Obama's Deficit Commission | Advisor Area

In February of last year, the Obama administration used an executive order to create a bi-partisan council of 18 members, with the hopes of creating meaningful solutions to help the nation restore fiscal order. The council is called the National Commission on Fiscal Responsibility and Reform. There have been many commissions like this in the past and the vast majority of these commissions have been met by dismal failure.

There is little reason to believe that this commission should be any different. The republicans have labeled the commission a “ Trojan horse” designed to push higher taxes. On the hand, there has been a massive outcry by Democrats every time there are even modest proposals for changes in Social Security or Medicare. Nancy Pelosi lambasted these proposals as “simply unacceptable.” This is the dilemma that the commission and every historical commission faced with the task of creating bi-partisan solutions is faced with. However, there have been a couple of interesting proposals that make this commission more hopeful than previous ones.

A Bi- partisan proposal came from Erskine B. Bowles and Alan K. Simpson. Bowles was the White House Chief of Staff until Bill Clinton and Alan K. Simpson was a former Republican Senate leader.

The two men’s proposal is contingent on make heavy tax cuts in Medicare and Social Security. In terms of taxes the proposal put emphasis on cutting deductions and loopholes.

Erskine B. Bowles, left, and Alan K. Simpson, are co-chairmen of President Obama’s panel on reducing the national debt. Picture Provided for by New York Times.

Bowles Simpson Deficit Chairmen

The Proposal would raise a significant amount of revenue. The graph below provided by NPR, shows Annual deficit reduction under the Bowles- Simpson plan. However, political capital in the commission is not behind the proposal.

No member of the commission openly supported the proposition, which is arguable, the most constructive debt relieving measure that has been formulated to date. Is the United States going to be bound by gridlock in the house and the National Commission on Fiscal Responsibility and Reform? Well, it’s hard to say, while the Bowles- Simpson plan was a good initial start it was by no means ideal.

The Center On Budget and Policy Priorities elaborates,

Specifically, the plan starts to take effect in fiscal year 2012, which could threaten the fragile economic recovery; it proposes policy steps that would prove a serious hardship for some of the nation’s most disadvantaged individuals; it relies far too much on spending cuts as opposed to revenue increases (both as a whole and, in particular, in its proposals to strengthen Social Security’s finances); and it calls for adopting policies that will hold annual revenues and spending to 21 percent of Gross Domestic Product (GDP) in future decades, which is both unrealistic and unwise.

There analysis is reasonable. Republicans are incredibly wary of cutting taxes especially during recessions, because they believe that it is a great stimulus for recovery. Democrats are especially wary of cutting spending especially during the recession because Democrats believe that in times of consumer frugality the government has to fill the gap for a serious lack of investment. Additionally, the Obama administration agrees with the vast majority of the Bush taxes cuts. Obama himself stated that he would be willing to extend 98% of the tax cuts, all of the tax cuts except for those that apply to the top 2% of the population. Obama’s taxes rates are lower than Regan’s, the man who best embodies the spirit of the modern Republican Party. Ronald Regan is hardly considered to be an advocate of the tenets of “ Marxism.”

On the flip side, George Bush Junior was lambasted my Democrats for being a cold, callous man far from the “ compassionate conservative” he tried to convey. Democrats often forget that former President George Bush Junior expanded Medicare by more the one trillion dollars.

The ultimate lesson of these two examples is that it is politically very easy to cut taxes and it is also politically easy to increase spending. Any politician trying to get America’s financial house in order has effectively committed political suicide in the process.

George Bush Sr. told a crowd of enthusiastic and cheering Republicans, “ read my lips, no new taxes.” As a result, he lost the election; Republicans and Libertarians jumped ship and voted for Ross Perot. These siphoned votes are what won Bill Clinton the election. Bill Clinton was charismatic that was for sure, at the same time Americans would not have unelected the man who launched the most successful military campaign in American history if it hadn’t been for the fact that he increased taxes.

Politicians deliver what the American people want and that is why it is so difficult to come up with meaningful solutions to reduce the deficit. The creation of the National Commission on Fiscal Responsibility and Reform through an executive order is not going to change this fundamental political fact.

Does history demonstrate that American politicians are forever subject to the shallow desires of the American public at the expense of responsible monetary policy? This question is very open ended, especially in a recent event that creates cause to be optimistic. On November 15^th President Barak Obama and Mitch McConnell the leader of senate Republicans both agreed to a ban on earmarks. The Economist elaborates in their November 20^th to 26^th issue in the article “ Confronting the Monster,

A cynic would say that such an agreement was easy since the stakes were so low. Earmarks attract plenty of bad press, but the money is trivial—less than 0.5% of federal spending. On the more pressing question of how to close America’s gaping deficits, Democrats and Republicans remain far apart.

The Economist may be right, however there is no shortage of small things that get in the way of a budget surplus that both Democrats and Republicans would be willing to get rid of. While the agricultural lobby in America is still strong it is in serious decline. One should not rule out the possibility that in a couple of decades farm subsides could be completely eliminated.

Deficit Projections

Additionally the United States in not in a dire situation right now. Our capital markets are still incredibly attractive for foreign investment, especially in light of the decline of the all powerful Euro. William G. Gale, Senior Fellow of Economic Studies elaborates in the Brookings institute,

The United States faces a very different situation. Long-term interest rates on government debt are low. Investors are not fleeing U.S. capital markets; instead, America continues to be a magnet for capital from around the world. Of course, the lack of an imminent crisis hardly means there is no problem. If our current policies continue, by 2020 net interest payments on the national debt will exceed $1 trillion, 20 percent of federal revenues, annually – enough for rating agencies to downgrade the quality of U.S. debt, which in turn would raise borrowing costs and increase the deficit further.

While the United States is not in the same financial shape as Greece, it does not have all the time in the world to waste. The National Commission on Fiscal Responsibility and Reform should try to come up with meaningful solutions but they should not propose to implement them as early as 2012 like the Bowles- Simpson plan advocated. Partisan bickering from people who are trying to defend their shortsighted constituents has so far eroded the political flexibility of this commission.