Bowles-Simpson: The Unequal Marriage of Reaganomics and Rubinomics
People's Pension
Eric Laursen
The Bowles-Simpson plan isn't a fair and equitable way to reduce the long-term federal deficit, whatever its co-authors might claim. In fact, it's the biggest proposed experiment in supply-side economics since early Reagan.
Long story short: The proposal put on the table last week by the co-chairs of the president's National Commission on Fiscal Responsibility and Reform is essentially a wedding of Rubinomics and Reaganomics. As such, it's what we might get if Bill Clinton and the late Ronald Reagan were locked in a room together and required to cut the long-term budget deficit – without any regard for the impact of their handiwork on low- and middle-income people.
You've probably guessed which partner has the upper hand in this deal. And we'll explore that in a moment. But first, some background.
This wasn't an overnight meet-court-marry. The supply-siders and the deficit hawks – as the two lovebirds are also known – have been trying to join hands even since 1985, when Sens. Bob Dole and Alan Simpson (the same), concerned about rising deficits under Reagan, lined up a bipartisan group of senators to pressure the president into accepting a budget-slashing plan that included benefit cuts for Social Security. Reagan at first agreed, then wisely pulled the rug out from under them. That adventure cost several lawmakers their jobs.
A quarter-century later, Republicans and the Democratic right are still at it. The goal is still lower deficit projections combined with lower taxes, Social Security being one of the key sources of savings. Bowles-Simpson dovetails perfectly with this objective. Let's see what the proposal draws from Rubinomics, and what it derives from Reaganomics.
The Rubinomics part (the term derives from Bob Rubin, Clinton's Treasury secretary and Wall Street eminence) is that the overarching purpose of the commission is supposed to be to reduce the deficit. And it drafts Social Security in the service of this project, even though Social Security's status is a separate issue from the overall federal deficit. As Peter Orszag, Obama's former budget director and a Rubin protege wrote in a New York Times column today, “reforming” Social Security “could help the federal government establish much-needed credibility on solving out-year fiscal problems.”
Recall that when Rubin was running Treasury during the second Clinton administration, he got the president to endorse a scheme whereby the surplus in the Social Security trust funds would be used to pay down the national debt. The idea was that bondholders – the godlike figures in the Rubinomic universe – would look more kindly on an America with less on the liability side of its balance sheet, lowering interest rates and thereby making everything government does more affordable.
In other words, the point of balancing the budget even as the U.S. faces its greatest economic crisis since the Great Depression is to ward off another, hypothetical future crisis that's much more likely to hit if the nation doesn't invest in rebuilding its economy. Never mind that interest rates on Treasury bonds are already way low. The entire Deficit Commission project is built on this set of assumptions – so much so that Bowles and Simpson felt it necessary to leave the country with an even lower debt-to-GDP ratio at the end of 25 years than the commission's charter called for.
It may not make sense, but this is how Treasury types think. To borrow from John Maynard Keynes' clever analogy, the person who subscribes to this viewpoint “does not love his cat, but his cat's kittens; nor, in truth, the kittens, but only the kittens' kittens, and so on forward forever to the end of cat-dom.”
What about the Reaganomics part? Well, curiously, reducing the deficit is actually not at the top of the list of “tax reform” goals in the Bowles-Simpson plan; it's number seven. Number one is lower tax rates! Bowles-Simpson presents four options for reforming and simplifying the tax structure, all of which would result in fewer and lower income tax brackets and lower corporate taxes. This would be balanced by wiping out “tax expenditures”: the $1.1 trillion universe of tax breaks that range from the earned income tax credit to giveaways for energy companies to the mortgage deduction.
Why is this Reaganomics? Reagan promised an economic policy based on tax cuts offset by spending cuts. What he actually delivered instead was tax cuts offset by “magic asterisks”: spending cuts to be determined later. Very few, of course, were ever enacted. Bowles-Simpson follows the same pattern, apportioning the pain 70% to spending cuts of various sorts and only 30% - some estimates say as little as 20% - to tax increases. In fact, Bowles and Simpson go Reagan one better, including a cap on tax revenues equal to 21% of GDP.
