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The Simpson-Bowles plan for capping stuff

By Ezra Klein

Thumbnail image for debtfiscalproposal.jpg

If you really get into the guts of the Simpson-Bowles deficit plan, what you'll find are a lot of caps. Most of the early savings come from a cap on discretionary spending that "rolls discretionary spending back to FY2010 levels for FY2012, requires [a] 1% cut in discretionary budget authority every year from FY2013 though 2015" and then indexes discretionary spending growth to inflation from 2015 to 2020. They've got some "recommendations on how to apply the caps," which mostly apply to congressional procedure, and they offer ideas for where the discretionary cuts might come from, but those are just "illustrative." The plan is the cap, and however you hit the cap, it nets you $1.46 trillion by 2020.

In the long term, the savings come from a cap on health-care spending. The commission recommends that we "contain growth in total federal health spending to GDP+1% after 2020 by establishing a process to regularly evaluate cost growth, and take additional steps as needed if projected savings do not materialize." This basically means strengthening the Independent Payment Advisory Board that passed as part of the health-reform law, which readers will know I'm sympathetic to. Republicans and conservative elites who are reacting to the plan positively might want to consider what this means for the GOP's effort to repeal not just the whole health bill, but to start by repealing IPAB. Take that off the table and the long-term balanced budget we see in this plan completely disintegrates.

There's also a cap on taxes. That's a bit odd, as there's no real reason a commission dedicated to reducing the budget deficit should be limiting the revenues we can bring in to reduce that deficit, but it's there nonetheless. The cap is 21 percent of GDP, which is a bit above the 19 percent of GDP that's been the historical average, and the 18.5 percent of GDP that was the case in 2007. Again, they don't say how exactly we should hit that level, but they offer some options, and note that if we get there, it'll net us $751 billion by 2020.

And that's most of the plan. It's also the best way to think about the plan. Even if Congress did seriously consider this proposal, the details would never make it through the legislative process intact. The commission doesn't pretend otherwise, offering "illustrative" specifics rather than throwing its weight behind detailed plans. What they've largely outlined are the spending and revenue targets they think we'll need over the next few decades, and the areas we need to consider if we're to hit them. In their telling, that means more revenues and fewer tax expenditures (like the mortgage-interest deduction), less discretionary spending in both the defense and non-defense sectors, some reforms to Social Security and, over the long-term, substantially slower growth in the health-care sector.

I've got my disagreements with this: I'd probably raise revenues above 21 percent of GDP, and I'd partly do it through a carbon tax. That would kill a couple of birds with one stone, and its omission from the "options" section of this plan is glaring. I'd also do less to Social Security than they do, and I'd be more explicit about the fact that it'll be difficult to get federal health-care spending growth down to GDP+1% by simply reforming Medicare and Medicaid. We're going to need to go even further in reforming the broader system as well. One option they mention is that IPAB's jurisdiction should be expanded to the private insurance plans operating in the health-care exchanges. They should emphasize this -- and related intrusions into the broader health-care market -- more.

But though the caps approach has come under some fire, I think it's basically the right way to discuss this -- and even to put it into action. It's very hard to say exactly what policies we'll need to follow in the coming years. Some things will save less money than we hope, and others will save more. Some programs will become more necessary than we realize them to be now, and others will fade in importance as the circumstances that birthed them recede further from view. We don't need to make all those decisions now, and we shouldn't lock all those changes into place now.

The genius of IPAB was always that it both set a growth target (eventually, GDP+1.5%) and created mechanisms to make it easier to achieve in a flexible, ongoing manner (an independent board of experts and stakeholders who would decide on the reforms and protections from the filibuster and congressional inaction to help pass them into law). That's why the Simpson-Bowles commission relies on it so heavily. And in the long term, deficit reduction will rely more on the success of structural innovations that help us get around congressional inertia, partisan gridlock and interest-group politics than on detailed lists of what we should and shouldn't cut. Things like PayGo, the budget reconciliation process, IPAB and some compromise on the Bush tax cuts that ties any extension to serious tax reform matter much more than any particular cut or reform.

By Ezra Klein  | November 12, 2010; 12:50 PM ET
Categories:  Budget  
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Next: Why wait to seat the new Congress?


We should put the option of not worrying about health care for the masses on the table.

Why isn't it there?

