While balancing national budgets appears to be overtaking the push for maintaining the fragile global economic recovery through additional stimulus, the 2010 Midterm Election clearly reflected voters’ fears over rising US national debt. The much anticipated report from the Obama Administration’s National Commission on Fiscal Responsibility and Reform, a.ka. the Deficit Commission, seeks to answer the question of how to address the burgeoning National Deficit and Debt. Since the release of its draft report, criticism, as well as alternatives approaches, has been offered by both sides of the aisle, but it does appear the National Debt and Deficient are manageable. Unfortunately, the political will required to act on a credible plan is seriously lacking, yet might be achieved with some prodding from constituents after the Deficit Commission’s proposal is fully reviewed by the American people.
Deficient and Debt reduction has the potential to cause by far more political strife than Healthcare Reform due to some emotionally driven issues like social equality and justice. As such, all parties with a sincere desire to balance the Budget need to avoid emotionally charged remarks. Regrettably, politicians often rely on emotion over reason to gain support for their policies and the Deficit Commission is a political body. Like many official commissions, they used rather loose language in their draft report. For example, they state, “America cannot be great if we go broke. Our economy will not grow and our country will not be able to compete without a plan to get this crushing debt burden off our back.” Although quite true, economists would never use this language, because it turns this extremely undesirable financial situation into an emotional crisis, thus undermining the political effort for reform.
Beyond political theater, it is important to recognize the Deficit Commission did attempt to avoid deadlock by taking an approach that asks all Americans to “sacrifice.” By spreading the burden of fiscal responsibility across the entire socioeconomic spectrum and offering rewards for doing so, Commission members were seeking to cajole people from all political ideologies to accept their plan. It is, however, important to remember spreading a burden evenly does not necessarily mean pain will be felt equally. In terms of the disadvantaged and vulnerable members of our society, reform measures may well be just too expensive. Fortunately, the Deficit Commission’s plan actually seeks to improve the lot of individuals such as impoverished elderly through policy shifts that set minimum benefits for Social Security. The Commission also appears to push for a more progressive tax system that actually decreases the tax burden on the poor by eliminating tax expenditures favoring the wealthy and decreasing the overall tax burden on the least wealthy.
On the other hand, the Commission does offer suggestions that could unduly hurt those who can least afford it as well as undermine other essential social needs. For example, the Commission targets the medical benefits of military and federal retirees by asking them to share perhaps too many costs. In addition, recommendations focus on across the board cuts to the number of federal employees, military spending, and the pay of employees as well as contractors. The downfall in such a sweeping approach is the lack of discrimination in terms of individual income. Ten percent cuts may be acceptable when an individual has a significant level of discretionary income, yet many subcontractors and government employees live on a modest budget. In the US postal service, many employees are paid quite well; however, there is a growing number of “independent contractors,” which is a arrangement that allows employers to circumvent labor laws, payroll taxes, and benefits, who often absorb so many costs that they can make less than minimum wage.
Meanwhile, the Commission also looks to decrease payments to doctors and other service providers in order to stabilize the costs associated with programs like Medicare. In many ways, doctors tend to earn a rather large compensation in comparison to other professionals, but doctors are also an essential resource that our society is already lacking. Much of the problem is a costs versus benefits issue where we are already encouraging talented individuals to pursue far less burdensome, far more beneficial careers such as those found on Wall Street. In other words, government should encourage the pursuit of careers in fields like medicine, not discourage it. The Commission also suggests stripping funds for graduate and indirect medical training. Again, doing this can undermine the needs of our society while only saving a few billion dollars.
Furthermore, the Deficit Commission’s recommendations and other plans present several options; however, some options go too far. Capital gains and dividends are taxed at a lower rate to encourage investment, i.e. doing so helps individuals access and contribute more directly to economic growth, though hedge funds and the wealthy do benefit far too much from current policies. The abuse of and the overly generous capital gains tax reduction does need reformed, but not eliminated. Of course, the Commission does suggest rather intelligent reforms like targeting abuse of the capital gains tax by hedge funds. The Commission also recommends excluding secondary residences, home equity loans, and mortgages over $500,000 from mortgage deductions as well as capping the tax deduction for healthcare benefits, thus discouraging excess benefits. More boldly, it pushes reforms that correct the overgenerous nature of how our Country depreciates assets and adjusts for inflation to more accurately tax income and provide benefits.
Consequently, there are plenty of good options presented in the Deficit Commission’s plan alongside some objectionable policy pursuits. What is most disappointing with their findings comes from a lack of details in certain areas. Major examples include a mandate to force medical malpractice tort reform, a call for comprehensive tax reform, and a requirement for government branches like the Department of Defense to find an additional specified amount to cut from their budgets. Although there are time limits imposed on these potential enactments, the Deficit Commission needs to be more detailed with its suggestions. After all, if the responsible parties were able to identify and act on such changes on their own, they would have likely done so already. The major problem is government agencies could trim budgets in ways that undermine their mission, safety, and/or security. More broadly, the Deficit Commission fails to fully take this opportunity to offer our government narrowly tailored options that can be openly discussed and voted on.
Despite the many political elements to the Deficit Commission’s report and a lack of detail in certain areas, it does offer a starting point for everyone across the political spectrum. That is not to say cutting the Deficit and the Budget should revolve around political theater and ideology. Reform must be based on policy changes that address the Budget crisis in an aggressive manner but do not jeopardize economic growth in an avoidable way nor undermine the social commitments of government. Probably the greatest shortcoming of the Deficit Commission’s plan and the upcoming debate will be the added benefits offered to all walks of life in order to appease political constituencies to accept reform. These “bribes” mean we cannot pursue Debt reduction in a more aggressive manner, which is necessary as uncertainty over coming decades will require emergency spending that the plan may not allow, while these concessions also likely translate into weaker policy changes.