Who pays? On the surface, it would seem that everyone's ox is gored somewhat. But not if you look a little deeper. If you're a multinational oil company, you lose a lot of tax breaks. But you get to pay a 26% corporate tax rate instead of 35%. Even more important, Bowles-Simpson would shift to the U.S. to a system of “territorial” taxation, in which profits that multinationals repatriate into this country face no corporate tax penalty. This would be a huge change, eliminating the one really big penalty companies face when they outsource jobs. Combined with a reduction in the top income tax bracket to 24% from 35%, this would be a bonanza for some of the richest Americans.
What about the middle class and low-income households? The mortgage deduction is everyone in Washington's favorite punching bag these days, although the arguments against it are somewhat contradictory. On the one hand, it's supposed to encourage working people to put too much of their wealth into real estate. On the other hands, it's argued that the mortgage deduction doesn't really raise the U.S. homeownership rate at all: Canadians are just as likely to own their homes, and they don't have such a break.
This is misleading. Canadian working families don't put up with anything like the degree of income inequality as those in the U.S., and don't have to finance nearly as much of their spending by going into debt. So they don't need a mortgage deduction. South of the border, where workers have to make every dime count, it's probably pivotal for many families, whose only accumulated wealth is likely to be in their homes.
Then there's the EITC. First, the EITC plays an essential role in offsetting the regressive effects of the payroll tax. Second, the EITC goes even to individuals who pay no income tax. As such, over the years it's become one of the most important poverty relief engines in the federal system. Wiping it out would be a disaster for many low-income families. (Bowles and Simpson present several different options for “tax reform,” not all of which include zeroing out all tax expenditures. But since their goal is a simplified tax code, this is clearly their preference.)
What about Social Security itself? Bowles and Simpson propose four basic changes in the program: a higher cap on income subject to payroll tax; shifting to the “chained” CPI, which underestimates the rise in the cost of living for seniors; so-called “progressive indexing “ of benefits, which cuts benefits for all but the lowest income workers; and a gradual increase in the retirement age.
The first is a change that defenders of Social Security have long been calling for. The others would tear the heart out of the program's income supports, Benefits would fall 25% for those earning 43,000 a year, and 40% for those earning $100,000. Elder poverty is likely to jump in the U.S. under Bowles-Simpson, just as it has in the UK thanks to the pension cost-cutting instituted by Margaret Thatcher's government three decades ago.
It might be possible to conclude that Bowles-Simpson actually delivers on the initial promise of Reaganomics: supply-side tax cuts, skewed toward the wealthy on the assumption they'll pump a lot of new investment into the economy, only this time actually offset by spending cuts. But this isn't the case. In a brazen act of sleight-of-hand, the co-chairs sidestep the whole issue of health care costs: the real driver of debt overrun, both for government and for households. Instead, they call on Congress to “establish a process to regularly evaluate cost growth, and take additional steps as needed if projected savings do not materialize.”
That's a magic asterisk with the magic thoroughly drained out, leaving nothing in its place.
The bottom line, then, is a marriage of Reaganomics and Rubinomics in which the latter is very much the junior partner. Which should be no surprise, since, in post-Reagan Washington, the Republicans always have the upper hand over their partners in bipartisanship, the conservative Democrats. The revenue enhancers in Bowles-Simpson are heavily skewed to benefit the affluent. Why? They don't say, but the most likely answer is pure Reaganomics. As the New York Times' David Leonhardt notes,
Arguably, economic growth is the most important yardstick for any plan, because growth can do much to reduce the deficit.... This helps explain why many economists favor a version of tax reform that would lower marginal rates and close loopholes. Ordinary tax cuts have a mixed record on helping the economy; growth after the Bush tax cuts was mediocre, for example. But tax reform could save households and businesses from changing their behavior, often inefficiently, to qualify for tax breaks. The Bowles-Simpson plan suggests several reforms that would raise more tax revenue than today’s code and help close the deficit.
In the case of many low-income households, those tax breaks change behavior in the sense that they let these people continue to keep body and soul together. No matter: Supply-side economics is all about efficiency and the smooth functioning of free-market forces. Asked what their proposal would do to encourage economic growth – the spending cuts would kick in barely 11 months from now – they would no doubt direct our attention to the tax cuts.
Which makes Bowles-Simpson not merely a deficit reduction plan, but the biggest proposed experiment in supply-side economics since early Reagan. Somewhere, the Gipper is nodding his approval.
