by Elliott R. Morss
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In the debt ceiling deal worked out by Congress and signed by Obama, a Congressional “Supercommittee” was created to reduce the deficit by another $1.5 trillion. In what follows, I will offer my view on it should do followed by my guess on what it will actually end up doing.
What It Should Do
There are two parts to this: the short and long run.
1. Short Run
In the short run, it is clear that the US is very close to a second recessionary dip. This in part results from a dysfunctional Washington. I quote from Warren Buffet’s recent Op-Ed piece in the New York Times: “Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.” And Bernanke at Jackson Hole: “It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”
As I have written, more Fed buying of Treasuries will help weaken the dollar, but do very little else to reduce the unemployment rate. And Bernanke at Jackson Hole again: “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery….” A new fiscal stimulus is needed and the Supercommittee should say so. Better still, it should recommend a specific package. And it should last until there are real signs the private sector is really gaining momentum.
2. Long Run
But the jitters created by Washington’s inability to come up with a longer term plan to address the Federal deficit must also be addressed. Nobody believes this can be accomplished without reducing Social Security and health outlays, but no politician wants to go on and vote for said reductions.
These issues have been studied carefully. What should be done about Social Security is straightforward – move the year at which one can start getting payments out a few years. What to be done about health costs is more complex. But I have written a series of articles on the subject and the solution is to give the Obama Health Care Act a chance. What am I talking about? US costs are high because services are “supply driven”. That is, if you live in a large urban area with a lot of doctors, hospitals, and test machines, you will spend more days in hospitals, meet with more doctors, and have more tests for every malady than if you live in a rural area with few doctors/hospitals/testing machines. But John Wennberg and other researchers have found that outcomes are not necessarily better with more doctors, tests, etc. In fact, research shows there are locales using far fewer inputs with outcomes just as good as or better than hospital systems in major cities. And under the Obama Plan, Medicare payments will be adjusted downward to the lower cost/good or better outcome charges.
In short, the new Act has features built in to make the system more outcome driven and less supply driven. But it has to be given a chance. Already, the special interest groups in the health industry are starting to complain: the big city hospitals have their DC lobbyists out in full force. And under the new Act, health information is supposed to be readily available to other doctors. But there is a problem: doctors don’t want to share information because they fear it will make it easier for their patients to switch doctors. Outrageous! But again, the new Act has to be given a chance.
But beyond Social Security and health what should be done to reduce the deficit?
Defense reductions: As I have written, the Congressional Budget Office estimates that the Afghanistan and Iraq wars will cost $170 billion in 2011. And by 2021 they will have cost $1.7 trillion! What will we get from such outlays? I see nothing beyond more Afghanistan, Iraq, and American deaths.
Beyond these three items, I would be reluctant to see further expenditure cuts. Throwing money at problems does not resolve them. But with a second rate education system, crumbling infrastructure, and no energy policy, this is not the time for more US Federal expenditure reductions.
Republicans rail against tax increases, claiming they would be just the wrong medicine for a weak economy. They appear oblivious to the fact that the government expenditure cuts they insist on will slow growth by even more than the tax increases suggested by others (including me). I quote from Buffet again: “Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends. I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”
What the Supercommittee Will Do
Derek Miller has provided summary descriptions of Supercommittee members in a recent Econintersect article.
What do we find? There are 6 Republicans and 6 Democrats, with 6 each from the Senate and House. 6 Republicans appointed, only one (Fred Upton) has not taken the Grover Norquist “no higher taxes pledge”.
What do these members bring to the table, and can they be expected to deliberate “in the national interest? Washington is controlled by special interest groups. Consequently, I offer the following information on the Supercommittee members drawn from the Open Secrets database.
Table 1 presents the campaign and leadership PAC contributions to each Democratic Supercommittee member for the 2005-2010 period, broken down by industry.
A few quick comments on this data. Baucus has been around a long time. He knows how the game is played in Washington. He was the only Democrat on the Simpson-Bowls Commission who refused to sign the report. He opposed the cuts in entitlement programs – not surprising in light of the contributions he receives from the health industry. And being from Montana, he also opposed cuts in farm subsidies. Murray has also been around long enough to have made friends in industry. Kerry, Van Hollen, Becerra, and Clyburn might try to get something useful done.
Table2 presents the campaign and leadership PAC contributions to each Democratic Supercommittee member for the 2005-2010 period, broken down by industry.
Portman was the White House budget director under Bush. He should at least understand the issues. Upton is the real hope for meaningful dialogue among Republican leaders.
Table 3 provides Supercommittee contribution totals for Republicans and Democrats by industry.
Special interest groups take care of both parties. And note the prevalence of finance. What are the chances of getting a good financial reform bill through Congress?
There is very little reason to be hopeful about what the Supercommittee will accomplish. All but one Republican oppose any tax increases. And the connections of both parties to the health industry special interests means meaningful reforms there are not likely.
I end with another quote from Buffet: “Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.
But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate. My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.”
Analyzing the Supercommittee by Derek and Jeff Miller
Global Economic Downturn: A Crisis of Political Economy by George Friedman
Analysis Blog articles by Elliott Morss