we do not pass onto them high levels of debt. But financial debt isn’t the only kind of debt that we can pass on to them. For example, failing to maintain our infrastructure and bequeathing crumbling roads and bridges is also a form of debt. So is providing poor prospects for obtaining a decent education. Reducing the debt load on future generations by cutting an investment in those same future generations doesn’t make them any better off, and thus negates the entire point of deficit reduction in the first place. Given the high returns of public investment, it is likely the net effect on these generations will be strongly negative.

5) It would undermine retirement security by cutting Social Security

The Bowles-Simpson proposal wouldn’t only cut Social Security benefits, it would do so in a way that harms the middle class. According to the Social Security Actuary, medium-income retirees would see their benefits drop by 4 percent for those who retire in 2030 to nearly 20 percent for those who retire in 2080. This is largely a function of two separate cuts, both of which fall on the low- and middle-class: raising the retirement age and using an alternate method to calculate cost of living adjustments, the so-called “chained CPI.”

Proposed cuts to Social Security need to be put in the context of broader retirement security. Social Security represents one of three sources of retirement security, the other two being defined benefit pensions and household savings (IRAs, 401(k)s, real estate, etc.). But private savings do a poor job of providing actual security—just ask a near-retiree how their nest egg fared after the financial collapse—and it’s unclear how much savings the average household can accrue in the first place when median wages continue to stagnate. Further, defined benefit pensions are becoming less and less common as more and more companies choose to drop them in favor of defined contribution plans (401(k)s or similar plans) which, again, provide little actual security against economic volatility. Social Security is the last reliable source of true retirement security for the middle class, and that means it’s more important than ever to protect it against cuts like these.

Not all bad

I would be remiss to point out that there are some good elements of the Bowles-Simpson plan. It raises nearly $2 trillion relative to current policy (which assumes all expiring tax cuts, such as the Bush tax cuts, are extended) and equalizes the taxation on capital and labor income (though it still fails to ensure that the rich pay their fair share, given the increase in income inequality by dedicating extra revenue gained from broadening the tax base to reducing marginal rates). It aggressively cuts defense spending. It raises the gas tax, thus shoring up the Highway Trust Fund and making transportation reauthorization an easier lift. It largely spares—and even builds on—the Affordable Care Act. Finally, while the ratio of spending cuts to revenue increases is flawed, it is better than most of the other “grand bargain” proposals—including some reported offers made by the Obama administration—that have come out in the last few years, which focus much more heavily on spending cuts.

But these strengths do not make up for Bowles-Simpson’s weaknesses, and being the “least-bad” budget proposal taken seriously by Beltway pundits is an achievement on the order of being the tallest leprechaun. Without significant changes, it would cost jobs, reduce long-run investment and economic growth, and endanger middle-class retirement security.