Posted by: krazen1211 | November 12, 2010 2:23 PM | Report abuse

The call for further tightening of the deductibility of employer-provided healthcare benefits is a significant potential cost control and should receive more attention.

Posted by: bdell555 | November 12, 2010 2:24 PM | Report abuse

Re Krazen1211: While we are at it, we should put the option of not worrying about retirement income for the masses and simply abolishing social security on the table too. Why isn't it there?

Posted by: rosiebutler | November 12, 2010 3:36 PM | Report abuse

I'd like to put rich people on the table.

Posted by: Chris48 | November 12, 2010 3:55 PM | Report abuse

In the context of all this, here's a nice old (~20 months) post from Jeffrey Frankel

Posted by: bdballard | November 12, 2010 3:59 PM | Report abuse

"We should put the option of not worrying about health care for the masses on the table. Why isn't it there? -
Posted by: krazen1211"

Johnathan Swift, is that you?

Posted by: jeirvine | November 12, 2010 4:05 PM | Report abuse

"This basically means strengthening the Independent Payment Advisory Board that passed as part of the health-reform law, which readers will know I'm sympathetic to. Republicans and conservative elites who are reacting to the plan positively might want to consider what this means for the GOP's effort to repeal not just the whole health bill, but to start by repealing IPAB. Take that off the table and the long-term balanced budget we see in this plan completely disintegrates'

Since as you yourself noted in your previous column the IPAB doesn't have any real ability to cut rates until 2018, this was an insignificant part of the bill that will surely no longer exist by the time it is able to really cut rates.

Furthermore we are about to see a raging inflation take hold in 2011. The Fed has guaranteed it by their use of core inflation, rather than real inflation. We are going to see rates approaching double figures by 2012.

The Fed will be reluctant to raise rates singificantly in 2011 at the same time as it is doing QE2. That means that inflation will get a 6 month head start at the minimum. The Fed will also not want to take significant market action directly in 2012 because it does not want to appear to be intervening in the election.

This is just another illustration of how foolishly the planning went on HCR in fiscal terms, in an effort to pass something, anything.

Posted by: 54465446 | November 12, 2010 4:14 PM | Report abuse

This is something I don't know anything about, so I'm just wondering -- as I read the proposal, it exempts all income earned by U.S. citizens and corporations abroad from taxation. Is this the current policy? Can anyone justify it to me? Isn't this is recipe for outsourcing and moving companies elsewhere?

Posted by: jsf1 | November 12, 2010 4:40 PM | Report abuse

Ken Starr was an Independent Prosecutor. Is that the sort of Independence the IPAB should offer?

Posted by: rmgregory | November 12, 2010 5:33 PM | Report abuse

"Ken Starr was an Independent Prosecutor. Is that the sort of Independence the IPAB should offer?"

No. But this is the kind of independence this commission has. If you accept their recommendations not only fiscal, but social and economical policies as well, will be preset for the next 50 years.

BTW, since when did the Democratic party outsource its policy making to one person named Erskine Bowles?

Posted by: Yoni1 | November 12, 2010 7:20 PM | Report abuse

For decades the US has let its deficit grow and while this has happened its citizens have complained.

Like it or not, US governments could have done something about this decades ago and if they had done so then you would have paid the price.

The idea that the deficit should be brought under control without every American bearing part of the burden is silly. It is your debt and you will have to pay it off.

Obama does not have a magic wand and he cannot make the process painless. The GOP's suggestion that taxes should be lowered in order to increase economic activity and thereby decrease the deficit will not work. The government will not receive enough of the benefits from that strategy to make a big impact on the deficit. If that strategy is followed I guess you will blame someone other than yourself for its adoption.

The US has to tighten its belt. It will have to tear up its credit cards. If you do what you have done before then you will get the same old result.

Either you want to reduce the deficit and you will do what is necessary for that to be achieved or you will not do so.

The UK has shown the US what it is doing to bight the bullet. Either you cut government spending or you let the deficit grow. What will it be?

Posted by: robertjames1 | November 12, 2010 8:10 PM | Report abuse

I find no mention of farm subsidies being cut. Why?

Posted by: hairman | November 12, 2010 10:12 PM | Report abuse

The IPAB is oddly reminiscent of the Soviet Union setting the price for bread. When fewer doctors participate, we'll end up with the lines. Of course, in this case, the government is buying the bread for the customers. So, if the bakers start making smaller loaves, since the price is set, they'll just get back in line for another one. The people running the USSR were really smart, but you can't be smart enough to solve a problem of 200 million interdependent variables.

