Introduction
This paper is about a report entitled “The Moment of Truth” (December 2010) sometimes better known as the “Bowles-Simpson Report”, named after the report’s authors, Erskine Bowles and Alan Simpson, who were tasked by President Obama with producing a plan to reduce America’s fiscal deficit (The Bowles-Simpson “Chairmen’s Mark” Deficit Reduction Plan, (n.d.)).
There are three parts to the paper as follows:
Reasons for the Debt Crisis
In the preamble to the report, its authors made an impassioned plea to those in power in Washington to put aside party and self interests and act immediately to face the inescapable challenge of the debt burden, stating forcefully: “America cannot be great if we go broke.” That referred to the mounting debts described under the report heading “The Looming Fiscal Crisis.” Giving some detail to that, Bowles and Simpson explained that the joint effect of rising expenditure and falling revenues have forced the U.S. government to borrow massive amounts every year to plug the gap. They noted that in 2010 expenditure had reached almost a quarter of the Gross Domestic Product (GDP), the largest since the second World War. At the same time tax revenues in GDP percentage terms stood at just 15 percent – the lowest since 1950, and resulting in a budget deficit of 9 percent (24 minus 15). They further reported that since 2001 the GDP debt percentage had escalated from 33 percent to the 2010 level of 62 percent, caused – in their view – by the costs of two wars plus what they referred to as “irresponsible policies” followed by both political parties, made worse by a downturn in the economy.
Whilst they conceded that an expected recovery of the economy will help the situation in the short-term, because government expenditure is projected to grow at a greater rate than revenues, the situation can only get worse unless there are drastic changes. If the country continues on the same unchanged course, federal debt will reach 90 percent of GDP by the year 2020. From then on the projections are even more depressing, forecasting a massive debt by 2035 of no less than 185 percent of GDP.
Summarizing, the continuing past excesses of government expenditure over revenues, the mounting borrowing to plug the gap, and the worsening outlook for the future if there are no drastic deviations from that course – those are the causes of the problems facing the U.S. economy and the reasons why action has to be taken, and soon.
The Proposed Solutions
The solutions proposed by Bowles and Simpson were geared to satisfying what they called “a two-part mission” given them by President Obama:
Stating that they believe their solutions will meet both of those key objectives, the report’s authors proposed what they called “a six-part plan” that will:
- Reduce the current deficit by almost $4 trillion by the year 2020 – a greater reduction than any in U.S. history;
- Make heavy tax rate cuts, abolish the Alternative Minimum Tax (AMT), and cut the tax code loopholes that facilitate so-called “backdoor spending”;
- Place a cap of 21 percent of GDP on government revenues, and bring expenditure below 22 percent and then to 21 percent;
- Guarantee lasting solvency to the Social Security system, block the 2037 projected Social Security cuts of 22 percent, reduce the amount of poverty among the elderly, and ensure a fair distribution of the burden;
Bowles and Simpson then “fleshed out” those six points, stating that their plan has the following “six major components:
- Cuts in Spending: Force Congress to limit their spending budgets. Cut the expenditure on programs having low priority and take measures to streamline the way government operates. Set an example with immediate cuts of over $50 billion and target savings of $200 billion by 2015;
- Reform Tax Structure: Steep rate reductions, simplify and broaden the tax system, and reduce tax loopholes (“backdoor spending”). Increase America’s competiveness and introduce revenue cap to avoid too much tax;
- Contain Health Care Costs: Replace unworkable existing and planned schemes with reforms to “physician payments, cost-sharing, malpractice law, prescription drug costs, government-subsidized medical education, and other sources.” Set up measures to reduce the growth of spending in this area;
- Compulsory Savings: Cut the subsidies to agriculture, modernize the retirement programs (civil service and military), and reform the student loans system. Also update the Pension Benefit Guarantee Corporate so that it is a sustainable system;
- Reform the Social Security System: Make the system solvent in the longer term and take measures to reduce elderly poverty. (The authors noted that the Social Security reforms would be those needed anyway – not connected with reducing the deficit);
- Budget Process Reforms: Needed to keep the government debt stable, expenditure controlled, inflation measured with proper accuracy, and the taxpayers’ monies are directed where they should be.
