Lemmings on the path

Traversing the fiscal cliff

November 17, 2012 

Most observers to the election of 2012 were dissatisfied with the depth of our political debate. The legislative process had created an odd convergence of the expiration of the Bush and Obama tax cuts and sequestration, the process of across the board expenditure reductions, together what we now call the “fiscal cliff.” The handlers of our candidates sought to avoid the raw meat of policy and win the election the old fashion way. Mitt Romney leaned right to win the Republican Party primary and then tilted to the middle in the general election. Both parties dumped $1.2 billion into the swing states. Politics as usual, the way the game has always been played.

Upon the completion of the election, our politicians were ready to address the national emergency that is now the fiscal cliff with a lame duck Congress and a 55-day constraint to the insanity of a prospective $600 billion fiscal restraint; a 3.8 percent hit to GDP. Apparently, our political elite felt that real policy would be beyond the understanding of the average voter. But now, the rush is on to resolve the fiscal cliff. To educate the public now is an insurmountable task. The voter is now left to educate himself and rather than cast an intelligent vote to be a passive observer of legislative anarchy. Fortunately, the Simpson-Bowles plan provides us with a playbill of what is in store.

Simpson-Bowles is the shorthand name for the National Commission on Fiscal Responsibility and Reform. President Obama appointed the commission with a mandate to restore fiscal responsibility in the long-run but with a path that would not impair short-term economic growth. The product of the commission, an extremely concise 66-page document, was presented in December 2010 and can be accessed at www.fiscalcommission.gov .

The commission formed three committees: mandatory and discretionary spending and tax reform. It recognized that the most important component of restoring fiscal responsibility is to put Medicare on a declining per capita path by bending the health care cost curve. Discretionary spending and tax reform are linked. We currently have a $1.1 trillion budget deficit, by coincidence the same size as the total discretionary spending budget (this budget includes defense). We are obviously not going to eliminate all discretionary spending so the answer is found in tax reform. There is another $1.1 trillion of spending that comes not from the programs of Congress but is automatic in the tax code; your mortgage interest deduction is a tax preference that is the equivalent of government spending. Inclusion of the previous “tax exclusions” gives us equivalent spending of $2.2 trillion per year that the commission intends to tame by $4 trillion dollars in the aggregate over the next decade.

How do we know that Simpson-Bowles is moving to center stage? We need only listen to the opening positions of Speaker of the House John Boehner and President Obama and compare it to the language of the committee. On Nov. 9, Boehner said the following, “the current tax code is inefficient, and the government is only collecting a fraction of what it is due. We recognize the government’s need to raise revenue. Ernst & Young [accountants, consultants] says that 700,000 jobs will be destroyed by raising rates on small business.” The language of Simpson-Bowles says the following, “the tax code is rife with inefficiencies, loopholes, incentives, tax earmarks, and baffling complexity. We need to lower tax rates, broaden the base, simplify the tax code, and bring down the deficit.”

Speaker Boehner’s position speaks to the broadening of the tax base through elimination of tax preferences and lowering tax rates. Hence, revenue is raised but tax rates are not. This is accomplished by linking discretionary spending reduction and tax reform. We will thus attain the panacea that the code has been made more efficient and income tax rates reduced.

President Obama’s opening position was as follows: “Our top priority has to be jobs and growth, to reward small businesses that create jobs here, not overseas. It is a plan to give people the chance to get the education and training that businesses are looking for right now.” The language of Simpson-Bowles says, “We must invest in education, infrastructure and high-value research and development to help our economy grow, keep us globally competitive, and make it easier for businesses to create jobs.”

The inescapable conclusion: Simpson-Bowles deals with Boehner’s priority to raise revenue without raising rates and Obama’s priority to reinvest a portion of the efficiencies gained from the process into education and infrastructure.

For those of us who believe that election campaigns in a representative democracy should always be about the issues that need to be resolved and the policies to address those issues, this election was a disappointment. It seems that we cannot divorce ourselves from the strategy of slicing the electorate demographically and expecting to reunite it thereafter. Our current polarization is a consequence of those strategies.

Retired Senator Sam Nunn (D-Ga.) proposed in a CNBC interview that we substitute Simpson-Bowles for sequestration on Dec. 31 and “kick a more attractive can down the road” for six months but with the eventuality that a modification of Simpson-Bowles is the likely outcome by mid-year 2013. The dialogue of the opening positions of both Boehner and Obama appear to be consistent with that proposal. That is not a bad outcome for our current unattractive situation.

Contact Glensky, a former Wall Street financial manager who now lives in North Myrtle Beach, at bwglensky@sccoast.net.

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