United Liberty

Reaction to the report released on Wednesday by the co-chairs of the President’s Commission on Fiscal Responsibility and Reform has been mixed to negative. For sure, there is a lot in the report for everyone to be disappointed with, whether it’s cuts to entitlements or ending tax exemptions to broaden the tax base. Or if you’re NPR, eliminating your funding.

To give you an idea of what economists, pundits and politicans are saying, I’ve gathered some comments.

Sen. Harry Reid (D-NV):

I thank the leaders of the bipartisan debt commission for their work. While I don’t agree with every one of their recommendations, what they have provided is a starting point for this important discussion. I look forward to the full commission’s recommendations and to working with my colleagues on both sides of the aisle to address this important issue.

Speaker Nancy Pelosi (D-CA):

This proposal is simply unacceptable.  Any final proposal from the Commission should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare.  And it must strengthen America’s middle class families—under siege for the last decade, and unable to withstand further encroachment on their economic security.

Joint Statement from Hensarling, Ryan and Camp:

We appreciate the leadership of Alan Simpson and Erskine Bowles on the Fiscal Commission, and their shared commitment to addressing our pressing fiscal challenges. This is a provocative proposal, and while we have concerns with some of their specifics, we commend the co-chairs for advancing the debate. We will continue to work toward solutions that help spur economic growth and restrain the explosive growth of government spending

Greg Mankiw (economist):

Early reports suggest the Bipartisan Deficit Commission is considering some good ideas: a higher retirement age, lower tax rates coupled with broader tax bases, eliminating tax expenditures such as the mortgage interest deduction, and a higher gasoline tax.

My regular readers will know that these are ideas I have long embraced.  I look forward to seeing more details.

Richard Trumka (President, AFL-CIO):

[Bowles and Simpson] just told working Americans to ‘drop dead.’ The very people who want to slash Social Security and Medicare spent this week clamoring for more unpaid Bush tax cuts for millionaires.

Arnold Kling (economist):

Lots of tax reform (get rid of the mortgage interest deduction, the health care deduction), and no VAT. Cuts in Social Security benefits, but trying to maintain benefits for the elderly poor. On Medicare, more or less the kitchen sink. I think they endorse everyone’s ideas for cost control—left (threatening the public option), right (saying something positive about consumers sharing costs), and center.

On the whole, the proposals probably add up to something center-right. The left may complain loudly (Tyler Cowen has found some complainers already), but the only way that the complainers will get their way is by electing a new people.

This looks like President Obama’s golden opportunity to triangulate. My guess is that he will seize it. I hope he does. We could do worse.

Paul Krugman (columnist, economist):

The idea that co-chairs of a commission whose charge is fiscal sustainability should take it upon themselves to (a) declare that federal revenue must not exceed 21 percent of GDP — that’s right, putting a cap on receipts and (b) call for reducing the top rate from 35 to 23 is just awesome.

Tyler Cowan (economist):

Mankiw is happy, Krugman and [Brad] DeLong are upset.  The home mortgage interest deduction goes and income tax rates are 8, 14, and 23 percent.  No one thinks this is the final deal.  I would say evaluate this as you would a movie trailer: will it get people to take the next step of thinking about a ticket purchase?  The top 23 percent tax rate is like the quickly cut scene with the rolling boulder, the skimpily clad girl, the grinning enemy, and the face of the star.  “The Bowles-Simpson plan has a ratio of roughly $3 in spending reductions for every $1 in revenue increases…”  It won’t happen in real life.  As a movie preview I judge this as “good enough.”  It basically declares that some major deductions have to be on the table and it gets us to the next step.

Dan Mitchell (economist):

The proposal from the Fiscal Commission, incidentally, does not balance the budget – even though they have a big tax increase (which they assume will have zero negative impact on economic performance).

So what does this mean? Well, we know that the budget can be balanced (with the 2001 and 2003 tax cuts) if spending grows two percent each year. And we also know that the Fiscal Commission increases the tax burden, yet still doesn’t achieve fiscal balance. So this means that they must be letting spending grow much faster than 2 percent each year. I’m guessing 4-5 percent annual spending growth.

In other words, the Fiscal Commission is asking us to pay higher taxes so that government spending can grow at twice the rate of inflation. That’s not a good deal.

Moreover, that’s almost certainly a ridiculously naive best-case scenario. If past behavior is any indication (and it is), politicians will spend any additional tax revenue. Whenever there’s a budget summit, the folks who want higher taxes make all sorts of empty promises about spending discipline. And when the other side caves in on taxes, they grab the money and have a party.

Chris Edwards (economist):

The report proposes to reduce spending from 25 percent of GDP currently to 21 percent over the long run. That’s a good start, but we need to pursue deeper cuts, as discussed on www.downsizinggovernment.org. After all, federal spending was just 18 percent of GDP in President Clinton’s last two years in office.

I like that the report suggests a broad array of budget cuts, including defense, nondefense, and entitlement programs. Everything needs to be cut, including programs traditionally defended by both liberals and conservatives.
[…]
The report proposes to raise taxes by $1 trillion over the next decade. But the federal budget crisis is caused by overspending not undertaxing. The election results showed that most Americans understand that, but the message hasn’t penetrated the beltway yet.

The report’s discretionary spending cuts are timid. For example, farm subsidies are cut by just $3 billion, just a fraction of their annual cost of about $20 billion. Farm prices and farm incomes are at high levels these days, so now would be a good time to repeal farm subsidies completely.

Ezra Klein (economist, columnist):

Some of it I like, some of it I don’t like, and some of it I need to think more about. But the report doesn’t fulfill its basic purpose, which was demonstrating enough consensus among congressional representatives of both parties to convince the public and the political system that Congress is ready to make these choices. The reality is, we don’t have a congressional fiscal commission, we don’t have a report from the White House’s fiscal commission, and we don’t have a consensus on fiscal issues between the two parties. The co-chairmen have some interesting policy ideas for how to balance the budget, but as of yet, they’ve not made any discernible progress on the political deadlock preventing us from balancing the budget. And it’s the deadlock, not the policy questions, that they were asked to solve.