Of course, we don't have this problem with bread in the United States, even though 40 million people get money from the 150 million people that pay federal taxes to buy bread. Instead of the government setting the price of bread, they give the needy money, and they use the money to buy the best value bread for their circumstances on the market.

Even a regulated system should allow for classes of service. I shouldn't be forced into the same copay for saving the plan money by going to a $75 doctor instead of a $180 doctor. I now have to pay the same copay for a $90/month prescription as people pay for a $5,000 month prescription. If doctors, hospitals, and pharma were forced to compete on value, we would have a real system in this country.

Instead, we'll have a board that determines a knee MRI should cost $500. This will allow the people that do a $350 job to prosper, while those that offer a higher level of service for $750 will lose out. And nothing, nothing, nothing at all will be done to address the fact that the problem could have been solved with an icepack, a few days rest, and losing 25 pounds.

Posted by: staticvars | November 12, 2010 11:19 PM | Report abuse

This is not really about the deficit. It is a sneak attack designed to throw more money at the wealthy at the expense of every one else by dramatically cutting the tax rate of the top income earners and eliminate the corporate tax. It is not the report of the full Commission, but a seeming effort to undermine the Commission by people foolishly appointed as Chair who put out proposals that the full Commission would probably not support.

Posted by: twm1 | November 13, 2010 12:06 AM | Report abuse

You guys should stop complaining because, one the health care we have now isnt as good as it was supposed to be. also the law has just been signed so give it some time. so if u want to say u have the right to choose tell that to ur congress men or state official. If you do not have insurance and need one You can find full medical coverage at the lowest price check .If you have health insurance and do not care about cost just be happy about it and trust me you are not going to loose anything!

Posted by: patriciajeff13 | November 13, 2010 3:18 AM | Report abuse

Bowles-Simpson "Bi-partisan" Deficit Commission is a scam:

1. Recommendations weren't generated, according to Fiscal Commission Charter & By-Laws, by "judgment and views" of 18 bi-partisan members. They were generated by Co-Chairs, a small cabal of GOP & Blue Dog Democrats & anti-Social Security Concord Coalition.

2. Recos were not reviewed by 18 members prior to release to media and American public, or subjected to requisite 14-vote approval. Annoyed members are already on record stating disapproval with many recommendations.

3. Concord Coalition "dedicated to educating the public about the causes and consequences of federal budget deficits, the long-term challenges facing America's unsustainable entitlement programs.." was one of 90 groups to make presentations on June 30. Track the presentation to Bowles-Simpson Draft?

3. Deficit Commission documents, meeting minutes, website make no special reference to Concord Coalition. But CC website has section dedicated to Commission & features 8 "Fiscal Commission Updates" issued between April 26 & Nov 12, and Bowles-Simpson publicity is featured under "Concord in the News"!

CC release issued on Nov 2, " Bipartisan Panels' Recommendations Could Provide an Antidote for Ill-advised Campaign Rhetoric", a week prior to Bowles-Simpson media blitz, suggests CC knew more about Commission's recommendations than the actual Commission!

4. Commission Charter says zero about releasing exclusively created draft recos to media & public BEFORE Commission members or Congress have a chance to see/review/approve. On Nov 10, Co-Chairs Bowles-Simpson staged 'guerilla' press conference & media blitz...when Pres was conveniently in Asia.

David Axelrod said WH found out 1 hour before it started and he had to download the Draft recommendations off internet! Commission members were similarly sideswiped. Not Pete Peterson, Concord Coalition founder; he issued a statement re Draft on Nov 10 to coincide with press event & CC issued a Nov 11 release. How did he/they know when Commission members didn't?

5.Bowles-Simpson Draft is 80% conservative Concord Coalition - there's little of more progressive thinking like excellent Economic Policy Institute recommendations:

6. Judd Gregg (R-NH), Paul Ryan (R-WI), Tom Coburn (R-OK) had prior connection to CC.

Before getting into the recommendations, the public has a right to transparency on this Commission - an investigation should be done.

Posted by: TruthFairy | November 13, 2010 2:43 PM | Report abuse

i no bro

Posted by: 473wea | November 13, 2010 5:49 PM | Report abuse

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