The Deficit Commission's 21-percent solution

Story Repair | By Greg Marx |
Erskine Bowles and Alan Simpson, co-chairs of the National Commission on Fiscal Responsibility and Reform

November 16, 2010 — The co-chairs of a bipartisan deficit reduction commission appointed by President Obama have released a proposal that calls for balancing the federal budget by squeezing health care costs, slashing military and other spending, and raising the age at which most workers become eligible for full Social Security benefits. The plan also contemplates eliminating or scaling back popular tax breaks.

All told, the report calls for more than $3.8 trillion in deficit reduction by 2020, with most of the savings coming from spending cuts. The plan asserts that it would reduce the deficit to $400 billion by 2015 — well below a target set by Obama — and close the deficit entirely by 2037.

But the plan does more than set out strategies for balancing the budget: it also proposes long-term limits on government spending and revenues as a share of the economy. That aspect of the plan — a determination about the appropriate size of the federal government — likely shaped its specific recommendations and, according to some critics, went beyond the commission’s budget-balancing mandate.

What is story repair?

In this feature, we select a story that appeared in one or more major news outlets and try to show how, with a similar investment of time, a different set of inquiries or observations could have produced a more illuminating article.

For repair this week: “Commission leaders say cutting deficit will hurt” (AP), “Draft deficit plan launches likely grueling political battle” (CNN), “Task force faces uphill battle on plan to cut deficit $3.8T” (USA Today). All three stories are datelined Nov. 11, 2010.

The draft proposal reflects the thinking of Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, a chief of staff in the Clinton White House, who were appointed by Obama to lead the commission.

Fourteen of the panel’s eighteen members must agree on a proposal before the commission presents its final report to Congress on Dec. 1, and initial responses suggested the Simpson-Bowles plan may struggle to find that level of support. While independent budget hawks praised the report — Maya MacGuineas of the Committee for a Responsible Federal Budget called it “a remarkable plan” — many elected officials were wary. Rep. Jan Schakowsky (D-Ill.), perhaps the most liberal member of the commission, declared, “any proposal to cut Social Security or Medicare is a non-starter.” Three Republicans on the panel, meanwhile, issued a joint statement in which they praised the co-chairs’ effort but said, “we have concerns with some of their specifics.”

The proposal contains elements sure to anger different constituencies: reductions to Medicaid likely to be opposed by liberals, an increase in the gas tax that has long been fought by conservatives, and cuts to agriculture subsidies that would draw the ire of farmers. In a move that homeowners are likely to oppose, two of the three tax reform programs contemplated in the plan would cut or reduce the mortgage interest deduction.

The plan also calls for sharply curbing the long-term growth in federal health care spending, a goal that could require radical changes beyond the measures detailed in the report. Those measures include cutting payments to doctors, requiring veterans to pay more of their own medical expenses, and giving more power to a new board set up to contain Medicare costs.

But the overall shape of the plan — in particular, its emphasis on spending cuts over revenue increases — appears to have been determined by the co-chairs’ recommendation that federal spending eventually settle in at 21 percent of GDP, with tax revenues capped “at or below” that level.

In their proposal, Bowles and Simpson write that the spending target is rooted in a “guiding principle” to “cut spending we simply can’t afford.” A spokesperson for the commission did not respond to an inquiry about how the co-chairs arrived at the 21 percent figure.

Total tax revenue as share of economy in developed countries

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The plan would set federal revenues as a share of the economy about where they peaked in 2000, during a string of budget surpluses at the end of the Clinton administration, while leaving total government revenues in the U.S. well below those of most other developed countries. (See related chart titled “Total Tax Revenues as Share of Economy in Developed Nations.”)

On the spending side, the 21 percent target would fall in the mid-range of recent U.S history: higher spending as a share of the economy than during Bill Clinton’s second term and the George W. Bush administration, but lower than during the presidencies of Ronald Reagan and George H.W. Bush. (See related chart on next page titled “U.S. Government Revenues and Expenditures as Share of Economy.”)

But while the proposed spending target is not outside the historical norm in the U.S., balancing the budget at that level would require cuts to many government programs. That is because major entitlement programs like Social Security and Medicare now account for a larger, and still growing, share of the economy, even under the cost-control provisions of the recent health care reform law and the additional changes proposed by Simpson and Bowles.

As a result, by 2020, the co-chairs’ proposed cuts to discretionary programs account for 38 percent of the progress toward balancing the budget — the biggest single factor. Their tax reform alternatives, which include a proposal to eliminate credits and deductions while lowering rates across the board, would do about half as much to close the deficit. New revenues from other sources, meanwhile, amount to less than 6 percent of the proposed deficit reduction.

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