The remainder of the Bowles-Simpson report then provided the fine detail for the various elements of the plan outlined above.
Opinions of the Proposed Plan Measures
Firstly, it is clear from the data provided in the early part of the Bowles-Simpson report (as paraphrased above) that America cannot continue indefinitely on the path of spending more than it collects in revenues, and consequently having to borrow more and more to “stay afloat.” As we are all aware, that is the road to insolvency and bankruptcy, even for a country like the U.S. The question is whether the solutions proposed in “The Moment of Truth” are the right ones – the ones that will solve America’s fiscal problems. What is easier to answer is whether present economic policies are sustainable, which of course they are not.
Wasik (Nov 2012) in his article “Simpson-Bowles Unplugged: Time’s Running Out” was writing almost two years after the publication of the Bowles-Simpson report, which had still not been endorsed by Congress. He described the two report authors as “true patriots, truth tellers and unabashedly post-partisan”, perhaps implying that the general populace would probably support the proposals in the interests of a secure future, whereas those in power (including Congress) were perhaps blinded by self or party interest so preventing them from accepting the need to take the longer term view. Wasik also saw the Congress refusal to accept the plans outlined in the report as approaching lunacy, and summarized some of the economic disasters that really do need resolving by biting the bullet and adopting the report:
- Spending on Health Care: The U.S. spends double that of any other industrialized nation, yet in terms of quality of health care is ranked somewhere between 25th an 50th . By 2020, spending on health care will use a third of the federal budget, with no sign of limiting the expenditure;
- American Defense Budget: U.S. Defense Expenditure exceeds that of the combined spend of the next seven largest nations. The campaigns in Afghanistan and Iraq were waged using borrowed money;
- U.S. Tax System: The plan’s measures would dramatically simplify what the report describes as a most inefficient tax system;
- Social Security: Is currently insolvent but would be solvent in the longer term. By 2050 the retirement age would be raised to 68;
- Just the national debt interest payments alone currently total $230 billion every year. That exceeds the combined budgets of the “Commerce, Energy, Education, Homeland Security, Interior and Justice Departments.”
Conclusions
Not being an economist or even an accountant, it is not easy for this researcher to determine the validity or otherwise of the various individual proposals set out by the plan, although the fundamentals of reducing expenditure, increasing revenues (within reason) and improving the efficiency of government bodies (and thereby further lowering costs) seems to be such simple and basic logic that it is incredible that Congress did not take the plan on board rightaway. Perhaps it tells us that the democracy we voted for and hold so dear has limits imposed by our elected representatives – not in the interests of their country (and ours), but to maintain the status quo that suits them and the powerful lobby groups that represent bodies like defense contractors, who stand to lose in a big way if defense budgets are slashed.
One item that does stand out is the cost of Health Care. If the service in the U.S. is ranked way down in terms of quality, but is costing much more than all other countries, it seems likely that somewhere along the line people are being paid too much, whether it be the drugs manufacturers, the physicians, hospital managements, whoever. That being the case, a review and revamping of the entire system is surely way overdue, as proposed by Bowles-Simpson.
Sadly, it would seem that America will continue to drift towards bankruptcy unless and until someone finds a way to overcome the obstacle that is Congress and maybe to knock some sense in those people who should be acting in our best interests.
As a postscript, Toscano (Feb 2013) reported for CNBC that Bowles and Simpson have recently produced a modified version of their tax changes plans, in an effort to find a compromise solution that will satisfy both Republicans and Democrats. His article is aptly entitled “Go Big or Go Home” suggesting that the plan must be accepted including the drastic expenditure cuts proposed, otherwise the economy and the government will eventually fail.
Works Cited:
“The Bowles-Simpson “Chairmen’s Mark” Deficit Reduction Plan.” (n.d.). Tax Policy Center. Web. 29 April 2013.
“The Moment of Truth.” (December 2010). The National Commission on Fiscal Responsibility and Reform. Web. 29 April 2013.
Toscano, P. (Feb 2013). “Go Big or Go Home.” CNBC. Web. 29 April 2013.
Wasik, J. (Nov 2012). “Simpson-Bowles Unplugged: Time’s Running Out.” Forbes.com. Web. 29 April 2013.
