Bowles-Simpson 2.0 Won't Be Enough

Erskine Bowles and former senator Alan Simpson, the two co-chairmen of the President's bipartisan National Commission on Fiscal Responsibility and Reform, put out a new plan to address our long-term debt problems. They welcome the deficit reductions implemented through the Budget Control Act of 2011 and the American Taxpayer's Relief Act or so-called fiscal cliff deal of 2013, but they believe that much more is needed to stabilize our debt problem.

There is some good and bad in the new plan. The best thing about it is that in a town where the Senate hasn't bothered producing a budget -- its most fundamental job -- in four years, and where most lawmakers are more interested in political posturing than addressing the country's long-term financial problems, Simpson and Bowles at least offer a plan. Granted, this plan is best described as the plan for a plan, but in that outline form it is still more than we have gotten from the Senate in years.

The authors also acknowledge that reforming the tax code is imperative to rid the system of its inefficiencies and maybe even grow the economy. Better yet, Simpson and Bowles have consistently stressed the need for entitlement reform for programs like Medicare and Social Security. In fact during a recent interview, Simpson said that if the president failed to shift the nation's fiscal course by reforming entitlement programs "he will have a failed presidency."

On the negative side, the incredible lack of detail and numbers in the plan make it mostly useless. Unlike with their first, official commission plan, it is impossible to say exactly how much spending it will cut, what programs it will target, or what share of the economy it will collect in new revenue. Their previous plan, for instance, relied on the ability of the government to consistently raise 21 percent of GDP in taxes--a level never reached before under the current tax system and hence unlikely. The lack of detail makes it impossible to say what faulty assumptions are built in to the plan.

More importantly, their "balanced" approach to deficit reduction (a mix of revenue increases and spending cuts) has a major flaw. It ignores the extensive academic literature that shows that the best way to successfully reduce debt-to-GDP ratios is to adopt fiscal adjustment packages heavily weighted towards spending cuts.

Take, for instance, the work of American Enterprise Institute's economists Kevin Hassett, Andrew Biggs, and with Matt Jensen from 2010. After looking at the many attempts by OECD countries to reduce their debt ratios, they found that on average, successful fiscal consolidations were made up of 85 percent spending cuts and 15 percent tax increases.

As Hassett noted in a recent blog post over at The Corner, the new Simpson Bowles framework would be "about 25 percent tax increases and 75 percent spending cuts. That is closer to the right answer than before, but still not mindful of the lessons of history."

Finally, while they rightfully put all spending on the table for review and potential cuts (including defense spending), the reforms they outline to curb the trend of exploding federal healthcare spending (the only government spending truly unsustainable) are unlikely be enough to solve the problem.

Recent Congressional Budget Office projections show that the deficit will be roughly $1 trillion and the debt will reach 77 percent by 2023. And these calculations rely on rosy assumptions that won't materialize, even though the worst is still to come. It means that even if Simpson and Bowles get their way, much bolder reforms would be needed to fix our long-term debt problem.